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MADSEN v. CHRYSLER CORPORATION

December 7, 1966

CLARENCE MADSEN, JOSEPH ANTHONY ZWIERZYCKI, JOSEPH D'ZIAK, GUY GLENN ASHMORE AND J.A. MADSEN MOTOR SALES, INC., PLAINTIFFS,
v.
CHRYSLER CORPORATION AND CHRYSLER MOTORS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Will, District Judge.

  OPINION

Plaintiffs, J.A. Madsen Motor Sales, Inc. and its stockholders, Madsen, Zwierzycki, D'Ziak and Ashmore, bring this action, complaining of defendants' decision to terminate the Chrysler, Plymouth and Imperial automobile franchises of Madsen Motor Sales in Wheaton, Illinois. A ninety-day notice of termination for cause was served on the plaintiff corporation on August 31, 1965. Prior to the termination of the ninety-day period, plaintiffs instituted this suit. While the franchises have been theoretically terminated as of November 29, 1965, plaintiffs have continued in the business of selling Chrysler, Plymouth and Imperial automobiles during the pendency of this action, under a separate agreement.

Plaintiffs seek damages and an injunction requiring Chrysler Corporation to maintain the original franchise relationship, basing their claim on several alternative theories. Initially, plaintiffs allege that Chrysler Corporation and Chrysler Motors Corporation have conspired to restrain trade and, individually or in concert, have attempted to monopolize trade and commerce in the sale, service and financing of Chrysler and Plymouth automobiles in the Wheaton and Glen Ellyn, Illinois markets, by determining to open a factory-owned or controlled sales unit in that area, replacing Madsen Motor Sales' Chrysler-Plymouth-Imperial (CPI) dealership in Wheaton and Glen Ellyn Motor Sales, an existing Plymouth dealership in Glen Ellyn operated by one William McKie. Plaintiffs contend that such action will restrain trade in violation of § 1 of the Sherman Act, 15 U.S.C. § 1, by eliminating the competition now existing between Madsen and McKie and constitutes an attempt to monopolize the business of both Madsen and McKie in violation of § 2 of the Sherman Act, 15 U.S.C. § 2.

As an additional ground for the claimed § 1 violation, plaintiffs submit that the termination by Chrysler Corporation is in fact a concerted refusal to deal brought about by an agreement between Chrysler and McKie providing that upon termination of Madsen Motors' franchise, McKie will be the operator of the new Chrysler-constructed CPI dealership planned to replace Madsen and Glen Ellyn, McKie's present dealership. Plaintiffs also contend that the conduct outlined above constitutes a violation of the Illinois Antitrust Act, ch. 38 Ill.Rev.Stat. § 60-1 et seq.

Alternatively, plaintiffs allege that the termination of the Madsen Motors franchise gives rise to a cause of action under the Automobile Dealers' Day in Court Act, 15 U.S.C. § 1221-1225, on account of defendants' failure to act "in good faith" with respect to the decision to terminate. Finally, plaintiffs submit that, in any case, defendants had no grounds for termination for cause and, accordingly, the termination constitutes a breach of their obligations under the contract.

As will appear more fully hereafter, defendants contend that the Madsen Motors franchise was terminated solely on account of the latter's failure to perform its selling obligations under the franchise agreement. While there is no dispute as to Chrysler's planned corporate-owned or controlled new dealership for the Wheaton-Glen Ellyn market, defendants take the position that this issue, and the selection of McKie as the proposed operator of the facility, is unrelated to the legality of the Madsen termination. The issues of injunctive relief and liability (on all counts of the complaint) have been tried to the court and the case is now ready for decision as to these issues.

J.A. Madsen Motor Sales initially acquired the Wheaton CPI franchise in 1953. The business was then operated as a partnership between plaintiffs Madsen and Zwierzycki. Thereafter, in 1958, the business was incorporated and two key employees, D'Ziak and Ashmore, acquired stock in the corporation. In 1957, after the enactment of the Dealers' Day in Court Act, new franchise agreements — one covering Chrysler-Plymouth and one for Imperial — were entered into and, upon incorporation of the business in 1958, the latter agreements were replaced with new franchises, designating the corporation as franchisee.

