In 2009, GM and Chrysler terminated over 100 franchises during the course of their bankruptcies. In two class action lawsuits, which include some Iowa dealers, franchise-owners claimed that the termination of their franchises created an illegal “taking.” Under the U.S. Constitution, the government cannot take property without just compensation. These dealerships argued that because the government would only provide GM and Chrysler with financial assistance if they terminated these franchises, then the federal government was engaging in an illegal taking.

Here, the dealerships have alleged that the termination is a regulatory taking, i.e. one that does not completely cut off ownership rights, but is overly burdensome. It either requires the owner to suffer a “physical invasion of his property” or “prohibit all economically beneficial or productive use.” Contracts (like franchise agreements) can be “taken,” just like real and personal property. However, if this case is successful, it will be the first time that the regulatory taking approach is applied to contract rights.

The takings allegation requires that the dealerships must have suffered economic loss and that the governmental taking must have been the cause of that loss. According to the court, the dealerships are struggling with this aspect of the case because they attribute the loss to the overall bankruptcy more so than any government action. Nonetheless, the dealerships were given the opportunity to amend their complaint so they can adjust their argument.

The government attempted to dismiss these suits for failure to state a claim, but the United States Court of Federal Claims denied the dismissal. In April 2104, the United States Court of Appeals for the Federal Circuit again denied the government’s pleas to dismiss. At this point, it is unclear whether the dealerships will prevail. Arenson Law Group, PC will continue to keep a close watch on this case because it may affect dealerships and their dealings with manufacturers.

Written by James H. Arenson

Last Updated : February 13, 2024