Dmo Norwood LLC v. Kia Am.

• Decision Date: 15 February 2023
• Docket Number: Civil Action 22-cv-10470-ADB
• Parties: DMO NORWOOD LLC d/b/a Dan O'Brien Kia Norwood, Plaintiff, v. KIA AMERICA, INC., Defendant.
• Court: U.S. District Court — District of Massachusetts

DMO NORWOOD LLC d/b/a Dan O'Brien Kia Norwood, Plaintiff, v. KIA AMERICA, INC., Defendant.

Civil Action No. 22-cv-10470-ADB

United States District Court, D. Massachusetts

February 15, 2023

MEMORANDUM AND ORDER ON MOTION TO AMEND

ALLISON D. BURROUGHS U.S. DISTRICT JUDGE

Plaintiff DMO Norwood LLC d/b/a Dan O'Brien Kia Norwood (“DMO Norwood”) filed an eight-count complaint against Kia America, Inc. (“Kia”), in Norfolk Superior Court on March 25, 2022, in which it alleged that Kia's audit of DMO Norwood and termination of the Dealer Sales and Services Agreement (“Dealer Agreement”) violated various provisions of Massachusetts General Laws Chapter 93B (Counts I, II, IV, V, and VI) and breached the parties' Dealer Agreement (Count III, VII), and sought preliminary and permanent injunctive relief (Count VIII). [ECF No. 1 ¶ 1; ECF No. 1-2 (“Compl”) ¶¶ 6, 87-151]. Currently before the Court is Kia's motion to amend its answer to add counterclaims and counterclaim defendants (“Motion to Amend”). [ECF No. 52]. For the following reasons, Kia's Motion to Amend is GRANTED in part and DENIED in part.

I. BACKGROUND

A. Statutory Scheme

Massachusetts General Laws Chapter 93B, Massachusetts' so-called “Dealers' Bill of Rights,” Wagner and Wagner Auto Sales, Inc. v. Land Rover N. Am., Inc., 547 F.3d 38, 40 (1st Cir. 2008), “regulates business practices between motor vehicle manufacturers, distributors and dealers.” Petrosyan v. Maserati N. Am., Inc., No. 19-cv-12425, 2020 WL 2104789, at *3 (D. Mass. May 1, 2020). The statute is “aimed primarily at protecting motor vehicle dealers from injury caused by the unfair business practices of manufacturers and distributors with which they are associated, generally in a franchise relationship.” Mass. State Auto. Dealers Ass'n v. Tesla Motors MA, Inc., 15 N.E.3d 1152, 1153 (Mass. 2014).

Section 3 of Chapter 93B makes “[u]nfair methods of competition and unfair or deceptive acts or practices” unlawful. Mass. Gen. Laws ch. 93B, § 3. These enumerated “unfair methods” and “unfair or deceptive acts or practices” include:

• “[T]erminat[ing] the franchise agreement of a motor vehicle dealer” “without good cause, in bad faith or in an arbitrary or unconscionable manner[.]” Id. § 5(a).

• “[A]udit[ing] or examining] any sales or service account or activity of a motor vehicle dealer as retribution because the motor vehicle dealer exercised . . . any right pursuant to its franchise agreement.” Id. § 9(i).

Section 9 imposes additional conditions on manufacturers' audits and sales incentives:

• Section 9(c) stipulates that manufacturers may “audit claims submitted by a motor vehicle dealer and paid by the manufacturer” for “sales incentive, bonus, or other claims relating to the sale of new motor vehicles or services,” but may only do so “for 1 year after the date on which a claim is paid or the end of any program period, whichever is later” unless “there is evidence of fraud or if there has been fraudulent concealment . . . .” Id. § 9(c).

• Section 9(e) states that “[a] sales incentive, bonus or comparable claim relating to the sale of new motor vehicles or services submitted by a motor vehicle dealer and paid by the manufacturer . . . may be charged back to the motor vehicle dealers only if the claim was fraudulent or false, the sales were not made, the sales were not timely, or the motor vehicle dealer failed to comply with the reasonable written requirements of the manufacturer . . . in effect at the time that the claim was presented for payment.” Id. § 9(e).

DMO Norwood brings claims under each of these provisions.

B. Factual Background

DMO Norwood began operating as an authorized Kia Dealer on or about February 1, 2019, pursuant to a Dealer Agreement with Kia. [Compl. ¶ 6]. DMO Norwood's sole owner, Dan O'Brien, also owns Kia Dealerships in Concord, New Hampshire (DMO Auto Acquisitions, LLC d/b/a Dan O'Brien Kia of Concord (“DMO Concord”)) and North Hampton, New Hampshire (DMO North Hampton, LLC d/b/a Dan O'Brien Kia of North Hampton (“DMO North Hampton”)) (collectively, the “New Hampshire Entities”), as well as three other non-KIA dealerships in Massachusetts and New Hampshire. [Id. ¶¶ 9, 10; ECF No. 62 at 1].

