Colony Place S., Inc. v. Volvo Car USA, LLC, 2024 U.S. App. LEXIS 29681
By: Jeffrey M. Goldstein
In a recent case decided by the United States Court of Appeals for the First Circuit, two Massachusetts Volvo automobile dealerships sued Volvo Car USA, Volvo Car Financial Services, and Fidelity Warranty Services for allegedly violating Massachusetts General Laws Chapter 93B. The claims related to Volvo-branded Prepaid Maintenance Program (PPM) contracts administered by Fidelity that allow customers to prepay for future routine maintenance at discounted rates. The alleged violations related to Volvo-branded Prepaid Maintenance Program contracts (“PPMs”) — a financial product allowing customers to pay up front at a discounted rate for future, routine maintenance services like oil changes at Volvo dealerships — that Fidelity administers and issues to Volvo dealers, who in turn sell the PPM contracts to their customers. The dealers argued they were being underpaid for servicing these contracts. The court disagreed, ruled against the dealers, holding that the “Dealers’ Bill of Rights” did not protect them.
The alleged violations related to Volvo-branded Prepaid Maintenance Program contracts (“PPMs”) — a financial product allowing customers to pay up front at a discounted rate for future, routine maintenance services like oil changes at Volvo dealerships — that Fidelity administers and issues to Volvo dealers, who in turn sell the PPM contracts to their customers. The parties cross-moved for summary judgment. After hearing argument on the cross-motions, the district court granted the defendants-appellees’ motion and denied the plaintiffs-appellants’ motion, concluding that entities like Fidelity are not regulated by Chapter 93B’s relevant provisions. The dealers appealed that decision. The court of appeals affirmed, for a different reason: the dealers’ sale and service of the Volvo PPM were not franchise obligations under Chapter 93B.
Defendant-appellee Fidelity, which is not a corporate affiliate of Volvo USA or Volvo Financial, develops, offers, and administers automotive financing and insurance products. Fidelity sells its financing and insurance products through franchise dealers, who operate as middlemen; it does not sell any of these products directly to consumers. To design and sell such products, Fidelity partners with many companies, including Volvo, Kia, Toyota, Polestar, and J.D. Power. Some of Fidelity’s products are sold to customers “branded” with the name of a vehicle manufacturer (e.g., Volvo), which imparts upon customers the goodwill and value in the brand name. Fidelity also sells non-branded products — that is, products with Fidelity’s name. The Retailer Agreements contain no express terms that reference the Volvo PPM.
Volvo Financial and Fidelity are parties to a Master Services Agreement that governed Fidelity’s development and administration of several financing and insurance products, including the Volvo PPM, which Volvo dealerships may sell to their customers. Under the Master Services Agreement’s terms, Fidelity must offer Volvo dealers the option to enter into “Administrative Agreements” which allow dealers to sell their customers various Fidelity-designed financial product contracts. These products include both Volvo-branded and non-branded PPMs, but also other contracts such as “Volvo Service,” “Volvo Ding Shield,” and “Theft Deterrence.” When a dealer sells a product under the Administrative Agreement, Fidelity pays Volvo Financial certain referral and incentive fees.
The car dealers together executed an Administrative Agreement with Fidelity. Under its terms, Fidelity agreed to administer and offer to dealers its suite of financial and insurance products, including the Volvo PPM, that dealers in turn may sell to their customers. In exchange, the dealers pay a fee to Fidelity for each contract sold, according to a pre-set fee schedule. The Administrative Agreement contains an integration clause providing that it comprises “the full and entire understanding and agreement” between Fidelity and the dealers and does not incorporate the Retailer Agreements or the Master Services Agreement by reference.
On the dealer-facing side, the Volvo PPM requires Fidelity to reimburse the dealers a portion of their parts and labor costs incurred to service PPM contracts according to pre-set “Maintenance Services Reimbursement Tiers.” Each “tier” effectively supplies a menu of reimbursement amounts for a given bundle of PPM services. For example, as of August 2017, “Tier 36” entitled dealers to $105 in reimbursements for changing a set of wiper blades and $253 for changing front brake pads; “Tier 38” entitled dealers to $108 and $271 in reimbursements for those respective services; and “Tier 42,” $120 and $343, respectively. The higher the tier, the higher the reimbursement amounts to dealers — but also higher the fee that dealers must pay Fidelity for each contract sold. Dealers choose the reimbursement tiers they think are best tailored to their business needs and costs when they sign the Administrative Agreement, although they can also change their tiers later if needed.
