UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
March 11, 1969
Herbert C. Swartz, Norman I. Swartz, Eleanor Lattig and Swartz Motors, Plaintiff
Chrysler Motors Corp., Defendant
Coolahan, District Judge.
The opinion of the court was delivered by: COOLAHAN
COOLAHAN, District Judge:
This is an action in which the plaintiffs seek to require Chrysler Corporation to continue Swartz Motors as a Dodge dealer. The jurisdiction of this court is invoked under the Automobile Dealers' Day in Court Act, 15 U.S.C. § 1221 et seq. The case is presently before the court on plaintiffs' motion for a preliminary injunction continuing Swartz Motors' status as a Dodge dealer; a temporary restraining order to that effect was signed on November 23, 1968, and has been continued pending this decision.
In order for a preliminary injunction to be issued here, the plaintiffs must prove that there is a "reasonable probability of eventual success" in the current law suit and that there is a "likelihood of irreparable injury" if the injunction is not issued. Ikirt v. Lee National Corp., 358 F.2d 726 (3d Cir. 1966). There seems little doubt that an automobile dealer will be irreparably harmed if the manufacturer which supplies its stock of cars terminates dealings with it. The loss of identification as a Dodge dealer and the resulting monetary loss will not be easily susceptible of proof at trial. Moreover, a measurement of the momentum lost by a failure to continue Dodge advertising on a regular basis could only be based on speculation. While the complaint asks for monetary damages in the alternative, as is pointed out by the defendant, it is clear that the main relief sought in this action is the injunction requiring Chrysler to continue Swartz as a Dodge dealer. The only question remaining, therefore, is whether it is "reasonably probable" that the plaintiffs will eventually succeed in this action.
Swartz Motors was begun in 1933 as a partnership consisting of the father, grandfather and uncle of the present President of the corporation, Herbert C. Swartz. From 1933 until 1955 Swartz acted as a dealer for Chrysler in both the Plymouth and Dodge lines of cars. In 1954, Mr. Herbert Swartz' father died, and, as a condition of continuing the dealership, Chrysler required that Swartz Motors incorporate and add a new shop. This was done. Then, in 1955, the Plymouth franchise was taken away, leaving Swartz with only its Dodge franchise. Finally, in 1965, Chrysler threatened to terminate the Swartz franchise if sales failed to improve, and sent in an inspector to survey the facilities of the dealer and to recommend changes. According to the uncontroverted testimony of Mr. Swartz, Swartz Motors, in order to prevent Chrysler from terminating the franchise at that time, was forced to consent to a cancellation of its permanent Direct Dealer Agreement, and to the substitution of a Term Agreement running from August 13, 1965 until June 1, 1966. On January 18, 1966, Chrysler had Swartz execute a "sales locality amendment," enlarging the territory involved in fixing the sales formula for Swartz from the immediate Dover area to the entire Newark metropolitan region, extending as far south as New Brunswick and as far east as Jersey City.
The term agreement was renewed, after Mr. Swartz flew to Detroit to work out the terms in May of 1966, and was to run from June 1, 1966 to June 1, 1967. This first extension was itself extended, by agreement on June 1, 1967, until December 1, 1968. A clause in the original Term Agreement, which continued to be a part of the contractual arrangements of the parties through the extensions, provided that a new Direct Dealer Agreement would be granted by Chrysler if Swartz fulfilled the responsibilities set out therein. These responsibilities included: (1) increasing working capital; (2) providing monthly financial statements to Chrysler; (3) selling a sufficient number of cars and trucks "to equal or exceed" the Minimum Sales Responsibility (MSR) as defined in the Direct Dealer Agreement; and (4) "Dealer is otherwise qualified for a regular Dodge Direct Dealer Agreement." The report of Scott Smith, a Chrysler inspector, dated October 8, 1965, calls for, among other things, an improved used car display, a remodeling of the showroom, an enlarged sales force, increased advertisement, and the removal of two persons then working at the dealership, Mr. and Mrs. Bruno Storck, Mr. Swartz' uncle and aunt. According to the testimony at the hearing on the preliminary injunction, all of these recommendations have been followed at great cost to the plaintiffs, but Swartz Motors has still not been able to equal or exceed its MSR. Chrysler maintains, therefore, that it has the right to refuse to allow Swartz to remain as a dealer and to refuse to sign the permanent Direct Dealer Agreement. Swartz, on the other hand, contends that the use of MSR is "unequitable, discriminatory and coercive," and that failure to meet MSR is being used as a subterfuge to cancel the dealership to allow Chrysler to establish a company-owned dealership. Swartz further alleges that, to further this plan, Chrysler expanded the area within which Swartz' MSR is computed, thus increasing Swartz' MSR, and reclassified Swartz' location in Dover from a "designated" to a "non-designated" area.
