California Courts Narrow the New Motor Vehicle Board’s Jurisdiction to Hear Dealer Protests
By Filemon “Phil” Carrillo on March 16, 2018
The California Legislature established the New Motor Vehicle Board (the “Board”). The mandate of the Board is to enforce the regulatory scheme set forth in the California Vehicle Code and Civil Code meant to regulate the franchise relationships between vehicle manufacturers, distributors, and dealer-franchisees. Under these laws, the Board is given the power to hear and decide a protest brought by a dealer-franchisee.
Early on, California courts applied the administrative exhaustion doctrine to a dealer’s claim against a manufacturer, holding that a dealer must bring a protest or otherwise lose its right to bring an action in the courts. This meant that a dealer’s failure to bring a timely protest had fatal consequences on its other statutory and common law claims, even if those claims were not under the Board’s purview. However, since the California legislature stepped in to expressly state that the administrative exhaustion doctrine does not apply to dealer protests, there has been a trend in the courts to narrow the Board’s jurisdiction and power in the context of dealer protests.
The brief history set forth below illustrates the consequences that the administrative exhaustion doctrine had on dealers’ grievances and how the current trend to narrow the jurisdiction and power of the Board to its statutory limits has developed.
Overview of the Board’s Jurisdiction to Hear a Dealer’s Protest
The Vehicle Code provides the exhaustive list of protests that a dealer-franchisee may bring before the Board. It states: “The [Board] shall . . . [h]ear and decide, within the limitations and in accordance with the procedure provided, a protest presented by a franchisee pursuant to Section 3060, 3062, 3064, 3065, 3065.1, 3070, 3072, 3074, 3075, or 3076.” Cal. Veh. Code § 3050(d). Under this section, a dealer may go to the Board to:
- Protest the termination, replacement, or modification of a dealership franchise as without good cause (§ 3060);
- Protest the establishment or relocation of another dealership or satellite warranty facility in the same market area as the protesting franchisee (§ 3062);
- Protest the reasonableness of the delivery and preparation obligations and respective compensation for those obligations set by the franchisor (§ 3064);
- Protest a reduction in time and compensation for warranty repairs (§ 3065);
- Protest the disapproval of a franchisee’s claim for payment under the franchisor’s incentive program (§ 3065.1);
- Protest the termination, replacement, or modification of a new recreational vehicle dealership as without good cause (§ 3070);
- Protest the establishment or relocation of another new recreational vehicle dealership in the same market area as the protesting franchisee (§ 3072);
- Protest the reasonableness of the delivery and preparation obligations and respective compensation for those obligations set by a new recreational vehicle franchisor (§ 3074);
- Protest the reasonableness of the reimbursement schedule or formula for labor and parts used to fulfill work covered under a new recreational vehicle franchisor’s warranty (§ 3075);
- Protest the disapproval of a franchisee’s claim for payment under a new recreational vehicle franchisor’s incentive program (§ 3076).
While the Vehicle Code established the Board’s power to hear these protests, it was silent about whether a franchisee must first bring its grievance to the Board. As it turned out, this created ambiguity.
Appellate Courts Disagreed About Whether A Dealer Must Bring A Protest Before It Could File Suit In The Courts
Early on, some California courts held that a franchisee must bring a timely protest before the Board or forfeit its right to bring a claim before a court. Surprisingly, several courts held that by failing to exhaust their administrative remedies, franchisees were also foreclosed from bringing a case before the courts under a legal theory was outside of the jurisdiction of the Board.
In Yamaha Motor Corp., U.S.A. v. Superior Court (”Yamaha I”), 185 Cal.App.3d 1232 (1986), a motorcycle dealer filed an action, as its first measure, against Yamaha for (i) breach of the franchise agreement, (ii) breach of the implied covenant of good faith and fair dealing, and (iii) intentional interference with prospective business advantage. Yamaha had created a new product and had established a new dealership in the protesting-dealer’s market area to sell the new product. The dealer complained that Yamaha should have allowed it to sell the new product and that placing the new dealer nearby breached the franchise agreement. In response, Yamaha sought to dismiss the case on the ground that the dealer failed to exhaust its administrative remedies because it failed to bring a protest before the Board. The trial court denied the demurrer and Yamaha filed a writ of mandate with the Court of Appeal.
On appeal, the dealer argued that its grievance did not fall under the purview of the Board. It argued that Yamaha’s conduct was neither a modification of the franchise (§ 3060) nor an establishment of a new franchise in its area (§ 3062). The court of appeal disagreed. It held that the dealer’s claims fell “squarely within the statutory jurisdiction.” Because it did not bring a protest before the Board, the dealer failed to exhaust its administrative remedies. Consequently, it was precluded from bringing even its common law claims before the court. A later court, citing Yamaha I, reiterated this holding. It stated: “Whether or not the administrative remedy is permissive and whether or not it may afford complete relief, the complainant must exhaust it before seeking judicial assistance.” Yamaha Motor Corp. v. Superior Court, 195 Cal.App.3d 652, 657 (1987) (emphasis added); see also Mathew Zaheri Corp. v. Mitsubishi Motor Sales, 17 Cal.App.4th 288 (1993).
