Liberty Lincoln-Mercury v. Ford Motor Co.

134 F.3d 557 (3rd Cir. 1998)
  • Opinion Date: January 22, 1998

FRANCHISES—The New Jersey Franchise Practices Act requires reimbursement for warranty repair parts at the franchisee’s prevailing retail price, if reasonable. The franchisor may not adopt practices which, in effect, deprive its franchises of full reimbursement.

In 1976, an automobile manufacturer entered into an agreement to sell vehicles wholesale to a dealer, which then resold them to consumers. The retail sales were accompanied by a warranty from the manufacturer guaranteeing that it would replace certain systems and parts free of charge. The dealer would perform the repairs and the manufacturer would reimburse it for the parts at 30-40% above the dealer’s cost, depending on the model of the vehicle. In 1991, the dealer asked to be reimbursed at its retail rate of 77% above cost, pursuant to the New Jersey Franchise Practices Act (FPA) which states that a motor vehicle franchisor shall reimburse its franchisee for parts used in warranty repairs at the franchisee’s prevailing retail price. Although believing this markup to be unreasonably high, the manufacturer agreed. A few months later, it announced that it would recover this cost by adding a surcharge to the wholesale price of each car delivered to the dealer. The dealer filed suit alleging that the surcharge violated the FPA mandate that the manufacturer reimburse it for warranty parts at its retail rate. It also alleged that by imposing the surcharge on it but not on its competitors, the manufacturer was engaging in unlawful price discrimination in violation of the Robinson-Patman Act. The District Court granted summary judgment in favor of the dealer, finding that the manufacturer was trying to do an end run around the clear language of the FPA since the surcharge effectively reduced the dealer’s reimbursement thereunder. However, the Court found no price discrimination because the surcharge simply offset the increased reimbursement costs, leaving the dealer in the same economic position as its competitors. After the surcharge was invalidated, the manufacturer imposed detailed documentation requirements for all New Jersey dealers seeking reimbursement under the FPA. The District Court hearing that dispute concluded that this reimbursement procedure was “onerous…and designed to frustrate any attempt to obtain statutory reimbursement.” It ordered the manufacturer to comply with the retail rate reimbursement it had agreed to before it imposed the surcharge.

The Third Circuit also concluded that the surcharge violated both the plain language of the FPA and the legislative intent behind its enactment. The manufacturer argued that the District Court read into the FPA the requirement that the manufacturer bear the full cost of compliance with it. The Circuit Court disagreed, finding that the District Court did not forbid the manufacturer from recovering the cost of compliance with the FPA. The lower court decision only found that this particular surcharge was not permissible. In examining the method by which the manufacturer arrived at its surcharge, the Circuit Court found that it bore no economic relationship to the dealer’s wholesale purchases, but was “exacted as an automatic result of, and in direct proportion to, the dealer’s warranty reimbursement claims.” To accept the manufacturer’s argument would result in a statute permitting illusory transactions with no economic effect, contrary to the notion that a statute be construed in a common sense manner to accomplish its legislative purpose.

As to the documentation requirement imposed by the manufacturer as an alternative to the surcharge, the Court found that it was unclear whether the lower court order was a penalty for the manufacturer’s attempt to circumvent the FPA, or an entry of judgment based on a finding that the documentation requirement violated the FPA. Regardless, the Third Circuit refused to uphold the order and remanded the matter to the District Court for reconsideration of the amount the dealer was entitled to recover.

The Third Circuit agreed with the District Court that there was no actionable price discrimination in violation of the Robinson-Patman Act, since the surcharge was equal to the increased reimbursement costs. Even though the dealer was paying more for the manufacturer’s cars than its competitors, it was receiving more reimbursement for the manufacturer’s parts than its competitors. The Court added that the dealer failed to demonstrate competitive injury as a result of the surcharge.