Coady Corp. v. Toyota Motor Distributors, Inc.

• Decision Date: 18 March 2004
• Docket Number: No. 03-1586.,03-1586.
• Parties: COADY CORP., d/b/a 495 Toyota, Plaintiff, Appellant, v. TOYOTA MOTOR DISTRIBUTORS, INC., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

361 F.3d 50

COADY CORP., d/b/a 495 Toyota, Plaintiff, Appellant, v. TOYOTA MOTOR DISTRIBUTORS, INC., Defendant, Appellee.

No. 03-1586.

United States Court of Appeals, First Circuit.

Heard January 8, 2004.

Decided March 18, 2004.

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Evan T. Lawson with whom J. Mark Dickison, Robert J. Roughsedge, Michael Williams, Nicole L. Johnson and Lawson & Weitzen, LLP, were on brief for appellant.

Daniel L. Goldberg with whom David Yamin, Justin M. O'Sullivan and Bingham McCutchen LLP, were on brief for appellee.

Before BOUDIN, Chief Judge, LOURIE^* and LYNCH, Circuit Judges.

BOUDIN, Chief Judge.

This is an appeal from the judgment of the district court rejecting claims by Coady Corporation ("Coady") against Toyota Motor Distributors, Inc. ("Toyota"). Toyota is the regional arm of Toyota Motor Sales USA, Inc., a national distributor of Toyota Motor Vehicles; Coady, doing business as 495 Toyota and owned by Kevin Coady, is a Toyota dealer based in Milford, Massachusetts. Much of the dispute revolves around Coady's access to new vehicles from Toyota.

Toyota, like other major distributors, supplies a large number of dealers; in its "Boston region," which includes most of New England, there are about 71 dealerships, each with its own primary market area. However, other dealers are free to compete with Coady, and Coady with them. Coady's nearest competitor is Bernardi Toyota, which is based closer to the Boston metropolitan area. Boch Toyota is another competitor, and its primary market area adjoins Coady's.

Coady has been a Toyota dealer since 1977 and, for most of the period, operated under the standard Toyota dealer agreement. Among other things, the agreement obligates Toyota to explain its vehicle distribution methods to dealers, to use its best efforts so dealers can meet their own obligations under the agreement, and to allocate vehicles in a fair and equitable manner as determined by Toyota. Statutes impose additional and more detailed obligations on Toyota, as we discuss below.

Until February 1999, Coady mostly operated under six-year agreements, and, for part of its tenure was not apparently a successful dealer, which Coady says resulted from his unfair treatment by Toyota. When the last of these six-year agreements expired in 1999, Toyota — unhappy with Coady's performance and acting against a background of quarrels between Coady and local Toyota managers — offered Coady only a two-year extension. The proposed new agreement contained a non-standard provision requiring Coady to maintain 100 percent or better "retail sales efficiency" — a measurement used by Toyota for which 100 percent is supposed to represent average dealer sales performance in the region.

When the 1999 agreement expired in 2001, Toyota again offered a new two-year agreement, even though Coady's efficiency rating had fallen to under 40 percent. The proposed new agreement retained the unenforced 100 percent sales efficiency requirement. It also proposed new requirements that Coady maintain a debt to equity ratio of no more than 1:1 and renovate the interior of its dealership. Coady declined to sign the new agreement and has instead operated under month-to-month extensions of its franchise.

In the meantime, Coady filed the present lawsuit in November 1997, against Toyota asserting a host of claims under federal and state law, including federal antitrust claims, 15 U.S.C. § 1 (2000), claims under the federal Automobile Dealers' Day in Court Act, 15 U.S.C. §§ 1221-1225 (2000), and claims under the so-called Massachusetts "Dealer's Bill of Rights", Mass. Gen. Laws ch. 93B ("chapter 93B").

In due course, the district court dismissed certain of the claims, allowed Coady to expand its complaint and then denied cross-motions for summary judgment. Beginning on January 13, 2003, the district court held a jury-waived trial, comprising eight days of testimony. On April 14, 2003, the district court filed a detailed decision over 50 pages rejecting on the merits all of the Coady claims, and Coady now appeals.

On this appeal, Coady's main claims are directed at a set of practices or occurrences that, in Coady's view, represent violations of chapter 93B as it stood prior to recent amendments.¹ Coady also presses claims for breach of contract. Our review of the district court's decision is for clear error as to its findings of fact and de novo as to questions of law, Fed.R.Civ.P. 52; Liberty Mut. Ins. Co. v. Nippon Sanso K.K., 331 F.3d 153, 158 (1st Cir.2003); as to questions of characterization, the standard is more complex. See note 4 below.