Other courts disagreed with this approach. In Ri-Joyce, Inc. v. New Motor Vehicle Bd., 2 Cal.App.4th 445 (1992), a dealer protested the establishment of a new dealer more than ten miles from its location. The court of appeal overturned the Board’s decision to dismiss the protest, finding ambiguity in the parties’ agreement. However, while its decision did not address whether a dealer must exhaust its opportunity to bring a protest before the Board before filing suit, the court noted that the Board “does not have plenary authority to resolve any and all disputes which may arise between a franchisor and a franchisee. . . . Claims arising from disputes with other legal bases must be directed to a different forum.” Id., at 455. Accord Miller v. Superior Court, 50 Cal.App.4th 1665 (1996); Hardin Oldsmobile v. New Motor Vehicle Bd., 52 Cal.App.4th 585 (1997).
In sum, by 1997, the California courts disagreed about whether a dealer must bring a protest before the Board before it could pursue other claims in the courts.
The Legislature Steps In
In 1997, the California Legislature settled the dispute. In passing SB 690, the Legislature added the following language to Section 3050 of the vehicle code: “Notwithstanding subdivisions (c) and (d), the courts have jurisdiction over all common law and statutory claims originally cognizable in the courts. For those claims, a party may initiate an action directly in any court of competent jurisdiction.” This narrowed the plenary authority granted to the Board by earlier appellate decisions and is now codified at California Vehicle Code § 3050(f).
Subsequent Decisions Continue To Narrow The Board’s Jurisdiction
Since the legislative repudiation of the administrative exhaustion doctrine in dealer protests, subsequent decisions have continued to narrow the Board’s jurisdiction and power to its statutory limits.
In Mazda Motor of America, Inc. v. New Motor Vehicle Bd., 110 Cal.App.4th 1451 (2003), a franchisee-dealer filed an application with the manufacturer to transfer its dealership to a third party. After Mazda denied the application, the dealer filed a petition with the Board pursuant to Vehicle Code § 3050(c). This subsection empowers the Board to consider matters concerning the conduct of a person holding or applying for “a license as a dealer, manufacturer, branch, distributor, distributor branch, or representative.” Cal. Veh. Code § 3050(c). The remedies available under subsection (c) are regulatory in nature, limited to action against the manufacturer’s license. Id. When an administrative law judge held that the Board has the authority to hear these claims, Mazda filed a petition for writ of mandate in the trial court. The trial court issued a writ of mandate ordering the Board to dismiss the petition and decline jurisdiction to hear the dealer’s claims. An appeal by the Board and the dealer followed.
The appellate court found that because the dealer was seeking an order effectuating the transfer of the franchise, it sought a remedy beyond the enumerated powers of the Board. The court held: “The Board's jurisdiction to preside over claims is limited by its statutory authorization,” and “[w]here the Board's activities exceed its authorization, the Board violates the judicial powers clause of the California Constitution.” Mazda Motor of America, Inc., 110 Cal.App.4th at 1457. In effect, the court ruled that the Board’s power under Section 3050(c) is limited to action on the manufacturer’s license. As a result, it could not issue an order compelling Mazda to grant permission to transfer the franchise. Although this holding did not address the Board’s power to hear a dealer’s protest, it clearly narrowed the power and reach of the Board.
Later, in Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corp., U.S.A., 221 Cal.App.4th 867 (2013), the California Court of Appeal continued to narrow the Board’s power. There, Yamaha terminated a franchise while the dealer was in the process of selling it to a third party. The dealer filed a protest with the Board, but it was overruled as untimely. Powerhouse filed suit and eventually secured a large judgment against Yamaha.
On appeal, Yamaha argued that the dealer’s claims in court were precluded as a matter of law because the Board overruled the protest as untimely. The court disagreed. It found that, while the Board retains jurisdiction to decide whether a protest is timely, the determination does not preempt or limit in any form the dealer’s right to assert statutory and common law claims in the courts.
Most recently in Roadtrek Motorhomes v. California New Motor Vehicle Board, No. G049534 2016 WL 3885006, (Cal. Ct. App., July 14, 2016), a dealer filed a protest with the Board alleging that the manufacturer lacked good cause to terminate its dealerships. Before the Board hearing, the dealer argued that there was a de facto termination of the franchises before the franchisor gave notice of termination. Because there was a de facto termination prior to the notice, there was no need for a hearing on the issue of good cause. The case eventually made its way to the California Court of Appeal.
The appellate court cited several cases that limited the Board’s jurisdiction. It noted that the Board “does not have plenary authority to resolve any and all disputes which may arise between a franchisor and a franchisee,” quoting the Ri-Joyce, Inc. decision discussed above. Ultimately, the court decided that while the same set of facts may set the foundation both for a civil claim and for a protest before the Board, the Board can only decide questions within its jurisdictional limit. The question of whether there was a de facto termination did not fall under this jurisdictional limit.
As it turned out, the Legislature’s action catalyzed what has been a trend in the courts to narrow the jurisdiction of the Board. Franchisors and franchisees alike should keep the outer limits of the Board’s power in mind when deciding whether to pursue a protest or a claim in the courts. Thinking strategically since the beginning will reduce costs and expedite the resolution of manufacturer-dealer disputes in this arena.
This article was prepared by Filemon Carrillo (firstname.lastname@example.org), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to motor vehicle manufacturers and franchisors in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution.