Defining Good Faith in Iowa Automotive Franchise Law

In 2010, the Iowa legislature passed S.F. 2234, which added a new section to the Iowa Motor Vehicle Franchisers law (Iowa Code § 322A.18) (the “Act”) regarding a duty of good faith. The new section says: “A franchise imposes on the party a duty of good faith in performance and enforcement of the franchise agreement. ‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” So far, however, there are no Iowa cases reported that specifically interpret this new section of our state’s dealer law.

Traditionally, contract disputes in Iowa have the same general requirement of “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Therefore, the Act has an additional requirement of looking to the “trade” (automobile industry) to determine what “fair dealing” means. Since we do not have cases in Iowa to provide an example of what this may mean for automobile dealers, cases that have similar requirements outside of Iowa may provide some clues.

Pennsylvania has a Board of Vehicles Act that was created “to promote fair dealing and honesty in the vehicle industry and among those engaged therein without unfair or unreasonable discrimination or undue preference or advantage.” As such, franchisors in Pennsylvania are required to deal with franchisees “in good faith and in a commercially reasonable manner.” This language is similar to Iowa’s good faith requirement.

Two competing Cadillac dealerships in the Pittsburgh area recently fought with GM about relocation. One dealer, Bowser, wanted to relocate so that he could achieve the requirements to be eligible for GM’s Essential Brand Elements (EBE) program. The EBE program pays dealers approximately $400–$800 per vehicle sold if the automobile dealer’s facility complies with the EBE standards. For Bowser, meeting the EBE standards required a complete rebuild.

Bowser’s dealership was located on rented property, and he did not want to rebuild on property that he did not own. Although he attempted to buy the property, the property owner wanted a price that was roughly $1 million higher than market value. So, he looked for other potential locations. He found another location that had good visibility and was priced reasonably.  However, GM attempted to prevent the relocation.

As part of Bowser’s dealer agreement, GM required him to request and obtain GM’s approval before any relocations. In response to Bowser’s relocation request, GM offered to buy-out Bowser’s franchise or move the Cadillac dealership to Bowser’s Buick-GMC dealership, which was east of the Cadillac dealership. Bowser rejected each of these suggestions and GM subsequently denied Bowser’s relocation request.

GM stated several reasons for its denial of the relocation request. At the heart of the denial was concern that Bowser’s move would place his dealership too close to Rohrich’s dealership. Rohrich is a competing Cadillac dealership that did meet the EBE standards because of a recent remodel. However, GM did not explicitly state that Rohrich was the main reason that they denied the request. Instead, GM gave a number of unrelated reasons that were not actually supported.

Bowser argued that GM was unreasonably withholding consent to the relocation in violation of Section 12(b)(4). Section 12(b)(4) requires that a manufacturer must have good reason to deny a new vehicle dealer’s relocation request. Rohrich petitioned to intervene in the proceeding and did so with the consent of the Board. After two days of testimony from GM, Bowser, and Rohrich, the Board determined that GM did unreasonably withhold their approval for the dealership relocation.

The Board concluded that many, if not all, of GM’s stated reasons were not the actual reasons for the denial of Bowser’s relocation. In fact, the evidence showed that GM had discussed Bowser’s move with Rohrich and expressed concern to Bowser that Rohrich would be upset with the move. GM specifically discussed alternatives that Bowser could pursue with Rohrich. As such, GM did not meet the requirement of good faith by failing to explain the actual reasons behind the request denial.

The Board issued a final order supporting Bowser’s move and ordering GM to approve the relocation request. Then, Rohrich, not GM, filed for review of the Board’s order. The Commonwealth Court of Pennsylvania took the appeal to explain that GM had the burden to prove that its denial was reasonable. Bowser did not need to show that the refusal was unreasonable. The Court concluded that a “vehicle manufacturer’s conduct that fails to meet standards of good faith and honesty may therefore may properly be found unreasonable under the Board of Vehicles Act.” Since the Board found that the reasons that GM articulated for refusing the relocation request were not the actual reasons, GM unreasonably rejected Bowser’s request for relocation.

Like Pennsylvania, Iowa’s Act requires good faith. As this case illustrates, that likely means that if the franchisee can show that the franchisor is not being honest, then they have violated the required duty of good faith. To determine how this affects your dealership and your relations with the factory, contact the car dealer attorneys at Arenson Law Group, PC at 319-363-8199.