Daily Development for Monday, November 10, 2003 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu OPTIONS; RIGHTS OF FIRST REFUSAL; AUTOMOBILE DEALERSHIPS: A prospective purchaser of an automobile dealership does not have standing to challenge the exercise of a manufacturer's right of first refusal, even when the challenge is based upon the fact that the manufacturer is in fact not matching the prospective purchaser's offer. Rosado v. Ford Motor Company, 37 F.3d 291 (3d Cir. (Pa.)2003) Most of this case is based upon an interpretation of a special Pennsylvania law relating to automobile dealerships. The author assumes, but is not certain, that other states have similar laws. Under that law, an automobile manufacturer may not place in the franchise agreement an enforceable right to withhold consent to the transfer of a dealership. If the manufacturer later unreasonably withholds consent, the third party to whom the sale was denied would have a right to a damages action against the manufacturer under the statute. The statute further provides, however, that the manufacturer can make a condition to the franchise agreement that the manufacturer would have a right of first refusal as to any transfer. The statute requires that prospective purchasers receive notice of the right of first refusal and compensation for their negotiating costs if the manufacturer exercises the right. Here, plaintiff buyer agreed entered into an agreement to purchase a Ford dealership in Pennsylvania. The agreement included the purchase of the dealership assets and real estate. Under the terms of the franchise, the seller submitted the purchase agreement to the defendant manufacturer, Ford Motor Company, which chose to exercise its contractual right of first refusal. The buyer had received appropriate notice of Ford's right and received compensation for its negotiation costs, but it argued that it lost the benefit of an advantageous acquisition when Ford bought the franchise under the refusal right. The plaintiff buyer alleged that the seller received less compensation than it would have under the agreement with the buyer. This would appear to be an allegation that the manufacturer paid less than a "right of first refusal" normally would require, and thus that the seller inappropriately refused to sell. But the plaintiff buyer brought the action for damages against Ford. Plaintiff alleged a cause of action for breach of the statute and also claimed damages for tortious interference. The buyer apparently was not named as a party defendant. The court first considered whether a prospective purchaser has standing under the statute to claim that the selling dealer did not receive the same or greater consideration when the manufacturer exercises a right of first refusal. Looking to Pennsylvania law, the court found that a party must have a substantial, immediate and direct interest in the subject matter to have standing. The court distinguished a prospective buyer's standing with respect to a right of first refusal from the issue of whether a potential buyer has standing to challenge the manufacturer's unreasonable withholding of consent to sell. In the latter case, where a manufacturer has unreasonably consented to a proposed sale of a franchise, the court had found that a prospective buyer likely would have standing. But here, with respect to a right of first refusal, the court concluded that a prospective buyer does not have a direct interest in the manufacturer's exercise of its right. Indeed, the statute requires the manufacturer to give timely notice to and to reimburse the prospective buyer, thus implying a limit to that buyer's possible claims. The court commented that it would not be the litigant, but the seller who would benefit a finding based upon the buyer's claim. Therefore, the court held that the plaintiff buyer did not have standing to challenge Ford's exercise of its right of first refusal as a violation of the statute. The buyer, however, had also alleged tortious interference. The court concluded that the appeal on this issue was properly before it, and then concluded that a tortious interference claim would lie only if a violation of the statute could be shown. And plaintiff lacked standing to show a violation of the statute. Catch 22? Comment 1: One purpose of posting this case is to provide a "heads up" for lawyers advising clients in connection with the transfer of auto dealerships and associated property rights. Not all the state statutory schemes likely are the same, but there may very well be similar issues in a number of jurisdictions. Comment 2: The other thing that the editor found interesting about the case was the court's treatment of the tortious interference issue. Although one could make the argument that remedies under the statute ought to be limited to particular circumstances, it does seem bizarre that a right of first refusal could be used to terminate a sale without the actual transfer of the interest. Hasn't the seller already contracted to sell to the buyer, subject only to the exercise of first refusal rights? Isn't there a breach of contract if the seller does not sell and does not follow through on the rights? Remember that the right of first refusal is very different from the right of a franchisor to refuse to approve the transfer of the franchise. It is that very difference that led the Pennsylvania legislature and courts to find that there is a duty of reasonableness with respect to the refusal right but no such duty with regard to the right of first refusal. The franchisor does not have to defend its actions because the franchisor is matching the pot. The court makes much of the fact that the franchisee in this case was not making an objection to the exercise of the right. But pays some lower consideration than the price offered by a potential buyer, and the seller/current franchisee doesn't object, there is a very high probability that the current franchisee's acceptance was obtained through economic pressure by the franchisor. Perhaps there is a threatened reprisal with respect to other franchises held by the franchisee (many car dealers these days have numerous franchises). It would appear to be the policy of the state of Pennsylvania not to let such economic bullying go on. Shouldn't parties injured by overbearing behavior by the franchisor, including third party sellers, be permitted at least to challenge such conduct through a tortious interference lawsuit? Precedent cases relied upon by the court here do not involve this special allegation that the right of first refusal was in fact not fully exercised because full consideration wasn't paid. Comment 3: Of course, it might also be argued that the whole purpose of the limiting the franchisor's absolute right to consent is to protect the franchisee, and not to protect potential third party purchasers. Consequently, as the court notes in this and in the precedent cases, many other jurisdictions don't let disappointed third parties sue even on the basis of an unreasonable withholding of consent. They choose not to limit the freedom of contract of franchisee and franchisor in order to protect future buyers. That philosophy would justify excluding third parties in every case, including this one. 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