The Chrysler-Plymouth and Imperial agreements are generally identical. Each provide for a continuing, indefinite term relationship, the dealer maintaining the right to terminate for any reason on 30 days' notice and Chrysler reserving the right to terminate on 90 days' notice in five specific instances. Aside from these specified causes, no general right of termination at will is reserved to the manufacturer. This distinguishes Chrysler Corporation franchise agreements from those of the other major automobile manufacturers. See Macaulay, Changing A Continuing Relationship Between A Large Corporation and Those Who Deal With It: Automobile Manufacturers, Their Dealers, and The Legal System, 1965 Wis.Law Rev. 483, 564-65 (No. 3, Summer 1965). While § 2-309 (2) of the Uniform Commercial Code, in force both in Illinois and Michigan, Ill.Rev.Stat. 1965, c. 26. § 2-309(2); C.L. 1948, § 440.2309(2) [P.A. 1962, No. 174], provides that contracts for indefinite terms are terminable at will, that section — if applicable to franchise agreements — is qualified by the words "unless otherwise agreed." The introductory portion of the dealer agreement refers to the recitation of Chrysler's right to terminate for specific causes in opposition to the dealer's right to terminate at will and specifically points out that the franchise agreement may be terminated by Chrysler only in reliance on one of the specific enumerated causes.

On October 26, 1959, an additional dealer agreement relating to Valiant automobiles was executed by Chrysler and Madsen. Its terms are substantially identical to the Chrysler-Plymouth and Imperial agreements mentioned above. The primary ground for termination for cause stated in the agreements is the dealer's failure to perform any of the undertakings and obligations stated in the operative sections of the agreement concerning sales of automobiles and parts, advertising, record keeping and the like.

The franchised dealer agrees that he will sell energetically in the non-exclusive sales area assigned him in the agreement and, since passage of the Dealers' Day in Court Act, specifically will sell whatever number of new Plymouth (or Chrysler or Imperial) automobiles is needed to fulfill his "Minimum Sales Responsibility" or "MSR". The basis for calculating MSR is then set out in the agreement.

Periodically, and generally once each quarter, Chrysler calculates its overall regional market penetration attained in each of the past three months for each line of cars, determining, for example, the percentage of Plymouths bought by all purchasers in the region from the total number of automobiles purchased. The number of new car registrations in each dealer's sales locality is then determined and the regional percentage applied. The resulting figure is the dealer's Plymouth MSR. In other words, the dealer agrees that he will sell a sufficient number of automobiles to achieve the same percentage of Plymouth sales versus total new car sales as exists in the region — a percentage which is determined and furnished to the dealer approximately three months after the time for performance has passed. The percentage, of course, represents an averaging of the sales of all Plymouth dealers in the region. All sales, including those outside of the assigned sales locality are included, without regard to whether the purchaser resides in an "open point" or in another dealer's locality.

Since the regional percentage is an average, some dealers will necessarily be above the figure and some below — absent the unlikely situation where all dealers have sold a number of cars which yield identical percentages in each sales locality. The evidence adduced at trial shows that, in actual operation, some 40% of all Chrysler dealers fail to achieve the sales figure imposed by the MSR formula and thus, are theoretically subject to immediate termination. The implications of the MSR formula, its application by Chrysler and its availability as a ground for termination will be considered in some detail hereafter, first in connection with the background of the Madsen-Chrysler relationship and thereafter with respect to plaintiffs' contention that Chrysler's application of the MSR formula constitutes a breach of contract and a violation of the duty of good faith imposed by the Dealers' Day in Court Act.

The Wheaton CPI dealership purchased by Madsen from a retiring dealer in 1953 consisted of a small building (65' x 75') containing a two-car showroom and a repair shop accommodating five vehicles. A used car lot, accommodating 30-35 cars, was located across the street and was also used for new car storage. At the time the dealership was acquired, Chrysler's district manager, who participated in the purchase negotiations, advised Madsen that the facilities would be inadequate if the volume of sales — then approximately 100 cars per year — was increased. By 1955, Madsen had increased volume by approximately 50% over the sales of his predecessor and was required to lease additional outside space for storage.

By 1958, Madsen began considering the possibility of obtaining additional property outside of the downtown business district on Roosevelt Road to be used for used car sales and storage, thus increasing the number of new cars which could be "on hand" and freeing the lots across the street from the dealership for use in connection with customer service. The evidence shows that the extent of the dealer's facilities bears an important relationship to volume of sales, a sufficient inventory of new cars being essential to supply the varying demands of customers without delay and the ability to handle increased service volume being an important factor in covering fixed costs, thereby reducing the amount of overhead which must be allocated to each new car sold, permitting dealing at a lower profit margin and thus also increasing volume.

