Diesel Machinery, Inc. v. B.R. Lee Industries

Citation418 F.3d 820
Decision Date08 August 2005
Docket NumberNo. 03-2652.,No. 04-1577.,03-2652.,04-1577.
PartiesDIESEL MACHINERY, INC., Appellee, v. B.R. LEE INDUSTRIES, INC., Appellant.
CourtU.S. Court of Appeals — Eighth Circuit

William A. Clineburg, argued, Atlanta, GA (Matthew A. Boyd, Atlanta, GA, on the brief), for appellant.

Michael P. Healey, argued, Kansas City, MO, for appellee.

Before BYE, JOHN R. GIBSON, and GRUENDER, Circuit Judges.

BYE, Circuit Judge.

Diesel Machinery, Inc. (DMI), sued B.R. Lee Industries, Inc. (LeeBoy),1 alleging LeeBoy unlawfully terminated DMI's dealer franchise. The district court2 entered partial summary judgment in DMI's favor on liability, and a jury subsequently awarded DMI compensatory damages of $665,000, and $4.335 million in punitive damages, remitted to $2.66 million by the district court. See Diesel Mach., Inc. v. B.R. Lee Indus., Inc., 328 F.Supp.2d 1029, 1051-56 (D.S.D.2003). In this appeal, LeeBoy challenges the grant of partial summary judgment and several of the district court's pre-trial, trial and post-trial rulings. We affirm the district court in all respects.


DMI is a construction equipment dealer in South Dakota. LeeBoy manufactures several models of pavers and other road-building equipment. In November 2000, LeeBoy entered a dealership agreement with DMI giving the latter exclusive rights to sell LeeBoy products throughout South Dakota as well as seven counties in Minnesota. Initially effective through December 31, 2001, the agreement provided it would thereafter "automatically renew for successive one (1) year terms." DMI's App. at 76. The agreement also indicated either party could terminate the agreement with "advance written notice of termination at least sixty (60) days (or longer if required by the laws of the state where your principal office is located) prior to the end of the then current term." Id. The agreement further provided:

Some states have laws that give you certain rights which may vary from, or are in addition to, those found in this Agreement. If your principal place of business is located in one of those states, this Agreement is amended to the fullest extent necessary to provide you those rights.

Id. at 77.

This provision resulted from DMI's request to modify the initial draft of the agreement, which had provided North Carolina law would govern. DMI wanted the benefit of the South Dakota Dealer Protection Act (SDDPA), which it understood to permit termination of the agreement only if DMI justly provoked LeeBoy through misconduct. See S.D. Codified Laws § 37-5-3 (prohibiting a manufacturer or distributor from canceling a dealer's franchise "unfairly . . . and without just provocation"); Groseth Int'l, Inc. v. Tenneco, Inc., 410 N.W.2d 159, 168 (S.D.1987) (holding "just provocation [under § 37-5-3] requires some sort of misconduct or shortcoming on the part of the dealer.").

After entering the agreement, DMI took its obligation to LeeBoy seriously. DMI likened its relationships with the manufacturers whose lines it carried to a marriage, putting the goodwill it had built with its customers on the line when promoting products. DMI trained its sales and service employees on LeeBoy products and procedures. Tim Jenkins, LeeBoy's Manufacturer's Representative for the territory which included South Dakota, presented sales training sessions to DMI sales people and traveled with various DMI salesmen on customer calls to promote LeeBoy products. LeeBoy's literature was disseminated to DMI's sales people, and DMI's sales people studied the LeeBoy product and procedures manual. DMI also stocked — in both its Sioux Falls and Rapid City branches — the parts LeeBoy recommended for stocking.

DMI advertised LeeBoy's products. LeeBoy provided DMI with a canvas sign or poster (approximately 3' x 5') displaying the LeeBoy logo, which DMI placed in its dealership lobby. DMI advertised LeeBoy products on its Internet website, in its DMI Product Support Report (a monthly publication indicating DMI's current inventory), and in the DMI Difference Magazine (a publication sent to about 2000 DMI customers and potential customers). DMI displayed product brochures for LeeBoy equipment in the lobbies of both its Sioux Falls and Rapid City branches. DMI's sales manager also prepared an advertising flyer specifically to promote the LeeBoy Force Feed Loader (referred to in South Dakota as a snow loader), which LeeBoy sent to all of its customers along with LeeBoy's own product brochure.