The Direct Dealer Agreement provides that a dealer's MSR is computed as follows:
From time to time, but at least once a year, Dodge will compute the ratio of the number of new Dodge passenger cars or Dodge trucks, as the case may be, registered for the most recent 12-month period for which registration figures are available in the Dodge Sales Region in which Direct Dealer is located to the number of all new passenger cars or trucks, as the case may be, so registered in that Region. The ratio thus obtained will be applied to the number of all new passenger cars or trucks, as the case may be, registered during the same 12-month period in Direct Dealer's Sales Locality. The resulting number (and the percentage share of market that such number represents for the Sales Locality) will be Direct Dealer's Minimum Sales Responsibility for this same twelve (12) month period, subject to such adjustment as is described below. . .
If Direct Dealer's Sales Locality is in a metropolitan or other market area where there are located one or more authorized dealers in the passenger car or truck as to which the Minimum Sales Responsibility computation is made . . . Direct Dealer's fair share will be determined on the basis of recent trends in sales performance, availability of motor vehicles, local conditions, revisions in Direct Dealer's Sales Locality description, location of facilities, and the other factors, if any, directly affecting sales opportunity.
At the hearing, however, Jack Casement, the manager of the department of Chrysler responsible for the computation of MSR for Plymouth and Dodge and for the calculation of each dealer's Fair Share, testified that the MSR and Fair Share were arrived at somewhat differently. The truck MSR, he explained, was not computed separately; instead, the figure was taken to be the same as the passenger car MSR. He testified further that the Fair Share was established by determining the relative importance of each dealer's local market, which is measured by the number of new cars registered in what Chrysler designates as the dealer's prime trading zone and after considering the combined selling strength of all dealers, including those of other automobiles which are located in the same general "dealer cluster." Mr. Casement did not deal specifically with the facts in the Swartz' MSR assignment, but testified only as to the general method by which MSR's were assigned.
While the Direct Dealer Agreement also provides that
Where appropriate, Dodge will adjust Direct Dealer's Minimum Sales Responsibility to take into account the availability of motor vehicles, local conditions, revisions in Direct Dealer's Sales Locality description, the recent trends in Direct Dealer's sales performance, and the other factors, if any, directly affecting sales opportunity.
Raymond Cox, Dodge Regional Manager for the New York Region, testified at the hearing that he had never been involved in any case in which the above paragraph was utilized during the sixteen years he has been employed in the regional office. His interpretation of the paragraph's use of the phrase "local conditions" was restricted to "a drastic situation which might adversely affect the dealer's ability to perform, such as a fire, which would have burned out his facilities." In considering whether MSR is "unequitable, discriminatory and coercive," therefore, this paragraph may be ignored.
Turning, then, to a consideration of the propriety of the MSR formula, its basic failure immediately becomes clear: The formula does not take into account the socio-economic level of the particular area surrounding the dealership or use as a factor the greater or lesser degree of acceptability which Dodge automobiles have in the vicinity of the dealership. Obviously local conditions are of paramount importance in any consideration of a dealer's performance, and the responsiveness of the MSR formula to these conditions has not, at least at this stage of the proceedings, been indicated. Furthermore, the method by which Chrysler made the decision to incorporate Swartz into the Newark Region, while not incorporating its dealer in Sparta, which is in a neighboring area of the same general character as that of Dover, was not elucidated at the hearing, nor was the subjective method of Fair Sharing used in deciding Swartz' MSR. In addition, it is clear that, given the method by which MSR is calculated, approximately one-half of all Chrysler dealers would be subject to termination at any time by virtue of the MSR clause,
since Chrysler defines "adequate performance" as the "attainment of minimum sales responsibility . . . [accomplishment] would be a hundred per cent." It is evident, because nowhere near that number have been terminated, that Chrysler accepts less than 100 per cent achievement of MSR as adequate sales performance. This court agrees with Federal District Judge Will, who after a trial on the merits in Madsen v. Chrysler, 261 F. Supp. 488 (N.D. Ill. 1966), vac. as moot, 375 F.2d 773 (7th Cir.), stated:
As we shall note subsequently in somewhat greater detail, Chrysler can properly waive "strict performance" of the MSR requirement and substitute a standard of conduct which accepts a lesser degree of performance as satisfactory. Having done so, however, it cannot claim the right to vary the standard of satisfactory performance between dealers so as to gain the right to terminate dealers for causes other than those enumerated in the contract, i.e., applying a more rigorous standard of satisfactory performance to one dealer because it has reasons for desiring termination, when those reasons, in and of themselves, would not constitute cause for termination under the contract. Such action is tantamount to rewriting the contract to give Chrysler the right to terminate at will which the contract -- as written -- precludes.
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We conclude that MSR calculated simply as provided in the Chrysler dealership agreements without adjustment for the various factors herein discussed and which results at all times in a substantial number of dealers being in technical default is an arbitrary, coercive and unfair provision since it would enable Chrysler to terminate roughly one-third to one-half of all its dealerships at any time. We conclude also that Chrysler has waived failure to achieve MSR as a default in plaintiff's dealership agreements by treating it as a performance goal rather than as a condition of those agreements.
In this court's view, it is obvious that to allow Chrysler to terminate, based solely on the use of these MSR and Fair Share figures which are computed by a division of Chrysler, would be unfair.
