October 20, 2020
Selling your franchise business usually requires the consent of the franchisor, whether you own a Subway franchise or an auto dealership. However, state law generally requires the franchisor to be reasonable in this approval process.
The deal involved the sale of a Buick GMC dealership located about 50 miles outside of Pittsburgh. The asset purchase agreement provided for a purchase price of $750,000 for goodwill plus payment for various assets. In addition, the buyer planned to discontinue Buick Operations at the seller’s facility and relocate GMC operations to Buyer’s existing Chevrolet, Buick, and Cadillac dealership in a buyer facility 20 miles closer to Pittsburgh.
The seller’s Buick GMC dealer agreement with GM provided that the GM franchise could not be assigned to the buyer without the approval of GM. The seller asked GM for approval and GM refused.
GM’s stated reasons for refusal included the permanency of the investment of the five existing Buick GMC dealers in Pittsburgh, declining population in and around Pittsburgh, existing GMC dealerships providing adequate competition, and the likelihood of injury to existing network outweighing any perceived benefit from increased competition.
The deal did not go through. The seller sued GM in a Pittsburgh federal district court for damages, based upon violation of sections of the Pennsylvania Board of Vehicles Act.
The seller retained an expert to conduct analysis and provide testimony regarding GM’s denial. In his report, seller’s expert stated that GM’s analysis of its factors was insufficient to justify its conclusions. The expert also stated that the conclusions GM reached in its denial contradicted the conclusions reached by GM in other cases involving network changes. Seller’s expert characterized GM’s analysis as an “outcome-driven approach” with an intent to deny the seller’ relocation request.
GM asked the court to prohibit the expert from testifying at trial, arguing in essence that the expert did not adequately disclose the facts underlying his opinion. The court disagreed, finding adequate disclosure of the facts underlying the expert’s opinion: “… (the expert’s) … report identifies each factor from the decision letter and outlines how the facts do not support the rationale or that it contradicts GM’s decisions from other cases.”
In addition, the court stressed how important experts are in this kind of dispute: “Without expertise in the automotive industry, as proffered by … (the seller) … through … (seller’s expert) …, a layman would not likely understand the methodologies utilized by GM or be able to assess whether those methodologies pass the scrutiny of another expert. In this case, … (seller’s expert) … is not charged with conducting an independent analysis to demonstrate that GM should have accepted the … (the deal) … Instead, the relevant inquiry into the … claim is the conduct of GM in reaching its conclusions and therefore whether it acted and decided reasonably. … Therefore, at issue are the cited GM rejection factors and the methods GM used to assess and determine those factors to reach its decision to deny … (the seller) … application for consent. Given the specialized knowledge needed to complete this analysis, the Court finds it appropriate to proffer an expert in the relevant field to offer a critique and opinion to assist the jury as it evaluates the reasonableness of GM’s actions and decision. Thus, … (seller’s expert’s) … opinions and testimony are relevant and admissible.”
This case is referred to as Brooks Automotive Group, Inc. v. General Motors LLC, No. 2:18-CV-00798-MJH, United States District Court, W.D. Pennsylvania, Pittsburgh, (May 8, 2020) https://scholar.google.com/scholar_case?case=15805139854672892254&q=%22asset+purchase+agreement%22&hl=en&as_sdt=2006&as_ylo=2020
This case demonstrates the risk of selling a franchise. A franchisee can assume that a legal challenge of a deep pocket franchisor’s denial of consent to sell the franchise will be opposed by top flight lawyers. The fight will be expensive and time consuming.
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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