G.A. Imports, Inc. v. Subaru Mid-America, Inc.

• Decision Date: 27 August 1986
• Docket Number: No. 85-1772,INC,MID-AMERIC,85-1772
• Citation: 799 F.2d 1200
• Parties: G.A. IMPORTS, INC., Appellee, v. SUBARU, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1200

799 F.2d 1200

G.A. IMPORTS, INC., Appellee, v. SUBARU MID-AMERICA, INC., Appellant.

No. 85-1772.

United States Court of Appeals Eighth Circuit.

Submitted April 17, 1986.

Decided Aug. 27, 1986.

Marc P. Seidler, Chicago, Ill., for appellant.

Andrew F. Puzder, St. Louis, Mo., for appellee.

Before JOHN R. GIBSON, Circuit Judge, BRIGHT, Senior Circuit Judge, and FAGG, Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

The Missouri Motor Vehicle Franchise Practices Act (Franchise Act), Mo.Rev.Stat. Secs. 407.810-.835 (V.A.M.S.Supp.1986), bars a franchisor from nonrenewal of a new motor vehicle franchise unless the franchisee is in "substantial default" of "reasonable and lawful obligations" to the franchisor. Id. Sec. 407.825(5). Subaru Mid-America (Mid-America), a regional distributor of Subaru automobiles, threatened nonrenewal of a franchise held by G.A. Imports (Imports), a Subaru dealer, because Imports had become a dual-line dealer, selling Peugeot automobiles in addition to Subaru, which Mid-America claimed constituted a default of Imports' obligation to deal exclusively in Subaru. The district court ¹ held that Imports' dual-line dealing did not create a default because its contract with Mid-America did not bind it to sell exclusively Subaru. The court further held that even if Imports were in default, the default was not substantial because there was no showing that Imports' dual-line dealing would detrimentally affect Mid-America's business. The district court also held that even if Imports had committed substantial default, the purported contractual obligation permitting it to sell only Subaru was unreasonable because Mid-America failed to supply sufficient Subaru vehicles to allow Imports to stay in business, the Peugeot line did not compete with Subaru, and Imports agreed to discontinue sales of Peugeot upon 30 days' notice that it would receive sufficient Subaru stock. Therefore, pursuant to its authority under the Franchise Act, the district court permanently enjoined Mid-America from not renewing Imports' Subaru franchise due to Imports sale of Peugeot. G.A. Imports, Inc. v. Subaru Mid-America, 608 F.Supp. 1571 (E.D.Mo.1985). Mid-America seeks to reverse the grant of injunctive relief, contending that the district court misinterpreted the franchise agreement and misconstrued the Franchise Act's substantiality and reasonableness requirements. We affirm.

I.

Imports has operated an automobile dealership in Webster Groves, Missouri, near St. Louis, since 1968. Mid-America, one of 13 regional distributors of new Subaru automobiles for Subaru of America, the importer, distributes Subaru automobiles within an eight-state region including Missouri, and currently distributes to 86 dealers. In 1973, Imports contracted with Mid-America to become a Subaru franchisee. The franchise agreement has been renewed with alterations several times since. The January 1984 Agreement, at issue in this case, which incorporates parts of earlier agreements, was to govern for one year. Because the district court enjoined Mid-America from not renewing Imports' franchise, the parties continue to do business under the January 1984 Agreement.

Imports, like all other St. Louis area Subaru dealers, has virtually always carried more than one manufacturer's line. Throughout the 1970s, Imports principally sold Fiat and Lancia, in addition to Subaru. In the early 1980s, Fiat and Lancia phased out new car sales in the United States. While Imports continued to carry those lines, by 1982 Subaru was Imports' top line; by 1984, Imports sold only Subaru. In deciding not to replace the Fiat and Lancia lines and to concentrate on Subaru sales, Imports seems to have been influenced by Mid-America, which had concluded that single-line dealerships achieve a 45% greater market penetration than multi-line dealerships. Throughout this period, all other St. Louis area Subaru dealers maintained sales of other lines, including Mazda, Volkswagen, and Toyota, which the district court found compete directly with Subaru.

