On April 7, 2015, the United States Second Circuit Court of Appeals affirmed the trial court’s dismissal of the Alliance of Manufacturers’ complaint arguing that certain Connecticut motor vehicle franchise laws were unconstitutional under the United States Constitution. In particular, the Alliance attacked that Connecticut provision put into law in 2009, requiring manufacturers to reimburse dealers for warranty work at rates equivalent to retail rates; and the corresponding provision which prohibited manufacturers from levying a surcharge against dealers to take back the increased reimbursement amounts. To give you an indication of what the Second Circuit Court thought of the Alliance’s argument, my partner Jason Allen and I, argued the case before the Second Circuit Court in Manhattan (covers Connecticut, New York and Vermont federal trial courts) only one week prior to the Court’s ruling. This is extremely unusual. Typically, an appellate court takes between three and six months to issue a ruling after oral argument!
So, why does this matter to dealers outside of Connecticut? Because the claims brought by the Alliance attacking the Connecticut franchise laws are the same claims that could have been brought against franchise laws in ANY other state. This is because the claims were based upon violations of the United States Constitution which apply to all state laws. Thus, if the Alliance had prevailed on its claims, other franchise laws besides the warranty reimbursement provisions within Connecticut and outside of Connecticut would have fallen like dominoes!
Specifically, the Alliance argued that the warranty reimbursement provisions of Connecticut law violated three separate provisions of the United States Constitution – the Commerce Clause, the Contract Clause and the Due Process Clause. To put each claim in layman’s terms, the Commerce Clause provides that states cannot burden the flow of interstate commerce with laws that favor in-state residents over out-of-state residents. The Contracts Clause simply provides that a state law cannot unreasonably interfere with the terms of a private contract. And, lastly, the Due Process Clause prohibits states from passing laws which are arbitrary and irrational.
As to the Commerce Clause, the Alliance contended that the warranty reimbursement provisions burdened the flow of commerce as a result of the additional cost to out-of-state manufacturers in compensating Connecticut dealers for warranty work. The Appeals Court; however, affirmed the trial judge’s ruling that the Alliance failed to show that the warranty reimbursement provisions favored an in-state competitor (i.e. another manufacturer) or otherwise had any different impact upon commerce within Connecticut as versus states outside of Connecticut.
As to the Contract Clause, the Alliance argued that the requirement to reimburse dealers at the equivalent of retail rates unreasonably interfered with the dealer agreements which contained lower reimbursement rates. The Appeals Court; however, affirmed the trial judge’s ruling that the interference by the Connecticut Legislator was not unreasonable as it was not unforeseen that the State would step in and regulate warranty reimbursement as the relationship between the manufacturers and dealers has been the subject of state regulation since 1982.
As to the Due Process Clause, the Alliance argued that the warranty reimbursement provisions were illogical and served no legitimate public purpose. Again, the Appeals Court agreed with the trial court’s ruling that the Alliance’s arguments failed because all that is required is that the challenged law have a “plausibly” legitimate purpose which does not have to be based upon any empirical evidence. In this regard, the trial court found that the law was rational and could certainly accomplish its intended benefit of increasing reimbursement to dealers while benefiting citizens by preventing dealers from having to increase non-warranty repair costs to subsidize dealers’ cost to perform warranty work.
We believe that the Alliance chose to pick on Connecticut because it is a state with a relatively small number of dealers with more limited resources than other states. You may recall that the Alliance also filed a similar lawsuit attacking several Florida franchise laws (warranty reimbursement, limitations on export chargebacks, etc.) prior to the Connecticut lawsuit. Although the Alliance brought virtually identical claims in the Florida lawsuit, the federal trial court in Florida did not dismiss the case but instead allowed the case to move forward. Fortunately, the Florida dealers put up a strong fight which resulted in the Alliance walking away from the lawsuit late last year in the midst of depositions and document production.
The Alliance has been using the Connecticut and Florida lawsuits as scare tactics in their attempts to stop enactment of further franchise protections in a number of states. In our representation of several state dealer associations, we have witnessed first-hand the Alliance representatives threatening legislators with a similar lawsuit if new franchise laws are passed. It went something like this – “you wouldn’t want to pass franchise laws which violate the United States Constitution and then have to deal with the hassle and embarrassment of a lawsuit overturning those laws, would you?” Unfortunately, in many cases the scare tactics worked and state legislators took a wait-and-see approach. Well, that threat has now been removed.