Volkswagen of America, Inc. v. Smit

• Decision Date: 28 October 2008
• Docket Number: Record No. 2961-07-2.
• Citation: 667 S.E.2d 817,52 Va. App. 751
• Parties: VOLKSWAGEN OF AMERICA, INC. v. Demerst B. SMIT, Commissioner of the Virginia Department of Motor Vehicles and Miller Auto Sales, Inc.
• Court: Virginia Court of Appeals

667 S.E.2d 817

52 Va. App. 751

VOLKSWAGEN OF AMERICA, INC. v. Demerst B. SMIT, Commissioner of the Virginia Department of Motor Vehicles and Miller Auto Sales, Inc.

Record No. 2961-07-2.

Court of Appeals of Virginia, Richmond.

October 28, 2008.

Randall L. Oyler (James R. Vogler, Stephanie M. Zimdahl, Chicago, IL; Douglas M. Palais, Brian L. Buniva, Corey B. Simpson, Stephen M. Faraci, Sr., Richmond; Barack Ferrazzano Kirschbaum & Nagelberg, LLP, Chicago, IL; LeClair Ryan, Richmond, on briefs), for appellant.

Eric K.G. Fiske, Senior Assistant Attorney General (Robert F. McDonnell, Attorney General, on brief), for appellee Demerst B. Smit, Commissioner of the Virginia Department of Motor Vehicles.

Brad D. Weiss (Robert D.H. Floyd; Charapp & Weiss, LLP, on brief), McLean, for appellee Miller Auto Sales, Inc.

Present: ELDER, FRANK and CLEMENTS, JJ.

JEAN HARRISON CLEMENTS, Judge.

This appeal arises from an order of the Circuit Court of the City of Richmond (circuit court) affirming the decision by Demerst B. Smit, Commissioner of the Virginia Department of Motor Vehicles (commissioner), that, during the period October 1997 through March 1998, Volkswagen of America, Inc. (Volkswagen) violated Code § 46.2-1569(7) when it failed to ship any newly introduced Passats or New Beetles to Miller Auto Sales, Inc. (Miller). On appeal, Volkswagen contends the circuit court erred in affirming the commissioner's decision because (1) the commissioner failed to perform the requisite analysis under Code § 46.2-1569(7), (2) the record contains no evidence to support the commissioner's decision, (3) the commissioner failed to observe required procedures, (4) the statute violates the dormant Commerce Clause, and (5) the statute is unconstitutionally vague. For the reasons that follow, we affirm the circuit court's affirmance of the commissioner's decision.

I. BACKGROUND

Volkswagen, a New Jersey corporation, imports a fixed number of vehicles from its German parent corporation and distributes them to its approximately 600 dealers in the United States, including its 17 dealers in Virginia. Miller is a Volkswagen dealer located in Winchester. In January 1998, Miller was the smallest dealer by volume in its assigned sales district.¹

In late 1997 and early 1998, Volkswagen began importing a number of new models of vehicles, including the 1998 Passat and the New Beetle, both of which were in short supply.² Volkswagen used a national allocation methodology to distribute those new models to its dealers. That methodology was based on a "mathematical algorithm" designed to distribute vehicles in short supply where they were most likely to be sold and where they were most needed because of low inventory. Volkswagen then adjusted the algorithm results for each dealer based on the dealer's customer satisfaction survey scores. Dealers, like Miller, that generally failed to achieve a certain level of customer satisfaction scores had their algorithm results reduced and received fewer vehicles as a result. Volkswagen also permitted its "area executives," who were responsible for allocating the new vehicles to the individual dealers, to modify the algorithm results in response to local market conditions. Additionally, Volkswagen utilized a "minimum stocking requirement," which allowed the area executives to override the algorithm results to ensure that each dealer had at least one vehicle of every Volkswagen model in its inventory.

In February 1998, Miller sent a letter to Volkswagen, with a copy to the commissioner, complaining that Volkswagen's allocation of vehicles to Miller violated Code § 46.2-1569(7).³ Specifically, Miller asserted that "allocating Volkswagens based on Customer Satisfaction Index" was contrary to the statute. Miller also requested that Volkswagen give Miller "the number of new vehicles of each make, series, and model needed by the dealer to receive a percentage of total new vehicles production or importation currently being achieved nationally by each make, series, and model covered under the warranty."

