Pennsylvania has elected to follow many other states in enacting vehicle dealer franchise laws as part of the Pennsylvania Vehicle Manufacturers, Dealers and Salespersons Act, 63 P.S. §818.1. In addition to providing licensing requirements and consumer protections, these statutes also attempt to protect the rights of Pennsylvania dealers and consumers by establishing laws to govern certain aspects of the relationships between vehicle manufacturers/distributors and their new vehicle dealers. To the extent applicable, these statutory provisions override and transcend contrary terms contained in the parties’ dealer franchise agreements that are typically drafted by the manufacturers.

In reviewing these statutes, the terms "reasonable" and "unreasonable" are used throughout the act. For example, Section 12(b)(3) of the act makes it unlawful for a manufacturer to unreasonably withhold consent to the sale or transfer of a dealership franchise to a qualified buyer who meets the manufacturer’s reasonable requirements for appointment as a dealer. Similarly, Section 12(b)(4) of the act makes it unlawful for a manufacturer to unreasonably withhold consent to the proposed relocation of an existing dealer provided that the proposed relocation is not within a statutorily defined distance of an existing same line-make dealer.

Other provisions of the act make it unlawful for manufacturers to do any of the following in conjunction with their dealer operations and/or their offering of new model vehicles to dealers:

• Unreasonably alter a dealer’s assigned area of responsibility.

• Operate a system for the allocation of new vehicles that is not reasonable or fair to the new vehicle dealer.

• Maintain unreasonable facilities requirements.

• Prevent a new vehicle dealer from changing executive management control unless the manufacturer can show that the new manager is not of good moral character or does not meet reasonable, pre-existing and uniformly applied minimum business experience standards.

• Require any new vehicle dealers to pay an unreasonable fee in association with the offering of new vehicles.

• Require a dealer to unreasonably remodel, renovate, purchase or construct a new facility.

• Require a dealer to unreasonably purchase parts, supplies, tools, equipment, merchandise or services.

• Require a dealer to unreasonably participate in training programs.

Notwithstanding the fact that the words reasonable and unreasonable are used repeatedly throughout the act, these specific terms are not defined within its statutory framework. Thus, the principal legal question for adjudication in a large number of the cases brought pursuant to the act is (1) what is reasonable or unreasonable conduct on the part of the manufacturer with respect to its interactions with its dealers; and (2) what are reasonable operational requirements that a manufacturer may impose upon its dealers.

This article is primarily intended to address the first question of what constitutes reasonable or unreasonable conduct on the part of a manufacturer under the relevant provisions of the act.

The spectrum for consideration of the issue ranges from something akin to a business judgment standard wherein the manufacturer’s conduct or decision is given a high degree of business deference and disturbed only in the event of clear evidence of malfeasance, to a de novo standard, wherein the manufacturer’s decision is reviewed on a de novo basis for complete accuracy and correctness on both objective and subjective grounds.

It should not be surprising that manufacturers have argued for the highest business judgment deference standard and, in many instances, have incorporated it into their dealer franchise agreements. Conversely, dealers have argued for the lowest de novo review standard wherein they can appeal to the conscience of the trier of fact in the event of a dispute over the manufacturer’s decision or conduct.

Somewhere between the two extremes is the good-faith standard established by the Pennsylvania Commercial Code and adopted by Pennsylvania courts in general franchise relationship termination disputes outside of the scope of the act.

In the late 1970s, the Pennsylvania Supreme Court considered the issue of the franchisor’s duty in terminating a gasoline service station franchisee and found that it means acting in good faith and in a commercially reasonable manner. That case was Atlantic Richfield v. Razumic, 390 A.2d 736, 743 (Pa. 1978). Subsequently, the Pennsylvania Superior Court in Loos & Dilworth v. Quaker State Oil Refining, 500 A.2d 1155, 1160-1161 (Pa. Super. 1985), adopted the definition of good faith codified in the Pennsylvania Commercial Code at 13 Pa. C.S.A. §1201, which requires "honesty in fact on the conduct or transaction occurred."

Unfortunately, neither Atlantic Richfield nor Loos & Dilworth was decided under provisions of the act, as neither case involved a vehicle dealer franchise relationship. The closest appellate case on point is the Commonwealth Court’s acknowledgement of the state Board of Vehicle Manufacturers, Dealers and Salespersons’ use of the Loos & Dilworth commercial good-faith standard in an appeal of an administrative protest decision regarding franchise termination under a "good cause" provision of the act in C. Earl Brown v. Commonwealth, 555 A.2d 314, 317 (Pa. Cmwlth. 1989). However, the Commonwealth Court did not specifically hold or find that the commercial good-faith standard applied.

In attempting to interpret Pennsylvania law under Section 12(b)(3) of the act (which prohibits a manufacturer from unreasonably withholding consent to the sale of a franchise), a federal district court, in an unpublished opinion in Gabe Staino Motors v. Volkswagen of America, Civil Action No. 99-5034 (E.D. Pa. 2005), stated that a "manufacturer’s decision to reject [a dealer's proposal to sell its franchise] must strike a balance between serving the manufacturer’s legitimate business purposes and affording an automobile dealer a reasonable opportunity to transfer its business without suffering an undue or unnecessary loss." In considering the manufacturer’s decision to reject the proposed sale of the franchise in Staino, the U.S. District Court for the Eastern District of Pennsylvania found that the manufacturer’s reliance on the poor performance record of the proposed buyer and the substantial inadequacy of the facility in which the dealership was to be relocated under the terms of the proposed sale were sufficient to establish that Volkswagen did not act unreasonably in denying the sale under the act. The court rejected the dealer’s argument that the manufacturer’s stated reasons were pretextual and therefore subject to closer scrutiny.

Thus, under the court’s balancing test interpretation, one could argue that the manufacturer’s decisions or conduct must be based upon honest and legitimate business interests that are materially sufficient to outweigh the dealer’s general rights to operate or transfer its business.

However, the court’s holding in Staino is not binding upon Pennsylvania administrative agencies or courts considering the issue of unreasonable conduct under the act. Thus, practitioners continue to argue the appropriate legal standard upon which the state Board of Vehicle Manufacturers, Dealers and Salespersons and Pennsylvania courts must decide the issue. Until the issue is specifically adjudicated by a Pennsylvania appellate court, the answer to the legal question of what constitutes unreasonable conduct by a manufacturer under the act continues to be an open and debatable question in Pennsylvania. •

John Consevage is a partner in Dilworth Paxson’s litigation practice and focuses his practice on vehicle dealer franchise law. He has broad and diverse experience in matters involving dealer franchise terminations and brand discontinuance, ownership sales, transfers and relocations, dealer facility requirements, warranty and incentive program audits and various types of protest, licensure and enforcement matters before the Pennsylvania Board of Vehicle Manufacturers, Dealers and Salespersons.