DMI purchased two pavers from LeeBoy within the first six months of the franchise period. DMI ordered the first paver in March of 2001 and purchased it in June of 2001. DMI leased this paver for three months to Bowes Construction in Brookings, South Dakota; Bowes ultimately purchased the paver in September 2001. DMI purchased a second LeeBoy paver in May 2001 to lease to M & S Construction in Deadwood, South Dakota.3 DMI was in the process of stocking a third LeeBoy paver when LeeBoy terminated the franchise.

On July 12, 2001, eight months into the agreement, Bryce Davis of LeeBoy called DMI's president, Dan Healy, and canceled the franchise agreement. Davis initially gave no reason for the termination; but LeeBoy had recently acquired another product line, Rosco,4 and planned to use an existing Rosco dealer network to sell LeeBoy products.5 On July 13, 2001, when LeeBoy confirmed DMI's termination in writing, it referred to its "acquisition of Rosco" as the sole reason for the termination, indicating "[t]he consolidation of dealers has resulted in the cancellation of your LeeBoy Dealer Agreement effective July 12, 2001."

LeeBoy never complained about DMI's performance before the termination. There were no problems regarding warranties, credit, sales performance, training, advertising, stocking requirements or quality of service. DMI had not breached the dealer agreement or violated any LeeBoy program, practice, policy, rule or guideline. In fact, DMI performed significantly better than LeeBoy's previous South Dakota dealer, who had no sales of LeeBoy pavers in the five years before DMI's franchise. LeeBoy admitted DMI had not breached or violated the dealership agreement prior to the termination, and that the sole reason for the termination was LeeBoy's acquisition of Rosco.

As it turned out, DMI's was just one of several dealer agreements across the country LeeBoy terminated due to its acquisition of Rosco. At trial, DMI presented evidence, and argued, that LeeBoy's dealer terminations were consistent with a corporate strategy of "growth through acquisition." LeeBoy was acquired by an investment bank, First Islamic Bank, and its co-investors, in January 2000. After the acquisition, LeeBoy became a portfolio company of Crescent Capital Investments, Inc., an Atlanta-based company owned by a First Islamic subsidiary, whose function it was to evaluate potential acquisitions for First Islamic and provide management and oversight services to portfolio companies. Crescent Capital advised First Islamic on the latter's acquisition of LeeBoy, and in turn advised LeeBoy on its acquisition of Rosco. Following Crescent's advice, LeeBoy "developed a plan for growing the company both organically and through acquisitions." LeeBoy expected its acquisition of Rosco to lead to a "lot of synergies between the two companies in both the distribution channel as well as the product channel," that is, LeeBoy could expand to new areas covered by existing Rosco dealers, and vice versa. Some areas, however, already had both Rosco and LeeBoy dealers. LeeBoy's plan required it to terminate some LeeBoy dealers in those areas that overlapped with an existing Rosco dealer.

DMI's evidence showed LeeBoy put its corporate interests first during the Rosco acquisition, and disregarded the contractual and statutory rights of some existing dealers. For example, Ed Underwood, Crescent Capital's executive director and a LeeBoy board member, knew dealers were protected by various state laws, but ignored the issue when LeeBoy's board discussed dealer terminations, indicating the issue of how to handle territories with both LeeBoy and Rosco dealers was "not on our list. . . . The discussion of dealer termination was very limited. They were being consolidated, period." Indeed, with respect to DMI, Underwood said South Dakota was "not big on my map." Kelly Majeski, LeeBoy's vice president, knew DMI's termination might violate the law but chose not to seek legal advice before going forward with the termination. Pat Labriola, LeeBoy's president and CEO, admitted he was aware of state laws that protect dealers, but did not review those laws indicating "[t]hat's what I hire lawyers for." There was no evidence, however, Labriola bothered to consult with lawyers before terminating DMI. Bryce Davis, who made the phone calls to cancel at least ten dealers, acknowledged several got upset and threatened litigation, with some specifically referring to state laws protecting them from cancellation. Undeterred, LeeBoy plowed ahead with its consolidation plans.

A week after DMI's termination, DMI's attorney contacted LeeBoy by letter. The letter referred to the SDDPA's prohibition against canceling a dealer's franchise "without just provocation," claimed the termination would cause DMI significant damage, offered to settle the dispute for $600,000, and promised litigation ifLeeBoy did not respond to the settlement offer by August 3, 2001. DMI's attorney also referred to a previous suit DMI brought against Ingersoll-Rand for wrongful termination of DMI's Ingersoll-Rand franchise, and "enclosed for review by your law department" a copy of an order entered in that case which resolved some preliminary issues in DMI's favor.

When LeeBoy did not respond by August 3, DMI filed this suit. In relevant part,...

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