After a failed attempt by the parties at mediation, the hearing officer conducted an evidentiary hearing to determine whether Volkswagen failed to provide Miller with "an equitable number of vehicles in short supply." Based on the evidence presented by the parties, the hearing officer found that Volkswagen's vehicle allocation methodology in effect since October 1997 did not conform to the provisions of Code § 46.2-1569(7) because it unfairly penalized small-volume dealers like Miller. In reaching that decision, the hearing officer found that the algorithm Volkswagen used to allocate vehicles in short supply effectively prevented Miller from acquiring such vehicles because it "truncated fractional allocations" and "did not accumulate `fractional vehicles.'" The hearing officer further found that the deficiencies in Volkswagen's algorithm were compounded by Volkswagen's use of customer satisfaction scores to adjust the algorithm results. That practice, the hearing officer found, inequitably punished Miller because "the restriction of allocations itself created a vicious cycle of lower [customer satisfaction] scores." The hearing officer also found that Volkswagen's "minimum stocking requirement" failed to overcome the inequities in the allocation methodology in this case, because it was applied only after Miller requested a hearing.

Adopting the hearing officer's findings, the commissioner concluded that the allocation methodology utilized by Volkswagen since October 1997 violated Code § 46.2-1569(7).

Volkswagen appealed to the circuit court, arguing that the commissioner erred in basing his determination whether Volkswagen was in compliance with Code § 46.2-1569(7) on the allocation methodology used by Volkswagen rather than on the actual number of vehicles Miller received from Volkswagen [Volkswagen allocated to Miller] in relation to the number of vehicles Volkswagen imported nationally. Volkswagen also argued that Code § 46.2-1569(7) is unconstitutionally vague and violates the Commerce Clause of the United States Constitution. Rejecting Volkswagen's arguments, the circuit court affirmed the commissioner's decision that Volkswagen's vehicle allocation methodology violated Code § 46.2-1569(7).

On appeal to this Court, we affirmed the circuit court's judgment, holding that Code § 46.2-1569(7) was neither unconstitutionally vague nor in violation of the Commerce Clause and that the commissioner's determination that Volkswagen's vehicle allocation methodology violated Code § 46.2-1569(7) was consistent with the plain meaning of the statute and supported by the record. See Volkswagen of Am., Inc. v. Quillian, 39 Va. App. 35, 55, 62, 64-65, 69, 569 S.E.2d 744, 754, 757-58, 759, 761 (2002), reversed in part and vacated in part sub nom. Volkswagen of Am., Inc. v. Smit, 266 Va. 444, 454, 587 S.E.2d 526, 532 (2003).

The Supreme Court of Virginia awarded Volkswagen an appeal and, by opinion dated October 31, 2003, reversed this Court's judgment that the commissioner properly based his determination that Volkswagen violated Code § 46.2-1569(7) on Volkswagen's vehicle allocation methodology rather than the specific number of vehicles Volkswagen allocated to Miller. Volkswagen, 266 Va. at 454, 587 S.E.2d at 532. The Court held that the "plain and unambiguous" language of Code § 46.2-1569(7)

required the [c]ommissioner to consider the actual monthly shipments that Volkswagen made to Miller in relation to the number of new vehicles imported by Volkswagen on a national level in the particular vehicle categories covered under Miller's franchise agreement. The statute further required that the [c]ommissioner, in conducting this examination, determine whether Miller obtained the number of such vehicles needed to receive a percentage of new vehicle sales "equitably related" to the number of these types of vehicles imported by Volkswagen nationally.

Id. at 452, 587 S.E.2d at 531.

The Supreme Court then concluded that the commissioner failed to undertake the required analysis:

Instead of addressing the actual number of vehicles Miller received from Volkswagen in relation to national importation numbers, the [c]ommissioner merely examined the component parts of Volkswagen's vehicle allocation methodology, and adjustments made to that process, to determine whether they were "fair" in their application to small dealers such as Miller. Thus, in basing his determination on Volkswagen's vehicle allocation methodology, the [c]ommissioner wholly failed to consider the national importation numbers for the types of vehicles covered under Miller's franchise agreement. This omission was followed by the [c]ommissioner's failure to address whether Miller received the number of vehicles needed to receive a percentage of new vehicle sales "equitably related" to the quantity of these types of vehicles imported on a national level.

Id. at 453, 587 S.E.2d at 531. Hence, the Court ruled that the commissioner's "determination must be set aside." Id. at 453, 587 S.E.2d at 532.

The Supreme Court further ruled that, because its "conclusion regarding the [c]ommissioner's erroneous application of the statute decide[d] the merits of [the] appeal," it was unnecessary to "reach the constitutional issues raised by Volkswagen." Id. Accordingly, the Court vacated "that portion of [this Court's] judgment holding that Code § 46.2-1569(7) does not violate the Commerce Clause of the United States Constitution and is not unconstitutionally vague." Id.

Reiterating the need to focus "on the actual shipments to Miller, the relevant national importation figures, and whether there was an `equitable' relationship between those numbers as mandated by the statute," rather than "on the business judgment of Volkswagen," the Supreme Court remanded the case to this Court "for ultimate remand to the [c]ommissioner for further proceedings consistent with the principles...