Imports' planning volume, acknowledged in the January 1984 Agreement, was 113 Subaru vehicles per year. With such a planned sales volume, Imports was required, under Subaru of America's national minimum standards, incorporated into the Agreement, to maintain a monthly ending inventory of 17 vehicles. In 1982 the Japanese government limited its manufacturers' exportation of new cars to the United States, and a scarcity of Subaru vehicles developed. In response, Mid-America instituted a "turn and earn" vehicle rationing system, under which the number of new Subarus a dealer obtained was pegged to its retail sales rate relative to that of other Subaru dealers. Despite turn and earn, Imports was unable to obtain sufficient inventory to support its planned sales volume. Thus, after selling more Subarus in 1983 than it had received, and despite its planning volume of 113 for 1984, Imports received only 88 Subaru vehicles in that year. During the first three months of 1985, Imports received only 10 Subaru vehicles. Moreover, throughout 1984 and 1985, Imports monthly ending inventory of Subaru automobiles never exceeded 14, and its inventory usually was lower.

Faced with the continuing prospect of insufficient Subaru inventory, on October 15, 1984, Imports, without notifying Mid-America, obtained a franchise to sell Peugeot automobiles from its Webster Groves facility. The agreement with Peugeot allowed Imports to terminate that franchise upon 30 days' notice. Mid-America learned of Imports' Peugeot sales the following day, and on October 19, 1984, wrote Imports that it would not renew the January 1984 Agreement if Imports continued to sell Peugeot. Mid-America stated that its prospective nonrenewal was based on Imports' violation of the January 1984 Agreement, which Mid-America asserted required Imports to devote the entire Webster Groves facility exclusively to the sale of Subaru.

The district court found that the January 1984 Agreement did not explicitly bind Imports to maintain a single-line Subaru dealership. Rather, the assertions of exclusivity arose from requirements concerning the space Imports was to devote to Subaru sales referenced in four separate places in the January 1984 Agreement, which consisted of five separate documents. Paragraph 9 of one of the documents, entitled "Dealership Agreement," required Imports to commit 2,264 square feet of showroom space, which constituted its entire showroom, to the display of Subaru. Another document, "Schedule A," attached to "Addendum A," required Imports to devote 960 square feet of its showroom, the minimum under Subaru of America's national minimum standards, exclusively to the display of Subaru. Paragraph 5.1 of still another document, entitled "Dealership Agreement and Standard Provisions," indicated that the space requirements in any addendum to the Agreement--in this case Schedule A--would supersede those in the Dealership Agreement. Schedule A also required Imports to maintain 43,500 square feet, another Subaru of America minimum standard, which constituted most of its 49,685 total square feet, exclusively for Subaru. The 1981 Agreement required that Imports maintain 54,375 square feet exclusively for Subaru; at that time Imports' facility consisted of only 34,685 square feet.

The district court, unable to reconcile the 2,264 square foot showroom space requirement in Paragraph 9 and the 960 square foot showroom space requirement in Schedule A, reasoned that the January 1984 Agreement was ambiguous in this respect, and thus would be construed against Mid-America, the drafter. It therefore concluded that the January 1984 Agreement did not require Imports to devote its entire showroom space to Subaru. The court further concluded that as Mid-America had never enforced the total square foot exclusivity requirement, 54,375 in the 1981 Agreement, and 43,500 in the January 1984 Agreement, which it found was established to ensure the availability of adequate space to sell, service, and store the Subaru line, the parties' course of dealing throughout their relationship and the purpose of the space requirement indicated that the January 1984 Agreement must be read to require Imports to maintain the total space for Subaru only if Mid-America supplied Imports with sufficient inventory. The court thus held that by committing part of its facility to the sale of Peugeot, Imports had not defaulted on any obligation to Mid-America under the January 1984 Agreement.

The district court further held that even if Imports had defaulted, the default did not constitute a "substantial default" within the meaning of the Franchise Act. To prove the default substantial, the court reasoned, Mid-America was required to show that Imports' sales of Peugeot from its Webster Groves facility would detrimentally affect Mid-America's business. The court found that Mid-America failed to show that its sales would slip or that other dealers obligated to sell exclusively Subaru, allegedly 10 of the 86, would violate their single-line obligations should Imports maintain the Peugeot line.

The court also held that were Imports obligated to maintain a single-line Subaru dealership, the requirement under these circumstances was not "reasonable" within the meaning of the Franchise Act. The court recognized that Mid-America's interest in seeking to achieve increased market penetration through the maintenance of single-line dealerships, while legitimate, would unlikely be realized as long as Mid-America failed to supply Imports with sufficient vehicles. Imposition of a single-line obligation on Imports, the court found, placed the dealer at a competitive disadvantage to the other St. Louis area Subaru dealers, all of which were able to subsidize their fixed costs through the sale of lines in addition to, and indeed competitive with, Subaru. The court also found it unreasonable to require Imports to keep its...