Key v. Chrysler Motors Corp.

Decision Date31 May 1996
Docket NumberNo. 22587,22587
Citation121 N.M. 764,1996 NMSC 38,918 P.2d 350
PartiesJack KEY and Jack Key Motor Company, Inc., Plaintiffs-Respondents, v. CHRYSLER MOTORS CORPORATION, Defendant-Petitioner.
CourtNew Mexico Supreme Court

MINZNER, Justice.

Jack Key and Jack Key Motor Company, Inc. (Key) sued Chrysler Motors Corporation (Chrysler), alleging that Chrysler had unreasonably withheld its consent to the transfer of a Chrysler/Plymouth dealership franchise from the Borman Motor Company (Borman) to Key in violation of the New Mexico Motor Vehicle Dealers Franchising Act, NMSA 1978, §§ 57-16-1 to -16 (Repl.Pamp.1995) (the Act). After a bench trial, the district court concluded that the Act granted Key standing, found that Chrysler had acted unreasonably in violation of the Act, and awarded Key $300,000 in compensatory damages and $125,000 in attorney fees. Chrysler appealed to the Court of Appeals on three issues: (1) whether Key had standing to sue under the Act, (2) whether the trial court applied the proper legal standard in finding that Chrysler unreasonably withheld consent to the transfer, and (3) whether Key's own negligence demanded a reduction of the damages award. Key cross-appealed, arguing that the trial court erred in excluding evidence of lost future profits as damages. The Court of Appeals affirmed. Key v. Chrysler Motors Corp., 119 N.M. 267, 277, 889 P.2d 875, 885 (Ct.App.) (Hartz, J., dissenting), cert. granted, 119 N.M. 311, 889 P.2d 1233 (1995). We granted certiorari to address the first two issues. We conclude that the Act does not afford standing to all prospective franchisees. Therefore, we overrule the Court of Appeals' rationale in granting Key standing. We also conclude that Key failed to state a cause of action under the Act. Therefore, we vacate the judgment entered in favor of Key and remand with instructions to enter judgment for Chrysler.


Because the facts of this case have been fully presented in the Court of Appeals opinion, we will not repeat them except as they are relevant to our discussion of the arguments made to this Court on certiorari. This suit arose out of Chrysler's refusal to approve the transfer of a Chrysler/Plymouth franchise to Key, who already owned and operated a Jeep/Eagle franchise with Chrysler and was seeking to expand the existing business. Key alleges that Chrysler's rejection of his application to acquire the Chrysler/Plymouth franchise violated the Act. Key then sued Chrysler pursuant to the Act.

The Act requires that the manufacturer's "consent [to transfer a franchise] shall not be unreasonably withheld." Section 57-16-5(L). Chrysler rejected Key as a potential franchisee because he failed to meet his Minimum Sales Responsibility (MSR) for the Jeep/Eagle line of vehicles sold under his existing franchise. The MSR is Chrysler's measure of a dealer's sales ability. It is derived from new vehicle registrations within the dealer's sales territory multiplied by a second figure based on Chrysler's sales within a larger sales zone encompassing the dealer's sales territory. The record indicates that in reviewing applications from prospective franchisees who had existing dealerships, Chrysler used a dealer's MSR to evaluate sales performance, but used different criteria for reviewing other prospective franchisees. The trial court found that a dealer's MSR may be a reasonable criterion in evaluating a prospective franchisee; however, in this case local geographic and economic factors distorted its accuracy in evaluating Key's sales performance. The trial court found that fraudulent registration in New Mexico of vehicles owned by Texas residents distorted the number of total new vehicle registrations in Dona Ana County, so that mathematically applying the number of new vehicles registered in the county into the MSR formula was not representative of Key's true percentage sales. Consequently, the trial court found Key proved that Chrysler's reliance on the inaccurate MSR to reject Key as a potential franchisee was unreasonable and violated Section 57-16-5(L).

The trial court interpreted Section 57-16-5(L) to impose a statutory duty on Chrysler to act reasonably, which included the specific duty to ensure use of an accurate MSR in the subject area. Chrysler had unilateral control over the standards used to select dealers, and as such had the upper hand in the selection process. Thus, the trial court concluded that even if Chrysler's MSR committee did not know about extenuating factors affecting Key's territory, it had a duty to ascertain the MSR's accuracy. The trial court held, and the Court of Appeals majority agreed, that Chrysler's failure to use an accurate MSR to judge Key's application fell below the legal standard required under the statute.

