Volkswagen of America, Inc. v. Smit

• Decision Date: 31 October 2003
• Docket Number: Record No. 022402.
• Citation: 587 S.E.2d 526,266 Va. 444
• Parties: VOLKSWAGEN OF AMERICA, INC., v. Demerst B. SMIT, Commissioner of the Virginia Department of Motor Vehicles, et al.
• Court: Virginia Supreme Court

587 S.E.2d 526

266 Va. 444

VOLKSWAGEN OF AMERICA, INC., v. Demerst B. SMIT, Commissioner of the Virginia Department of Motor Vehicles, et al.

Record No. 022402.

Supreme Court of Virginia.

October 31, 2003.

Randall L. Oyler, Chicago, IL (Douglas M. Palais, Brian L. Buniva, Richmond; James R. Vogler, Chicago, IL; LeClair Ryan, Richmond; Barack, Ferrazzano, Kirschbaum, Perlman & Nageleberg, Chicago, IL, on briefs), for appellant.

William H. Hurd, State Sol.; Brad D. Weiss, Washington, DC (Jerry W. Kilgore, Atty. Gen.; William E. Thro, Deputy State Sol.; Richard L. Walton, Senior Asst. Atty. Gen.; Michael G. Charapp, Washington, DC, Stephen F. Varholy; Charapp, Deese & Weiss, Washington, DC, on briefs), for appellees.

The Alliance of Auto. Manufacturers, Inc. (Charles R. Mills; Charles J. Chiappa; Jason P. Isralowitz; John J. Sullivan; Kirkpatrick & Lockhart, on briefs), Amicus Curiae in support of appellant.

Virginia Auto. Dealers Ass'n (Walter A. Marston, Jr.,: Kevin R. McNally; Reed Smith, on brief), Amicus Curiae in support of appellees.

The Nat. Auto. Dealers Ass'n (Richard A. Bussey; Glen A. Mitchell; Andrew M. Beato; Stein, Mitchell & Mezines, on brief), Amicus Curiae in support of appellees.

Present: HASSELL, C.J., KEENAN, KOONTZ, KINSER, LEMONS, and AGEE, JJ., and RUSSELL, R.J.

OPINION BY Justice BARBARA MILANO KEENAN.

In this appeal, we consider whether the Court of Appeals erred in affirming a circuit court judgment approving a decision of the Commissioner of the Department of Motor Vehicles (the Commissioner) that an automobile distributor violated Code § 46.2-1569(7). We primarily consider whether Code § 46.2-1569(7) requires the Commissioner to find, before holding that a distributor has violated the statute, that the distributor failed to ship to a Virginia dealer a quantity of new vehicles that meets the statute's requirements.

We will state the facts relevant to this appeal. Volkswagen of America, Inc. (Volkswagen), a New Jersey corporation, is the distributor of Volkswagen motor vehicles in the United States and Canada and is a subsidiary of the German automobile manufacturer, Volkswagen AG. Volkswagen imports a fixed supply of vehicles from its corporate parent and distributes these vehicles to about 600 dealers nationwide, including 17 dealers in the Commonwealth.

Miller Auto Sales, Inc., d/b/a Miller Volkswagen (Miller), is a retail dealer of Volkswagen motor vehicles in Winchester, Virginia. Miller is the smallest dealer by volume of Volkswagen sales in its assigned sales district.

In late 1997, Volkswagen adopted a national program for allocating and distributing to its dealers vehicle models often in short supply, such as the Beetle, the Passat, and the Jetta. This allocation program was designed to take shipments of vehicles that Volkswagen imported from its corporate parent and to divide those vehicles among Volkswagen's six national sales regions in proportion to each region's share of Volkswagen's national "planning volume," which reflected anticipated annual unit sales.

Each region's allotment of vehicles was subdivided further among the region's sales districts, with each district receiving a number of vehicles in proportion to its share of the region's annual planning volume. At the district level, an "area executive" was responsible for allocating vehicles to individual dealers based on Volkswagen's national allocation methodology.

Although Volkswagen's vehicle allocation methodology underwent several changes through October 1998, the core of that methodology consistently had been a "mathematical algorithm" contained in a computer-generated spreadsheet that Volkswagen distributed electronically to its area executives. Volkswagen's allocation formula was based on several factors, including the reported inventories of all dealers within a district, anticipated unit sales, and actual unit sales for that year. Each area executive had discretion to adjust the results of the formula in response to local market conditions.

The results computed from the mathematical algorithm were further modified by Volkswagen's "Create an Apostle Program" (CAAP). Under CAAP, Volkswagen used an independent organization to conduct telephone surveys of recent purchasers of Volkswagen vehicles to evaluate customer satisfaction. From these surveys, a customer satisfaction index was created that measured each individual dealer's performance in sales, service, and customer relations.