DMO Norwood's claims arise from Kia's decision in January 2022 to terminate DMO Norwood's Dealer Agreement, following an audit of DMO Norwood's recent sales records in June 2021. See [Compl. ¶¶ 38, 44-47, 74-75]. DMO Norwood had submitted the sales records to Kia pursuant to a sales policy that provides incentives to drive specific sales, [id. ¶ 34-37], and the stated purpose of the audit was to confirm compliance with the sales policy, [id. ¶¶ 3839]. On January 3, 2022, Kia communicated the final results of the audit, stating that roughly 20 sales were subject to chargeback, because DMO Norwood had “submitted fraudulent [retail delivery reports] to [Kia] to receive incentive credits to which the Dealership was not entitled.” [Id. ¶¶ 63-66 (second alteration in original)].

Thereafter, on January 28, 2022, Kia sent DMO Norwood a “Notice of Termination” of the Dealer Agreement, citing several grounds for termination, including that DMO Norwood: “repeatedly submitted false information to [Kia] in connection with its reporting of new vehicle sales[,]” “assisted an affiliated Kia Dealership [Dan O'Brien's Concord, New Hampshire dealership] in its submission of false sales reports to [Kia,]” and “failed to furnish accurate sales information and supporting data to [Kia], both in the underlying retail delivery reports (“RDRs”) and, in response to [Kia's] audit procedure.” [Compl. ¶¶ 74, 75]. The Notice stated that “in particular” “audits conducted by [Kia] have revealed that the Dealership has perpetrated a fraud on [Kia] through the submission of false sales information.” [Id. ¶ 75].

DMO Norwood asserts that these grounds for termination of the Dealer Agreement were “pretextual,”^[1] [Compl. ¶¶ 101, 109], and that the termination and the audits of DMO Norwood, DMO Concord, and DMO North Hampton were done “in retribution” for O'Brien's decision to stop contributing funds to a voluntary marketing program run by Kia, which funded promotion for all Kia dealerships in the Boston Metro Group, including DMO Norwood's Kia competitors. [Compl. ¶¶ 19-20, 43].

Kia's proposed counterclaims arise from what Kia describes as the “widespread false reporting of sales” by DMO Norwood and O'Brien, DMO Concord, and DMO North Hampton, and “an attempted cover-up of their activity.” [ECF No. 53 at 3]. According to Kia, during the course of discovery it uncovered evidence that “O'Brien launched an urgent but only partially successful effort to a move a substantial number of Kia vehicles from one O'Brien Auto Group dealership to another, and to sell off over 100 Kia vehicles to a wholesaler,” and that this was done to “conceal from Kia's auditor that [all three O'Brien Kia Dealerships] still had dozens of vehicles in inventory that they had previously reported to Kia as retail sales and for which they had received tens of thousands of dollars in incentive payments to which they were not entitled.” [ECF No. 53-1 ¶ 37]. Kia states in its reply brief, [ECF No. 69], that it has now learned of additional allegedly fraudulent sales reports, including an allegedly false report from December 2021, which it intends to add to its allegations, [id. at 2].

C. Procedural Background

Following the filing of the complaint on March 25, 2022, see [Compl.], Kia removed the action to this Court on March 29, 2022. [ECF No. 1]. On April 1, 2022, with the parties' agreement, the Court set a trial date of January 9, 2023, [ECF No. 14], and thereafter approved the parties' stipulation that the termination of the Dealer Agreement would be stayed pending entry of final judgment in this action.^[2] [ECF Nos. 17, 19]. Kia answered DMO Norwood's Complaint on April 29, 2022 and did not raise any counterclaims. [ECF No. 23].

On June 15, 2022, the Court approved a schedule proposed by the parties that contemplated five months of discovery prior to trial. [ECF Nos. 32, 33]. The parties agreed that fact discovery would be completed by October 21, 2022, expert discovery by November 16, 2022, and all dispositive motions would be due by November 18, 2022 in advance of the January 2023 trial date. [ECF No. 32].

On September 19, 2022, a month before the close of discovery, Kia moved for leave to amend its Answer to add seven counterclaims and three counterclaim defendants, DMO Concord, DMO North Hampton, and O'Brien, as sole owner of DMO Norwood, DMO Concord, and DMO North Hampton (“Proposed Counterclaim Defendants”). [ECF Nos. 52, 53-1]. The proposed counterclaims allege violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) (Counterclaim Counts I and II), fraud (Counterclaim Count III), negligent misrepresentation (Counterclaim Count IV), conversion (Counterclaim Count V), civil conspiracy (Counterclaim Count VI), and breach of contract (Counterclaim Count VII). [ECF No. 53-1 ¶¶ 64-120].

In the meantime, the New Hampshire Entities, DMO Concord and DMO North Hampton, filed administrative complaints against Kia related to “[Kia's] efforts to chargeback certain incentive payments” and “attempt to terminate” their Dealer Agreements in violation of the New Hampshire motor vehicle franchise statute, and the Court understands those complaints are currently proceeding before the New Hampshire Motor Vehicle Industry Board. [ECF No. 62 at 1-2]; see also [ECF No. 53 at 2-3; ECF No. 69 at 3-4].

II. DISCUSSION

Federal Rule of Civil Procedure 15(a) provides that leave to amend generally should be “freely give[n] . . . when justice so requires.” Fed.R.Civ.P. 15(a)(2). “[E]ven so [a] district court enjoys significant latitude in...