On certiorari Chrysler argues that Key lacked standing to sue under the Act because the Legislature did not intend to provide a cause of action to a prospective franchisee. Chrysler reasons that the Legislature intended to redress the historical imbalance of power between automobile manufacturers and their existing franchisees, and that its overriding purpose of protecting franchisees is clear. Chrysler asks us to conclude that only franchisees holding valid franchises have standing to sue manufacturers under the Act.

Key argues that a plain reading of the Act's declared policy makes it clear that the New Mexico Legislature intended the Act to govern pre-franchise relationships, including conduct pursuant to obtaining a franchise. The Act's declared policy is as follows:

The distribution and sale of motor vehicles in this state vitally affects the general economy of the state and the public interest and welfare of its citizens. It is the policy of this state and the purpose of this act to exercise the state's police power to ensure a sound system of distributing and selling motor vehicles and regulating the manufacturers, distributors, representatives and dealers of those vehicles to provide for compliance with manufacturer's warranties, and to prevent frauds, unfair practices, discriminations, impositions and other abuses of our citizens.

Section 57-16-1. The Court of Appeals majority agreed with Key's interpretation of the Legislature's intent. Key, 119 N.M. at 274, 889 P.2d at 882.

Judge Hartz, however, noted that the Act limits recovery to damages for an injury "by reason of anything forbidden in this act." Key, 119 at 279, 889 P.2d at 887 (Hartz, J., dissenting) (discussing Section 57-16-13). He observed that Section 57-16-9 provides as follows:

Anything to the contrary notwithstanding, it shall be unlawful for the manufacturer, distributor or representative without due cause to fail to renew on terms then equally available to all its motor vehicle dealers, to terminate a franchise or to restrict the transfer of a franchise unless the dealer shall receive fair and reasonable compensation for the value of the business. (Emphasis added.)

Id. at 279, 889 P.2d at 887. Judge Hartz reasoned that Section 57-16-9 precluded a dealer from suing a manufacturer for refusing to transfer the franchise when the dealer had received "fair and reasonable compensation." Id., 119 N.M. at 277-78, 889 P.2d at 885-86. He concluded that Section 57-16-9 eliminated "liability to the proposed transferee ... altogether" when the dealer had received adequate compensation. Id. at 280, 889 P.2d at 888. Key neither pleaded nor proved that Borman failed to receive proper compensation. Id. at 281, 889 P.2d at 889. Judge Hartz concluded that on these facts Key did not have a cause of action. Id.

The majority opinion construed Section 57-16-9 as limiting only the selling dealer's cause of action, and thus as not dispositive of Key's cause of action. Id. at 273, 889 P.2d at 881. The majority viewed the remaining issue as whether the trial court erred in holding Chrysler liable "for relying on the inaccurate MSR when it did not actually know the facts rendering the MSR inaccurate." Id. at 275, 889 P.2d at 883. The majority concluded that "because Chrysler determined the elements for calculating the MSR and the formula for measuring dealer's sales performance, Chrysler had an obligation to make reasonable inquiries about whether local conditions rendered the MSR on which it relied inaccurate." Id.

Judge Hartz, on the other hand, noted that:

When Section 57-16-5(L) states that a manufacturer's consent to transfer of a franchise "shall not be unreasonably withheld," it is not imposing a tort standard of "reasonableness." It is saying that the manufacturer's reasons for denial must be sound reasons. It is requiring the manufacturer to make an objectively reasonable business decision. Rather than saying that the manufacturer must act with "due care," it is saying that the manufacturer must act with "due cause." See § 57-16-9 (manufacturer cannot restrict the transfer of a franchise "without due cause"). The requirements of "due care" and "due cause" will overlap substantially, but they are not congruent.

Key, 119 N.M. at 282, 889 P.2d at 890. Having construed the Act to require the manufacturer to act with "due cause" rather than "due care," Judge Hartz noted that the trial court's findings indicate Chrysler's use of Key's MSR was negligent for lack of an independent investigation. Id. at 284-85, 889 P.2d at 892-93. He reasoned that the Court's findings and conclusions did not...

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