Volkswagen then used each dealer's CAAP score to adjust the allocation formula's results for that particular dealer. Volkswagen also imposed a "minimum stocking requirement," which functioned as a "safety valve" authorizing the area executive to override the allocation formula to ensure that each dealer would have in its inventory at least one vehicle of every Volkswagen model.

In February 1998, Miller sent a letter to Volkswagen, with a copy to the Commissioner, alleging, among other things, that Volkswagen's use of a customer satisfaction index in its allocation of vehicles violated Code § 46.2-1569(7). That statute provides in relevant part:

Notwithstanding the terms of any franchise agreement, it shall be unlawful for any manufacturer, factory branch, distributor, or distributor branch, or any field representative, officer, agent, or their representatives:

7. To fail to ship monthly to any dealer, if ordered by the dealer, the number of new vehicles of each make, series, and model needed by the dealer to receive a percentage of total new vehicle sales of each make, series, and model equitably related to the total new vehicle production or importation currently being achieved nationally by each make, series, and model covered under the franchise. Upon the written request of any dealer holding its sales or sales and service franchise, the manufacturer or distributor shall disclose to the dealer in writing the basis upon which new motor vehicles are allocated, scheduled, and delivered to the dealers of the same line-make. In the event that allocation is at issue in a request for a hearing, the dealer may demand the Commissioner to direct that the manufacturer or distributor provide to the dealer, within thirty days of such demand, all records of sales and all records of distribution of all motor vehicles to the same line-make dealers who compete with the dealer requesting the hearing.

Id.

In the letter, Miller requested that Volkswagen disclose "in writing the basis upon which new motor vehicles are allocated, scheduled, and delivered to the dealers of the same line-make." In April 1998, Miller's counsel sent the Commissioner another letter requesting a hearing under the statute. The Commissioner referred the case to a hearing officer to conduct the hearing and to make recommended findings and rulings.

Before the hearing, Volkswagen moved to dismiss the proceedings on the grounds that Code § 46.2-1569(7) was unconstitutionally vague and violated the Commerce Clause of the United States Constitution. The hearing officer denied Volkswagen's motion. At the hearing, much of the factual evidence and expert testimony received by the hearing officer focused on Volkswagen's vehicle allocation methodology rather than on the actual number of vehicles that Volkswagen had shipped to Miller.

After the hearing, the hearing officer issued a proposed decision in which he found that Volkswagen's allocation methodology was "flawed in its design and deficient in its operation." The hearing officer recommended that the Commissioner declare that Volkswagen's vehicle allocation methodology was unlawful and in violation of Code § 46.2-1569(7).

The hearing officer found that there were two mathematical calculations in Volkswagen's allocation formula that worked to Miller's detriment. First, the hearing officer observed that the "algorithm truncated fractional allocations in certain circumstances due to peculiarities of the computerized spreadsheet program." Second, he noted that "the algorithm did not accumulate `fractional vehicles' so that a small volume dealer, like Miller ... was effectively frozen out on a repeated basis from acquiring vehicles in short supply."

The hearing officer further found that the results of Volkswagen's allocation program were monitored solely on an "ad hoc" basis and that "[o]nly when a dealer, such as Miller, complained, was there any apparent effort to verify whether or not allocations were fair." The hearing officer stated that statistical measurements were not used in such circumstances and that "the notion of fairness would seem to rest strictly on achieving quietude from the dealerships."

The hearing officer also found that the flaws in Volkswagen's allocation formula were exacerbated by Volkswagen's use of the CAAP program to modify the algorithm results, thus making the allocation of new vehicles "hostage to CAAP performance." In explaining this conclusion, the hearing officer stated:

[O]ne could reasonably conclude from some of the statistical evidence presented, both by fact witnesses and by expert witnesses, that the restriction of allocations itself created a vicious cycle of lower CAAP scores, as customers who were delayed in receiving ordered vehicles, or who could not get vehicles precisely as specified, might well be less satisfied with Miller.

The hearing officer further found that while Volkswagen presented some testimony that its minimum stocking requirement was a "hallowed and longstanding `unwritten rule' for allocation," it appeared that this requirement was not applied in allocating vehicles to Miller until after Miller had requested a hearing. The hearing officer concluded that the evidence failed to show that the minimum stocking requirement functioned as an adequate "safety valve" to remedy the deficiencies of Volkswagen's allocation formula.

The Commissioner issued a "Hearing Decision" in which he adopted the findings of the hearing officer. The Commissioner...