At this time, however, Madsen was dissuaded from expanding his facilities, in part on the advice of Mansfield, the Chrysler district manager and Conklin, his superior. Both expressed the opinion that at that time the Wheaton market did not justify additional investment in facilities and that it would be more profitable to increase their investment by acquiring a second dealership in another location. In view of the prospect of acquiring a second dealership, Madsen and Zwierzycki took steps to incorporate the Wheaton business, to insulate the operation from liability arising from another business and to give D'Ziak and Ashmore, their two key employees, an interest in the Wheaton operation which they would manage in the event a second dealership was acquired. This change required the approval of Chrysler and, as noted above, new franchise agreements were executed for the corporation.

The papers submitted by the Chrysler regional manager relating to the termination of the franchise agreements with the partnership and execution of new agreements with the corporation summarize Madsen's performance with respect to MSR. They indicate that in 1957, Madsen had achieved only 78% of MSR for Plymouth (-28 cars); 92.6% of MSR for Chrysler (-4 cars) and 160% for Imperial ( cars). In the first nine months of 1958, Madsen achieved only 48% of MSR for Plymouth (-52 cars); 63% of MSR for Chrysler (-10 cars) and 71.4% of MSR for Imperial (-2 cars). Notwithstanding the fact that Madsen was therefore theoretically in default of its contract selling obligations, the regional manager reported that the management of this dealership is "capably conducted, as proven by past performance."

During the balance of 1958, the Madsen dealership did improve its MSR performance somewhat, achieving 86% of MSR for Plymouth and exceeding MSR for Imperial by two cars. Chrysler MSR achievement remained at the same 63% level. As of October of 1959, Madsen's MSR performance was 87.1% on Plymouth (-11 cars); 87.5% on Chrysler (-4 cars) and even on Imperial. During this same month, the regional manager recommended Madsen for a Valiant dealership, indicating that the sales, service and management organization were good and stating that "they have done a good job for us in the past." During the last three months of 1959, performance was basically unchanged, Plymouth MSR performance dropping to 84% (-16 cars); Chrysler staying the same at 88% (-5 cars) and Imperial improving to over MSR. MSR performance during 1960 was slightly higher for Plymouth, rising to 97% (-2 cars) at year's end. Chrysler MSR performance dropped somewhat. There is no calculation in the record for 1960 Imperial performance.

Throughout this period, Chrysler personnel were actively attempting to find a second dealership for Madsen and Zwierzycki, showing them various possible locations ranging from Milwaukee, Wisconsin, to Quincy, Illinois, as well as several in the Chicago region. The Chicago regional manager, upon learning that Madsen had visited various dealerships outside of the Chicago region, advised him that he wanted to keep Madsen in his region. By the fall of 1960, arrangements were made to acquire Borman Motor Co., Inc., a CPI dealership in Downers Grove, Illinois. In recommending approval of this acquisition, the Chrysler regional manager again noted that the Wheaton dealership had been operated successfully and profitably since 1953, without reference to the fact that MSR for Plymouth and Chrysler had never been attained.

New franchise agreements for Borman Motors, Inc. were issued by Chrysler, effective February 24, 1961. Thereafter, Madsen and Zwierzycki managed the Downers Grove dealership and attempted to supervise D'Ziak and Ashmore's conduct of the Wheaton dealership, spending part of each day in Wheaton. During 1961 and 1962 the sales of the Wheaton dealership suffered a serious decline, from a total of 166 new cars sold in 1960 to 143 in 1961 and 119 in 1962. The principal decline in this period was in sales of Chrysler automobiles, the number of sales dropping to 52 and then to 38, and the MSR percentage dropping to 75.4% and then to 48.1%. Plymouth sales also dropped during this period, however Plymouth's overall regional penetration fell even more, resulting in an increase in MSR performance up to 98.5% for 1962. Imperial sales continued at approximately the same level, 2 units over MSR in 1961 and even with MSR in 1962.

In March of 1963, Madsen and Zwierzycki obtained the financial statement for 1962 Wheaton operations and noticed that profit had declined substantially. They then planned to return to Wheaton as soon as possible, selling the Borman Motors facility in Downers Grove and concentrating their efforts solely on the Wheaton dealership. Madsen immediately approached Chrysler's "Chicago West" district manager, Rydberg, for assistance in finding a prospect to buy the Downers Grove outlet. Shortly thereafter Rydberg was transferred to another area and replaced by a new district, manager, Drace. Madsen then approached Drace for assistance in selling Downers Grove indicating his plans to return full time to Wheaton.

