In our Jan. 30, 2024, bulletin, we reported on Mercedes-Benz’s attempt to do an end-around the Motor Vehicle Review Board hearing process created under the Illinois Motor Vehicle Franchise Act. You can view all our IADA bulletins at www.IllinoisDealers.com. In Mercedes-Benz USA LLC v. JP Motors Inc. (2023 U.S. Dist. Lexis 211132), Mercedes-Benz exercised a right of first refusal (ROFR) upon a dealer who was selling a combined Mercedes-Benz/Nissan/Chevrolet store and demanded that the seller apportion the percentage of the selling price that was attributable to the Mercedes franchise.

The U.S. District Court judge abstained from hearing the case, holding that the dispute was a matter of state law interpretation that should properly be heard by the Illinois Motor Vehicle Review Board to decide. After the dispute was remanded to the board, the matter was litigated, and the hearing officer’s finalized decision provides Illinois dealers with another resounding success.

The hearing officer found that the seller’s dealer agreement with Mercedes-Benz that contained Mercedes’ purported ROFR — enabling Mercedes to assume the buyer’s rights and obligations under a proposed buy/sell agreement — had expired at the end of 2012, nine years before the proposed sale. As discussed below, the seller alleged that Mercedes’ refusal to make a final decision about whether to exercise its ROFR until the seller provided an apportionment of the selling price that was attributable to the Mercedes franchise violated multiple provisions of the Illinois Motor Vehicle Franchise Act (Act). For its part, Mercedes asserted that the seller’s refusal to provide an apportionment violated the Mecedes dealer agreement and the Act.

The hearing officer’s decision found that Mercedes was not entitled to condition its approval of the sale on receipt of an apportionment for several reasons:

• First, the Act does not create a statutory right of first refusal. The Act merely regulates the enforcement of independently created contractual rights of first refusal and prohibits “unreasonable restrictions” on dealership sales.
• Second, JP’s written dealer agreement expired at the end of 2012, meaning that Mercedes and the seller were operating under an unwritten agreement. An expired dealer agreement could not create a contractual ROFR, or any other contractual rights, for either party. Mercedes-Benz failed to provide evidence that the unwritten “arrangement” between Mercedes and the seller included a ROFR.
• Third, if the expired written dealer agreement had still been in effect, that agreement did not include a provision that would have required the dealer to apportion its Mercedes franchise in the event of a sale. Without express apportionment right in the dealer agreement, the hearing officer refused to infer one.
• Fourth, the Act does not expressly mention a right to an apportionment in any Section of the Act. The absence of an apportionment right in the Act, on its own, defeats Mercedes’ contention that the seller’s refusal to provide an apportionment is a violation of the Act.
• Fifth, the Act does not imply a manufacturer right to apportionment and, as a matter of fact, Section 4(e)(14)(B) of the Act requires a manufacturer exercising a ROFR to pay the selling dealer consideration at least equal to “all or substantially all of the dealership assets, stock or other ownership interest, including the purchase or lease of all real property, leasehold or improvements related to the transfer or sale of the dealership.” In other words, a manufacturer exercising a right of first refusal must pay the same or greater price as the seller expected for the entire transaction. Section 14(e)(14)(C) bolsters this position by requiring a manufacturer to assume “all of the duties, obligations and liabilities contained in the agreements that were to be assumed by the proposed transferee.” A manufacturer exercising an ROFR cannot assume some of the proposed buyer’s obligations and ignore other obligations. It is impossible to apportion the proposed transaction without dismantling the dealership, which was not the intent of the Act.

In addition to holding that Mercedes was not entitled to demand an apportionment as a condition of approving the sale, the hearing officer also found that Mercedes’ apportionment demand violated several provisions in the Motor Vehicle Franchise Act:

• Section 7 of the Act prohibits unreasonable restrictions relative to transfer, sale, right of first refusal or option to purchase. Neither the dealer agreement (which was expired anyway) nor the Act require apportionment. Mercedes’ apportionment demand was an unreasonable restriction on the proposed sale that would have prevented the dealer from selling all three of his franchises.
• Sections 4(e)(6) and 4(e)(11) prohibit refusal “to give effect to or prevent or attempt to prevent by contract or otherwise any … motor vehicle dealer from selling or transferring any part of the interest in any of them to any other person” without good cause. As soon as Mercedes declared that it would not process the proposed transfer without an apportionment, it committed a violation of Sections 4(e)(6) and 4(e)(11). The hearing officer’s proposed decision rejected Mercedes’ argument that because Mercedes was awaiting the seller’s apportionment before deciding whether to approve the sale, it had not yet rejected the proposed sale. Mercedes could not stall to avoid a violation.
• Section 4(b) prohibits a manufacturer from taking action that is “arbitrary, in bad faith or unconscionable and which causes damage to any of the parties or to the public.” The proposed decision held that Mercedes withholding approval of the proposed sale pending an apportionment was unreasonable, arbitrary and in bad faith because:
  • • It demanded a right of first refusal under a contract that had expired nine years prior;
    • Mercedes’ partial ROFR left the seller with two choices, either of which would have devalued the seller’s investment, canceling the sale or trying to sell Chevy and Nissan franchises to a buyer who wanted Chevy, Nissan AND Mercedes; and
    • Mercedes’ apportionment demand was merely a pretext for refusing to act on the application — Mercedes had done no evaluation of the proposed buyer.

In addition to damaging the seller’s investment in his franchises, the proposed decision found that Mercedes demand for apportionment would harm the general public by eliminating a Mercedes point, forcing customers to travel at least 60 miles to get to the closest point for sales and service and reducing competition for repairs and warranty work. Finally, the proposed decision requires Mercedes to approve the proposed sale.

Legislation passed by IADA created the Motor Vehicle Review Board to preside over disputes under the Illinois Motor Vehicle Franchise Act. The board hearing officers have expertise in the act, which is a specialized area of Illinois law, and the creation of the board has provided an efficient means for dealers to seek resolution of Motor Vehicle Franchise Act disputes. This Mercedes-Benz protest is another case in which a dealer has been able to stand up for his statutory rights against overbearing manufacturer actions.

In addition to the creation of the Motor Vehicle Review Board, dealer support over the past 104 years has helped IADA pass the Motor Vehicle Franchise Act, Vehicle Code, Sales Tax and other legislation for the benefit of franchised dealers.

We will never take your support of IADA for granted!