Miles of Deceit: Protecting Yourself From Duplicitous Dealers Selling Out

Introduction

Given the significant restrictions that manufacturers and franchisors can face in terminating a dealer or franchisee, controlling the identity of those business partners is vital.  A critical moment arises when a dealer or franchise is seeking to change the ownership or control of its business, and a recent decision from the United States Court of Appeals for the Third Circuit illustrates why it is vital for suppliers and franchisors to protect their right to control such a change in writing in the dealership or franchise agreement.¹

Issue / Case Summary

Wyoming Valley Motors was a longtime Pennsylvania dealer for Audi of America.² Wyoming and Audi were parties to a franchise agreement that gave Wyoming the right to sell Audi vehicles only at a specific dealership location, and gave Audi the right to sign off on any significant transfer of dealership assets or change in ownership.³ While Wyoming sold Audis alongside other brands from the same location, Audi eventually limited the availability of certain financial incentives to dealers selling from single-brand locations.⁴ In anticipation of keeping access to those incentives, Wyoming made plans to build a new showroom, and submitted a request to Audi for approval of the location.⁵

What Wyoming did not disclose to Audi, however, was that it was also planning to sell its dealerships to Napleton, a major multistate dealership group that was engaged in litigation against Audi elsewhere in the country.⁶ Wyoming’s request to Audi made no mention of these plans, or of the asset purchase agreement it had already negotiated with Napleton.⁷ Audi approved the new showroom location, but conditioned its approval on Wyoming continuing to own the dealership.⁸ After receiving the approval, Wyoming finally disclosed the existence of the asset purchase agreement to Audi.⁹

Unsurprisingly, this resulted in a complete breakdown of the relationship between Wyoming and Audi. Wyoming ultimately went through with the sale to Napleton, but restructured it so that the Audi dealership would not formally change hands. Instead, profits would flow to Napleton through “management fees.”¹⁰ Seeing through the ruse, Audi rescinded its approval of the relocation, and a flurry of lawsuits followed, including a claim by Napleton that Audi had rescinded the relocation “without cause” and thus tortiously interfered with its business.¹¹

The district court disagreed, granting Audi’s motion for summary judgment, and the Third Circuit affirmed.¹² After first reviewing facts that “require[d] a long drive across miles of deception,” the court concluded that Audi’s conduct was justified on the basis of its right to approve any significant change in Wyoming’s business under the parties’ agreements.¹³ As the court noted, Audi had exhausted all of its options short of refusing to approve the transfer, leaving refusal the “only remaining path to protect its rights.”¹⁴

Key Takeaways:

• A supplier or franchisor should always include contractual terms protecting its right to approve a sale, assignment, or significant change to the ownership or control of a franchisee or dealer’s business.
• Suppliers and franchisors should insist on transparency from their network and consistently enforce their right to disapprove of inappropriate business partners.
• Consider including a contract term that allows for termination of a channel partner that lies to you in a formal request for such approval. Such a term might help you avoid protracted litigation.