District managers generally make monthly contacts with each dealer in their assigned area, discussing various advertising and sales programs, obtaining orders for new cars, and reviewing the dealership's sales on Sales Responsibility Review Form, commonly known as a "207". The 207 reports contain the figures comparing the dealer's sales to the total industry registration in his sales locality and indicating his performance vis-a-vis the MSR standard. The district manager usually appended his views as to the major cause of below average sales performance and the corrective action necessary. The information on the forms is discussed with the dealer and the dealer then inserts his comments and signs the form. The evidence shows that these conversations are generally pleasant, friendly chats geared primarily to impressing the dealer with the relationship between meeting MSR and obtaining a substantial profit for the dealer. The other corrective programs, e.g., increase sales force, advertising, phone contacts, etc., are similarly presented with this goal in mind. Thus, for example, while many of Rydberg's 207 reports for 1962 show that he considered incomplete coverage of the sales area specified in the dealer agreement a major cause of below average performance, he generally reviewed the scope of the assigned sales area in the context of recommending increased outside selling activity rather than in the framework of the contract-MSR-termination possibility.

On one occasion, Rydberg's report states that he read a copy of the sales agreement to Ashmore. Rydberg's present recollection of the event is that he read only that portion of the agreement which refers to the dealer's obligation to sell MSR, or at least excerpts from that section. In any case, it is clear that Rydberg did not think it necessary to read the portion of the agreement which states that failure to perform strictly in accordance with the MSR requirement will lead to termination. From Rydberg's overriding concern with outside sales activity and from his testimony that he referred to the text of the dealers agreement to refresh Ashmore's memory that he had a responsibility to Chrysler Corporation to get penetration in his local market of influence, we believe that it is reasonable to conclude that Rydberg's comments were not designed to warn Ashmore that Chrysler adhered to MSR as a contract term, but merely regarded reference to the contract as a further device for spurring the dealer on to greater sales. Although MSR achievement for Chrysler had dropped substantially during 1962, Rydberg apparently never considered it necessary to contact the major stockholders in the firm (i.e., Madsen and Zwierzycki) to point out the failings of the Wheaton dealership.

Before considering Drace's relationship with Madsen during 1963-65, the relationship between the number of sales and the MSR percentage requires some further amplification. While Madsen's MSR achievement percentages dropped substantially in 1963, its total volume of sales increased by 2, the same number of Chryslers, 3 more Plymouths and 1 less Imperial than in the previous year. The change in MSR can be explained in part by the fact that the Regional Average Market Penetration (i.e., the percentage applied to total sales locality registrations to determine MSR) increased, thus requiring Madsen to sell even more cars to keep pace. Such an explanation, however, is an extreme oversimplification of the factors which give rise to MSR. For example, the Imperial regional penetration rose only .01% in 1963. Madsen's MSR, however, increased from 13 to 16 and his performance went from -1 unit (92.3%) to -5 units (68.7%). Even under the original sales locality designations, the Madsen sales area for Imperial is substantially larger than for Chrysler, and the latter almost double the area used for Plymouth. Comparing the total number of car purchases in 1962 with 1963, purchases in the Plymouth area increased by only 8.5%. In the Chrysler locality, the increase in total car purchases was only slightly higher: 8.99%. When the additional territory covered by the Imperial designation is added, the overall increase in new car purchases rises to 13%, indicating that purchases in the area not covered by the Chrysler and Plymouth designations increased substantially more. The calculation of MSR assumes that each additional purchaser in the Imperial-only territory is as receptive to the purchase of a luxury automobile as persons in areas with a lower growth rate. Clearly, this assumption ignores the possibility that such a high growth rate in a specific area may involve persons whose automobile preferences are somewhat different than those of a wide cross-section of the population running from Elkhart, Indiana to Des Moines, Iowa. In calculating MSR, however, defendant apparently expects its dealer to sell 2 out of every 100 new car buyers an Imperial automobile and if new car purchases increase by 100 on account of the opening of medium-cost housing for factory workers in the area, the dealer is expected to sell at least 2 Imperials to factory workers (or, more accurately, to any purchaser to compensate for the presence of the factory workers).

In short, to the extent that any of the factors which go into determining the overall number of new cars sold and the number of new cars sold by a Chrysler dealer deviate from the regional average, a dealer may be under or over MSR while still performing adequately under the circumstances. While the dealer's agreement provides that Chrysler will make adjustments in the MSR calculation to incorporate factors affecting a particular dealer's sales opportunities, such adjustments were never made for Madsen, nor is there any suggestion that Chrysler follows a practice of making such adjustments among its dealers. The "adjustment", as it were, appears to be in the conduct of Chrysler personnel, treating ...


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