Champion Auto Sales, LLC v. Polaris Sales Inc., 2013
U.S. Dist. Lexis 65219 (E.D.N.Y. Mar. 27, 2013)
Mandatory arbitration clauses are common in franchise agreements,
including motor vehicle franchise agreements. Whether a
manufacturer can enforce such a provision requires an analysis of
competing state and federal statutes and a determination of whether
the vehicles sold fall within the statutory definition of a
"motor vehicle." In an opinion addressing the various
statutory regimes, a federal district court in New York held the
Motor Vehicle Franchise Contract Arbitration Fairness Act, 15
U.S.C. 1226 (the Fairness Act), did not limit a franchisor's
effort to arbitrate a dispute concerning dealer agreements for
snowmobiles and all-terrain vehicles (ATVs). At the same time, the
court held that the Fairness Act did serve to block arbitration of
claims regarding the same dealer's motorcycle franchise.
Champion Auto Sales, LLC v. Polaris Sales Inc., 2013 U.S. Dist.
Lexis 65219 (E.D.N.Y. Mar. 27, 2013).
Factual and Procedural Background
Polaris entered into a Dealer Agreement with Champion on July 21,
2011, pursuant to which Champion was authorized to sell Polaris
snowmobiles, various types of ATVs and Victory brand motorcycles.
The Dealer Agreement provided that any claims arising between the
parties were subject to mandatory arbitration proceedings in
Minnesota. Although only one agreement was executed, the parties
agreed that each product line was considered to be a separate
franchise. Champion 2013 U.S. Dist. Lexis 65219 at
*2-4.
In January 2012, Polaris sent a termination notice to Champion,
accusing it of breaching the Dealer Agreement. Champion and its
principal filed suit in New York State Supreme Court, seeking
preliminary and permanent injunctive relief and asserting a number
of claims, including violation of the New York Franchised Motor
Vehicle Act (NYFMVA), N.Y. Veh. 7 Traf. Law § 463. Polaris
removed the action to the United States District Court for the
Eastern District of New York and filed a motion to compel
arbitration and/or stay the action.
Enforceability of the Arbitration Clause
In its opinion, the court analyzed whether the claims were subject
to the arbitration clause in the agreement and then whether that
clause was enforceable. As the court noted, there is generally a
four-part inquiry when determining whether a cause of action is
subject to arbitration: (1) whether the parties agreed to
arbitrate; (2) the scope of the agreement; (3) if federal statutory
claims are asserted, whether Congress intended that certain claims
be nonarbitrable; and (4) if some, but not all, of the claims are
arbitrable, whether to stay the balance of the proceedings pending
arbitration. Champion 2013 U.S. Dist. Lexis 65219, at *7
(quoting JLM Indus., Inc v. Stolt-Nielsen SA, 387 F.3d
163, 169 (2d Cir. 2004)).
Although the court determined that the franchise agreement
contained an agreement to arbitrate that covered the asserted
claims, it needed to address Champion's contention that the
clause was not enforceable for two reasons. First, the court
quickly disposed of Champion's argument that the clause was
unconscionable simply because it was drafted by Polaris, a party
claimed to be in a superior bargaining position. Second, the court
examined whether Section 469(2) of the NYFMVA nullified the
arbitration clause in the Dealer Agreement. That section of the act
provides, in part, as follows:
Id. Thus, under the NYFMVA, a mandatory arbitration clause in a
motor vehicle franchise agreement is converted into a consensual
arbitration clause. The court, however, held that this portion of
the NYFMVA was itself not enforceable because it was preempted by
the Federal Arbitration Act, 9 U.S.C. 1 (the FAA).
Champion 2013 U.S. Dist. Lexis 65219 at *12. "Once it
is determined that the FAA applies to a particular arbitration
agreement, incongruent state statutory schemes are preempted."
Id. (quoting Shamah v. Schweiger, 21 F.Supp.2d 208, 212
(E.D.N.Y. 1998).
Finding there was an agreement to arbitrate and the scope of the
agreement encompassed all of Champion's claims, the court next
looked at whether Congress intended to make any of the asserted
claims nonarbitrable. Champion argued that Congress explicitly
carved out an exception to the FAA in passing the Fairness Act,
which (much like the NYFMVA) precludes the enforcement of
pre-dispute arbitration clauses in motor vehicle franchise
contracts. The Fairness Act states,
15 U.S.C. 1226.
On this point, the court agreed with Champion but only with respect
to the motorcycle franchise. Under the definition incorporated into
the Fairness Act, a "motor vehicle" is defined as "a
vehicle driven or drawn by mechanical power and manufactured
primarily for use on public streets, roads and highways, but does
not include a vehicle operated only on a rail line." See 49
U.S.C. 30102(a)(6). The court concluded that this definition
excluded Champion's claims related to its snowmobile and ATV
franchise agreements from the Fairness Act.
The final step in the court's analysis was whether to stay the
claims that were not subject to arbitration. It held, because the
non-motor vehicle claims were identical to the claims related to
Champion's motorcycle franchise, a stay would promote judicial
economy and avoid confusion and the possibility of inconsistent
results. Champion, 2013 U.S. Dist. Lexis 65219 at
*18.
Separately, the court concluded that it lacked authority under the
FAA to compel the arbitration proceeding in Minnesota as provided
for in the Dealer Agreement. Because the FAA grants a district
court the power to compel arbitration only within its own district,
9 U.S.C. 4, the court stayed the litigation and left it to the
parties to initiate an arbitration proceeding relating to the
non-motor vehicle claims in the appropriate venue.
Champion, 2013 U.S. Dist. Lexis 65219 at * 20 (citing
Provident Bank v. Kabas, 141 F.Supp.2d 310, 315 (E.D.N.Y.
2001).
The decision highlights limitations in the Fairness Act where the
franchisor-franchisee relationship extends beyond motor vehicles.
In such cases, a court will likely stay the motor vehicle-related
claims while the controversy is arbitrated. In many cases,
resolution of the arbitration will likely dictate how the motor
vehicle-related claims will be determined.
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