As its primary method of allocating vehicles — the so-called "balanced day's supply method" — Toyota allocates vehicles to dealers once every two weeks (usually at the beginning and middle of the month); the method uses a formula that assigns available vehicles in the region based upon each dealer's inventory and recent sales volume. The method does not simply replace vehicles sold on a one-to-one basis but rewards past sales performance, so that successful dealers do better than unsuccessful ones.

In the first instance, the system relies upon self reporting. For each sale, the dealer inputs the sale information — including the vehicle identification number and the name and address of the customer — into a computer network that informs Toyota of the sale. When supplies are tight and stock can be easily sold, as was true for much of the 1990s, there is some incentive for dealers to misreport in the hope of increasing new inventory.

Coady did offer evidence that its competitors had misreported sales and Toyota was aware of the problem although the precise effect on Coady is uncertain. How many inaccurate reports are required to affect the allocation and how much of an effect inaccurate reports produce is hard to summarize. Some evidence at trial suggested that for Coady to be deprived of a single Toyota Camry it would take 100 inaccurately reported Camry sales by other dealers in the region during a two-week period.

Toyota monitors the accuracy of the reporting by comparing the sales reports it receives from dealers with the registration data provided by the R.L. Polk Company — apparently a widely used automotive information and statistical reporting service. When the two reports do not match for a feature such as the customer's name or address Toyota labels this a "no-match". No-matches can reflect either innocent reporting errors or intentional false reporting by the dealer. All dealers, including Coady, incur no-matches from time to time. Coady's position at trial was that deliberately false reporting was widespread and known to Toyota.

At trial, Coady claimed that Toyota's tolerance of false reporting by its competitors violated chapter 93B. The statute makes unlawful "[u]nfair methods of competition and unfair or deceptive acts or practices," Mass. Gen. Laws. ch. 93B, § 3(a)(2001), and then lists specific forbidden practices. See Tober Foreign Motors, Inc. v. Reiter Oldsmobile, Inc., 376 Mass. 313, 381 N.E.2d 908, 911-12 (1978). Pertinently, section 4(3)(a) makes it a violation for a distributor

to adopt, change, establish or implement a plan or system for the allocation and distribution of new motor vehicles to motor vehicle dealers which is arbitrary or unfair or to modify an existing plan so as to cause the same to be arbitrary or unfair.

Mass. Gen. Laws. ch. 93B, § 4(3)(a) (2001) (emphasis added).

Relying on dictionary definitions and case law relating to a New Hampshire statute similar to chapter 93B, see N.H. Auto. Dealers Ass'n, Inc. v. Gen. Motors Corp., 620 F.Supp. 1150, 1157 n. 20 (D.N.H.1985), aff'd in part, vacated in part, 801 F.2d 528 (1st Cir.1986), the district court held that in this context "arbitrary" meant a regime that is "not based in reason and is implemented in bad faith because of a dishonest purpose." As for "unfair," the court relied again on the dictionary and a Massachusetts case, Levings v. Forbes & Wallace, Inc., 8 Mass.App.Ct. 498, 396 N.E.2d 149, 153 (1979)(addressing Mass. Gen. Laws ch. 93A, § 11 (1978)), to limit the term to an allocation plan "based on inequity, dishonesty and fraud".

Applying this definition to allocation systems, the district court held that:

In the absence of any claim that Toyota itself "cut off" Coady's supply of vehicles, in order to show that Toyota has implemented an "unfair or arbitrary" allocation system for the distribution of motor vehicles to Coady through periodic allocations, Coady must prove, based on "all pertinent circumstances," that Toyota affirmatively facilitated or encouraged fraudulent sales reporting by dealers other than Coady. It is insufficient for Coady to prove that dealers other than Coady inaccurately reported sales because, to be "arbitrary or unfair," such inaccurate sales reporting must be shown to be fraudulent or dishonest. Nor is it sufficient to prove that Toyota knew about fraudulent sales reporting by its dealers but failed to prevent it.

We think that the district court has made the legal standard too demanding. Based on ordinary usage, conduct can be "arbitrary" and perhaps even "unfair" without subjective bad faith;² agency action taken without any whiff of dishonesty or fraud is commonly so characterized, and overturned, under an arbitrariness standard.³ True, as the district court said, chapter 93B finds its roots in a concern about "oppressive power" of makers and distributors, Beard Motors, Inc. v. Toyota Motor Distribs., Inc., 395 Mass. 428, 480 N.E.2d 303, 306 (1985); but such power can be carelessly as well as wilfully deployed.

Admittedly, the district court's reading of the arbitrariness standard is supported by a statement of a sister federal court in New Hampshire construing the same term ("arbitrary") in that state's automobile-dealer statute. Relying on Black's Law Dictionary, that case held that "arbitrary" was synonymous with "bad...