License to Sue? Court Rules That a Motor Vehicle Dealer Does Not Need a Dealer’s License to Bring a Statutory Claim for Termination without Good Cause

by Mulcahy LLP

California’s motor vehicle code allows dealers to bring suit against manufacturers for terminating the dealer without good cause. See California Vehicle Code §§ 11713.3, 3060, 3061 and 3066. As currently written, the statutory scheme seems to suggest that dealers need to possess Department of Motor Vehicles (DMV) dealer’s licenses to bring a claim. A recent unpublished case, Guarantee Forklift, Inc. v. Capacity of Texas, Inc., Case No. A147954, 2017 WL 1684124 (May 2, 2017), clarifies that despite the inclusion of “licensee” language in the statutes, an unlicensed motor vehicle dealer can bring an action against a manufacturer for terminating without good cause.

In the Guarantee case, Guarantee Forklift (“GFL”) was an authorized dealer of Capacity products (semi-tractors) under a franchise agreement executed in July of 1995. In 2013, Capacity sent GFL written notice of its intent to terminate GFL’s franchise for (1) misrepresenting the employment status of a former GFL employee who went to work for Capacity’s chief competitor; and (2) allowing the employee to continue accessing Capacity’s online parts ordering system while working for the competitor.

GFL proceeded to protest the proposed termination with the New Motor Vehicle Board. The Board concluded in April 2014, that although factual findings confirmed Capacity’s allegations, there was not good cause for termination. The matter was then taken to the Superior Court on a writ of administrative mandamus. The court reversed the Board and directed it to enter a new decision in favor of Capacity and finding that the franchise could be terminated.

The matter would have likely ended there but for the fact that Capacity allegedly terminated GFL during the pendency of the protest. GFL filed an additional action in Superior Court seeking damages for the termination. GFL alleged violations of Vehicle Code section 11713.3, 3060, 3061 and 3066.

Section 3000 et seq. and section 11700 et seq. establish a statutory scheme regulating the franchise relationship between vehicle manufacturers and distributors, and their dealers. Section 3060 provides that no franchisor shall terminate a franchise unless it gives the franchisee and the New Motor Vehicle Board (Board) written notice of the proposed termination, establishes “good cause” for the termination, and gives the franchisee the right to file a protest. Section 11713.3, subdivision (l), provides that it is unlawful for a manufacturer or distributor “[t]o modify, replace, enter into, relocate, terminate, or refuse to renew a franchise in violation of Article 4 (commencing with Section 3060) ....""

Section 11726 provided in relevant part that “[a]ny licensee suffering pecuniary loss because of any willful failure by any other licensee to comply with any provisions of … Chapter 4 [Manufacturers, Transporters, Dealers, and Salesmen] of Division 5 or Article 3 (commencing with Section 3052) of Chapter 6 [New Motor Vehicle Board] of Division 2… may recover damages and reasonable attorneys’ fees therefor in any court of competent jurisdiction.” (emphasis added). Among the statutes encompassed by section 11726 is section 11713.3.

Capacity argued that the statutory scheme, particularly section 11726, only allows licensees to bring claims for violations. As GFL did not have a motor vehicle dealer’s license with the DMV, Capacity argued GFL did not have standing. The Superior Court agreed and granted a motion for summary judgment against GFL. GFL appealed.

At the appellate level, Capacity argued that GFL could not bring claims because the Superior Court had previously found that there was good cause for the termination. However, the appellate court noted that section 3060, subdivision (a)(2), prohibits a franchisor from terminating a franchise while a protest is pending before the Board. GFL provided evidence that following the filing of the protest, Capacity refused to recognize GFL as a dealer, refused to sell GFL parts or vehicles and refused to give GFL referrals to obtain parts. For these reasons, the appellate court held that to the extent that GFL’s claim against Capacity was based on the de facto termination of the franchise during the pendency of the protest, it could bring a claim.

The appellate court then decided whether GFL had standing to bring a claim. Section 11726 provided in relevant part that “[a]ny licensee suffering pecuniary loss because of any willful failure by any other licensee to comply with any provisions of … Chapter 4 [Manufacturers, Transporters, Dealers, and Salesmen] of Division 5 or Article 3 (commencing with Section 3052) of Chapter 6 [New Motor Vehicle Board] of Division 2… may recover damages and reasonable attorneys’ fees therefor in any court of competent jurisdiction.” (emphasis added). The trial court had granted summary judgment on Capacity’s behalf because it was undisputed that GLF was not a licensee.

The appellate court was stuck in responding to a quandary of how to interpret the Vehicle Code sections so that the legislator’s intent came through. On one hand, Section 11726 only referenced “licensees”. On the other hand, Section 11726 referenced a number of statutes dealing more broadly with the rights of manufactures and distributors.

The court reviewed the history of the statute and subsequent cases that had interpreted it. It noted the broad reach of section 11726 in that it “creates a private cause of action for the failure to comply with various provisions of the Vehicle Code, as well as with any DMV regulation or decision or rule issued by the Board.” The court also pointed out that many of the claims referenced in Section 11726 would not involve litigants holding a motor vehicle dealer’s license. Those sections would lose much of their impact if a party needed a license to bring an action.

For example, section 11713.3, subdivision (t), makes it unlawful for a manufacturer to “exercise a right of first refusal or other right requiring a franchisee … to sell, transfer, or assign to the franchisor, all or a material part … of the franchised business unless … (6) [t]he franchisor shall reimburse the proposed transferee for expenses paid or incurred by the proposed transferee in evaluating… and negotiating the proposed transfer.” Such a provision fell within Section 11726 yet neither the manufacturer nor the distributor would necessary have a license. Further, Section 11726 states that a licensee must cause another licensee loss to allow for recovery of damages. Under Capacity’s interpretation, if a dealer had a license and a manufacturer did not, the dealer could not bring a claim.

To make sense of this seeming contradiction, the court construed section 11726 as being concerned with remedies and not standing. Instead, it found that the other vehicle code statutes provide standing for a private right of action. The court concluded that “when determining a plaintiff’s standing to sue under section 11726, courts should look to the provision allegedly violated by the defendant and determine whether the plaintiff is a party the provision was intended to protect.”

As to GFL, it had claimed a violation of Section 11713(l). That section stated that it was unlawful for a manufacturer, manufacturer branch, distributor or distributor brand to modify, replace, enter into, relocate, terminate, or refuse to renew a franchise in violation of Article 4 (commencing with Section 3060) or Article 5 (commencing with Section 3070) of Chapter 6 of Division 2. The court noted that this section was designed to protect dealers who have been terminated and thus dealers had standing to bring a claim.

The court concluded that by construing the statute as such it promoted the purpose of giving a motor vehicle dealers a remedy for “unreasonable conduct” and providing an incentive to manufacturers/franchisors to comply with vehicle code statutory requirements before terminating a dealer’s franchise. As a result, the court reversed the granting of summary judgment and held that it was a question of fact for trial whether Capacity’s conduct amounted to a de facto termination of GFL (thus entitling GFL to damages).

The ruling is an important one as, although unpublished, it clarifies that franchisees/dealers do not need a license to bring claims for violations of the Vehicle Code. Consequently, both motor vehicle franchisors and distributors should pay close attention to the vehicle’s codes statutory requirements. If one party violates the statute, then there is a high likelihood that the other party, licensed or not, has a right to sue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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