This is in accord with the legislative purpose behind the Automobile Dealers' Day in Court Act, which indicates that the words "fair and equitable" are to be interpreted within the context of coercion by the manufacturers, which arises from the inequality of bargaining power between the oligopolistic automobile manufacturer and the local dealer who possesses little economic power. Milos v. Ford Motor Co., 317 F.2d 712 (3d Cir. 1963). If the franchise of a dealer is terminated for wrongful reasons, the manufacturer is liable under the statute. Berry Brothers Buick, Inc. v. General Motors Corp., 257 F. Supp. 542 (E.D. Pa. 1966), aff'd, 377 F.2d 552 (3d Cir. 1967). As the Fifth Circuit Court of Appeals has pointed out, in Woodard v. General Motors Corp., 298 F.2d 121, 127-28 (5th Cir. 1962):
The policy behind the enactment of the Automobile Dealer Franchise Act was to establish a balance of power as between manufacturers and dealers in the automobile industry by curtailing the economic advantages of the larger manufacturers and increasing those of the dealers.
* * *
[One] of the principal evils which the Act was designed to remove was the exertion of pressures by the dominant automobile manufacturers upon dealers to accept automobiles, parts, accessories and supplies which they neither needed nor wanted and which they felt their market would not absorb.
The insertion of the clause allowing Chrysler to terminate any dealer who falls below MSR, a figure which a very substantial number of dealers fails to meet, appears to have been inserted only as a result of the tremendous bargaining pressure possessed by Chrysler over its dealers, a pressure which the Act was intended to counterbalance.
None of the cases cited by the defendant is authority to the contrary. In Garvin v. American Motors Corp., 318 F.2d 518 (3d Cir. 1963), cited by defendant, the court says at p. 520:
As we have previously noted, Garvin promised to hire at least one full-time salesman in 1958. Certainly, there is nothing arbitrary or unreasonable about this requirement. Indeed, the very purpose of the franchise was to assure the sale of automobiles. Hence, the manufacturer's insistence on the performance of this contractual commitment could not possibly be considered coercion or intimidation. Milos v. Ford Motor Co., 317 F.2d 712 (3d Cir. 1963); Woodard v. General Motors Corp., 298 F.2d 121, 128 (5th Cir. 1962).
It appears from the court's statement that where there is an arbitrary or unreasonable requirement imposed upon the dealer by an automobile manufacturer as a result of its great bargaining power, the court may intervene under the Automobile Dealers' Day in Court Act. In this instance, as noted above, all requirements insisted upon by Chrysler were complied with. The showroom was redecorated, a new used car lot was purchased, a new lighting system was installed, the amount of working capital was increased, more workers were employed, the amount of money spent on advertising was increased to a level higher than that recommended by Chrysler, and, finally, Mr. and Mrs. Storck, founding members of the company, were bought out at a cost of more than $50,000. As in Madsen, supra at 506:
to permit Chrysler to terminate in reliance on plaintiffs' failure to achieve MSR would be particularly unfair here where, at Chrysler's urging, plaintiffs invested substantial funds in new sales and service facilities for the purpose of increasing sales and service volume.
To allow Chrysler to terminate Swartz' dealership in reliance on the coercive MSR clause, merely because the solutions Chrysler itself proposed are not totally effective in the Dover area, would be unfair.
The question before this court, therefore, is whether the sales record of Swartz Motors would warrant Chrysler's refusal to sign a permanent Direct Dealer Agreement.
The bare sales figures alone, showing an increase of from 65 cars sold in 1962 to 120 cars sold in 1967
are not sufficient for the court to conclude that Swartz' sales performance, absent other considerations, may be considered unsatisfactory by Chrysler. The new MSR formula devised by Chrysler and computed over the entire Newark area does not seem by the court, for the reasons heretofore given, to be of much assistance. Nor, for that matter, is the old MSR formula computed only in the surrounding area, because of the inequities which necessarily inhere in any computation of MSR.
The court therefore is left to its own devices in deciding whether or not Swartz' performance was so unsatisfactory as to warrant Chrysler in terminating the franchise.
According to Mr. Swartz' testimony at the hearing on the preliminary injunction, which was uncontroverted by defendant's witnesses, Swartz Motors did not experience any criticism of its sales performance by Chrysler until 1963. The year 1962, the earliest year for which the court was supplied sales figures, may therefore be used as a base year in any calculations, a year in which Swartz' sales performance was considered satisfactory by Chrysler. Swartz' growth in sales must be measured against the growth experienced nationally by Dodge, which increased its share of the market from 3.43% in 1962 to 5.87% in 1967. n6 The following table indicates that Swartz' growth, extrapolating from the sales figure for 1962, has more than equaled Chrysler's nationwide percentage growth in all but 1964, the year prior to the survey prepared by Scott Smith:
% by which
Cars to be Sold, Swartz Exceed-
Dodge % Using 1962 as Cars actually ed National
Year Nationwide the Base Year Sold by Swartz Market Growth
1962 3.43 65 65
1963 5.02 95 104 9%
1964 5.74 109 105 -4%
1965 5.60 106 116 9%
1966 6.03 114 143 25%
1967 5.87 111 120 8%
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