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:
Whenever a franchise provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy.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).
[W]henever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy.15 U.S.C. 1226.