Semmes Motors, Inc. v. Ford Motor Company, No. 861 and 862

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: WATERMAN, FRIENDLY and FEINBERG, Circuit
• Citation: 429 F.2d 1197
• Parties: SEMMES MOTORS, INC., suing on behalf of itself and together with Ford Dealers Alliance, Inc., etc., et al., Plaintiffs-Appellees, v. FORD MOTOR COMPANY, Defendant-Appellant.
• Docket Number: No. 861 and 862,Dockets 34447 and 34671.
• Decision Date: 06 July 1970

429 F.2d 1197 (1970)

SEMMES MOTORS, INC., suing on behalf of itself and together with Ford Dealers Alliance, Inc., etc., et al., Plaintiffs-Appellees,
v.
FORD MOTOR COMPANY, Defendant-Appellant.

Nos. 861 and 862, Dockets 34447 and 34671.

United States Court of Appeals, Second Circuit.

Argued May 28, 1970.

Decided July 6, 1970.

429 F.2d 1198

Otis Pratt Pearsall, New York City (Hughes, Hubbard & Reed, and John A. Donovan, New York City, of counsel), for defendant-appellant.

David Fisher, New York City (Manes, Sturim, Roth & Fisher, New York City, of counsel), for plaintiffs-appellees, and Wilentz, Goldman & Spitzer, Allen Ravin, Alan E. Davis, Stanley L. Benn, Perth Amboy, N. J., on the brief.

Jerry S. Cohen, Washington, D. C., for National Automobile Dealers Association as amicus curiae.

Margaret Millus Maroldy, New Rochelle, N. Y., for New Jersey Automobile Dealers Association as amicus curiae.

Before WATERMAN, FRIENDLY and FEINBERG, Circuit Judges.

FRIENDLY, Circuit Judge:

This heated controversy, which at this early stage has already produced four and a half printed pages of docket entries in the District Court for the Southern District of New York, not to speak of those in a related action in the District Court for New Jersey, is between defendant Ford Motor Company and plaintiff Semmes Motors, Inc.,

429 F.2d 1199

Ford's dealer in the plush suburb of Scarsdale, N. Y., since 1949. Federal jurisdiction is predicated both on diverse citizenship and on the Federal Dealer Act, 15 U.S.C. §§ 1221-1225. Part of the acrimony is doubtless due to the fact that William A. Semmes, president of Semmes Motors, has taken an active part in the formation of Ford Dealers Alliance, Inc., a New Jersey corporation joining as a plaintiff, whose "main purpose," as stated in the complaint, "is the protection of dealers from abuse of the franchise system run by" Ford.¹ Semmes considers Ford's termination of his dealership to be a retaliation for these activities and an endeavor to supplant him with a dealership in which Ford would have a financial stake; Ford rejoins that activities on behalf of dealers, however proper, cannot protect against the consequences of what it characterizes as fraud. We affirm, with a modification stated in section IV of this opinion, the temporary injunction issued by Judge Ryan as being within the discretion afforded him, but order that further proceedings be stayed pending termination of the New Jersey litigation

I.

Commencing with the 1965 vehicles, introduced by Ford in the fall of 1964, the manufacturer has made its warranty directly to the retail purchaser as well as to the dealer. When a purchaser of a Ford car finds a defect which he claims to be within the warranty, he returns the car to the dealer who repairs it and submits a Warranty Refund Claim to Ford. The company reimburses the dealer for replacement parts at cost plus a profit and for labor in an amount determined by multiplying the installation time specified in a Ford schedule by the dealer's then approved labor rate. Dealers have complained that deterioration in quality control at the factory, difficulty in securing skilled repairmen, and other elements have made this policy burdensome; Ford has been concerned over the submission of inflated and even wholly false refund claims.

It will suffice to state the facts and the proceedings below in rather summary form: Although there had been a considerable history of dissatisfaction by Ford with Semmes' warranty refund claims,² the kick-off for the present fight was an apparently routine letter, dated July 25, 1969, from S. J. Obringer, Ford's New York District Sales Manager, to Semmes. This announced that in accordance with Company policy, Ford auditors would call on him, would "examine warranty claims and their related dealership records, inspect repaired units and may possibly contact customers for whom you have performed warranty work." It continued that the auditors would bring to Semmes' attention "any opportunities they find for improving warranty administration at your dealership," that the audit findings would be discussed with him, and that claims determined to have been improper might be charged back.³

The audit was conducted from August 4 through 28; its results were embodied in a report submitted to Semmes on September 18. Not stating the number of

429 F.2d 1200

claims examined or the period covered, the report found that 253 claims submitted by Semmes for refund, with a price tag of $10,440, were defective. The most serious were 86 claims, aggregating $4,691, where the auditors found that work for which reimbursement had been obtained had not been performed at all. Fifty of these were determined by visual inspection of vehicles that had come in during the audit, presumably for some other cause; the inspectors reported that 87% "of the inspectable units checked had work not performed." The other 36 claims were ascertained in the course of questioning "during telephone contacts made in the form of an owner satisfaction survey." Despite these seemingly serious findings, the auditors' recommendations were rather bland:⁴ Semmes should consider appointing a shop foreman, and there should be better control of the return of defective parts, of the recording of mechanics' time, and of the status of repairs in the shop

The auditors' insistence on contacting customers led the Alliance and Semmes to file, on August 22, 1969, a complaint in a New Jersey state court, later removed by Ford to the District Court for New Jersey, seeking an injunction against such contacts. However, no application for interlocutory relief was then made. The New Jersey action came to the attention of Robert W. Scott, an Associate Counsel in Ford's main office in Dearborn, Michigan. Learning of the results of the audit, Scott decided that Ford would have to consider making a counterclaim for false and fraudulent refund claims and also terminating Semmes' dealership. The meeting promised in Obringer's letter took place on September 18. An affidavit of one of Semmes' attorneys alleges that Semmes requested an opportunity for an independent appraisal, to which the Ford representatives did not object, and access to certain materials used by the auditors, which was refused. Meanwhile Ford had arranged with its New York attorneys to interview the owners contacted by the auditors and for teams comprised of an attorney, a Ford service representative and an independent expert to conduct further physical inspection of vehicles on which Semmes had submitted Warranty Refund Claims. These inspections began on September 22 and by October 7 had included 105 vehicles; Ford asserts that in 70% of these, repairs claimed by Semmes had not been performed.⁵

On the afternoon of October 7, Ford's New York counsel informed Scott that plaintiffs' New York attorneys had advised them of an intention to file in the Southern District of New York an action on behalf of Semmes and the Alliance substantially identical to the New Jersey action and to seek a temporary restraining order similar to that which had been there refused, see fn. 5. Ford countered by moving on October 8 in the New Jersey action to dismiss Alliance's claim and filing an answer and counterclaim with respect to Semmes. On the same day Judge Ryan, in the Southern District of New York, declined to issue a temporary restraining order against customer contacts pending a hearing on a temporary injunction on October 14.

Meanwhile Scott had been discussing termination of Semmes' dealership with Ford officials in Dearborn, in part, according to him, because of a view that failure to take this step would cast doubt on the sincerity of Ford's counterclaim for fraud. On October 8, a termination notice was signed by the Secretary of Ford and sent to the New York District Sales Office. The next morning Scott cleared this with L. A. Iacocca, Ford's Executive Vice President, and service was made that afternoon. As a

429 F.2d 1201

result, plaintiffs sought and obtained leave to amend their complaint and their request for a temporary injunction in the Southern District to include the termination of Semmes' dealership

During and after the time this sequence of events was taking place, the District Court became the scene of a flurry of affidavits. Plaintiffs had already filed some on October 8 on the issue of customer contacts. Ford had submitted answering affidavits on that issue on October 13 and, on October 10, had also moved for a stay of proceedings pending determination of the New Jersey action. Voluminous affidavits and exhibits with respect to the temporary injunction against termination were filed by plaintiffs on October 13 and by Ford, after oral argument on October 14, on October 17 and 24.⁶ Plaintiffs then responded with a reply affidavit by Semmes, accompanied by exhibits, on October 31.

On November 5, Judge Ryan issued an opinion in which he denied the motion for a stay of the New York action, limited Ford's contacts with Semmes' customers although not to the extent sought by Semmes, and temporarily enjoined termination of the dealership. An injunction order was entered on December 15. On the same day, Ford moved, with elaborate affidavits and exhibits, to vacate the injunction and again to stay proceedings during the pendency of the New Jersey suit. In addition to more material relating to the extent of Semmes' alleged fraud based on further investigation between October 7 and November 5, and an expert statistician's appraisal of its significance, there was an affidavit by George Charney, Semmes' service manager since January 20, 1969, attesting to the regular submission of false claims with William Semmes' knowledge until just prior to the audit. According to the affidavit, dated December 5, 1969, Charney had confidentially advised Neuhart, a Ford service representative, of this practice in mid-April and Neuhart had made a written report. The...