The New York District Court recently ruled that a truck engine manufacturer was not a franchisor under the New York Franchised Motor Vehicle Dealer Act (Dealer Act).
In 2013, Daimler Trucks North America, LLC (Daimler Trucks) terminated its Freightliner truck franchise agreement with the plaintiff, Agar Truck Sales, Inc. (Agar), a dealer located in New York, for failing to meet certain sales requirements under the agreement. Shortly after, a wholly owned subsidiary of Daimler Trucks, Detroit Diesel Corporation (DDC), also terminated its engine franchise agreement with Agar. DDC sold Agar Detroit Diesel engines for approximately 25% of the Freightliner vehicles it purchased from Daimler Trucks. Agar brought suit against both Daimler Trucks and DDC for terminating the agreements without due cause or good faith.
DDS filed a motion to dismiss arguing that it was not a "franchisor" under the Dealer Act and therefore termination restrictions under the Dealer Act did not apply. Agar conceded that DDS did not meet the definition of a franchisor under the Dealer Act but argued nonetheless DDC should be held liable because the "Detroit Diesel franchise is part and parcel to of the Freightliner franchise, because DDC's action must be imputed" to Daimler Trucks.
The court ruled that DDC was not a franchisor because it manufactured engines and not vehicles and a plain reading of the Dealer Act made it clear that vehicle parts manufacturers are not covered. The court granted DDC's Motion to Dismiss Agar's count against it since DDC could not be held liable as a franchisor under the Dealer Act. The court did, however, allow Agar leave to amend its complaint to allege violations of the Dealer Act by Daimler Trucks due to the termination of the DDC franchise agreement under a section of the Dealer Act making it unlawful for a franchisor to use a subsidiary to accomplish what would otherwise be unlawful conduct under the Act.
It is always welcome to see a decision where a court applies the plain language of a franchise statute in the way the legislature intended and not judicially expand the scope of a state franchise relationship law. It is important to keep in mind, however, that careful corporate structuring by itself will not relieve a franchisor of liability for violations of state franchise termination restrictions by its subsidiaries. If you can't do something legally–such as terminate a franchisee–then your subsidiaries probably can't do so either.
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