The Franchise Memorandum

Although they still lost on other grounds, parties who attempted to purchase a Mercedes Benz dealership may have made important law last month in their tortious interference lawsuit against the car company. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 2014 U.S. App. LEXIS 21127 (9th Cir. Nov. 5, 2014). The plaintiffs maintained that Mercedes Benz did not provide timely notice it was exercising its right of first refusal to buy the dealership, and that the company's exercise of that right constituted interference with the plaintiff's contract to purchase the business from the existing dealer. The district court earlier had disagreed and held Mercedes Benz could not have tortiously interfered because it was not a "stranger" to the dealers' sale agreement. Instead, Mercedes Benz had an ongoing financial interest and involvement in the purchase since the buyer and seller had to obtain the company's approval of the deal. This defense is one many franchisors and manufacturers have used successfully in lawsuits involving transfer denials.

On appeal, however, the Ninth Circuit disagreed with the district court's decision, and found that the "stranger" principle is in a state of flux in California and that, more recently, California courts have limited application of the principle to parties with a "direct" interest or involvement in the contractual relationship. The appellate court therefore declined to uphold the lower court's decision. Instead, because the third parties admitted that the viability of their interference claim hinged on whether Mercedes Benz had timely exercised its right of first refusal, the Ninth Circuit analyzed the timeliness evidence. The parties did not dispute that Mercedes Benz had provided notice through email, facsimile, and overnight mail, but the third parties contended that the notice was improper and ineffective. The Ninth Circuit disagreed, noting that the distribution agreement was silent on the method of service, and in any case, Mercedes Benz had no obligation to provide notice to the proposed buyer. In addition, one of the third parties had entered into an acknowledgement agreement with Mercedes Benz in which it recognized that the car company had timely exercised its right. Thus, the Ninth Circuit determined that Mercedes Benz did not tortiously interfere with the purchase contract.