Volvo USA advertised that the Volvo PPM will be “honored at any authorized Volvo dealership.” The amount that Fidelity reimburses a PPM-servicing dealer depends, however, on the reimbursement tier selected by the dealer that sold a given PPM contract, not the reimbursement tier selected by the dealer servicing that PPM contract. This can result in a dealer being reimbursed at a lower rate than provided for in the dealer’s contract with Fidelity. For example, if a customer buys a Volvo PPM contract from Dealer A, who is at Tier 39, then redeems that same PPM contract with Dealer B, who is at Tier 41, Fidelity reimburses Dealer B at Tier 39 rates even though Dealer B prices and sells its own Volvo PPM contracts at higher prices based on its more profitable Tier 41 reimbursement rates. A similar problem arises if a customer takes a Volvo PPM contract to one of the nineteen Volvo dealers nationwide, who do not offer the Volvo PPM.
Legal Issues
The key question was whether Chapter 93B regulates the Volvo Maintenance Program, the PPM. The core issue of the case: whether defendants-appellees violated Chapter 93B because the reimbursement rates that Fidelity pays the dealers for servicing the Volvo PPM were less than what the statute requires.
Chapter 93B’s relevant provision provides:
A manufacturer or distributor shall within a reasonable time fulfill its obligations under all express warranty agreements made by it with respect to a product manufactured, distributed or sold by it and shall adequately and fairly compensate any motor vehicle dealer who, under its franchise obligations, furnishes labor, parts and materials under the warranty or maintenance plan, extended warranty, certified preowned warranty or a service contract, issued by the manufacturer or distributor or its common entity, unless issued by a common entity that is not a manufacturer . . . .
The statute benchmarks “fair and adequate compensation” to retail rates and prices that dealers customarily charge. The court had to determine if selling and servicing the Volvo PPM qualifies as a franchise obligation.
As a threshold matter, the court had to decide whether Chapter 93B regulates the Volvo PPM at all. By its express language, Chapter 93B guarantees dealers “adequate[] and fair[]” compensation for “labor, parts, and materials” furnished only if dealers are required to do so under their “franchise obligations.” In turn, the court examined whether the dealers sell and service the Volvo PPM under their “franchise obligations.” As explained below, the court concluded that dealers are not, and thus Chapter 93B does not require Fidelity to reimburse dealers under the Volvo PPM at the rates set by statute.
Analysis of Franchise Obligations
The court examined the Retailer Agreement between the dealers and Volvo USA to determine if it obligates dealers to sell or service the Volvo PPM. It concluded that selling the PPM is not required, as the agreement does not clearly include it as a “Volvo Accessory” dealers must sell. The fact that some Volvo dealers do not offer the PPM supports this, the court pointed out. Regarding servicing, the court found no clear obligation in the agreement to accept all Volvo PPM contracts for service.
The court examined the Retailer Agreement between the dealers and Volvo USA to determine what franchise obligations, if any, the dealers carry with respect to the Volvo PPM. The dealers contended that it is a franchise obligation to both sell and service the Volvo PPM. The court disagreed on both counts.
The Retailer Agreement requires dealers to sell “Volvo Accessories,” among other things. The dealers argued that “Volvo Accessory” is a term that encompasses the Volvo PPM and that they are therefore bound by the Retailer Agreement to sell them. The court disagreed on two grounds.
To begin with, the Retailer Agreement defines Volvo Accessory as “[a]n accessory supplied by [Volvo USA] or by a Volvo Affiliate.” This itself is not a model of clarity, but the term’s use in context is instructive. “Volvo Accessory” and “accessory” appear in provisions that:
- Require dealers to sell and “maintain sufficient inventory of . . . Volvo Accessories to meet customer demand and your sales objectives” (emphasis added);
- Prohibit dealers from “sell[ing] parts (including software) or accessories that infringe [Volvo USA’s] intellectual property rights” (emphasis added); and
- Require Volvo USA to “invoice [dealers] for the full price of the following Volvo Products on the following date: . . . for each Genuine Volvo Part or Volvo Accessory ordered by you, the date when it is shipped from our distribution center” (emphasis added).
The court concluded that “From this context, we cannot reasonably conclude that “Volvo Accessory” includes something like the Volvo PPM — a financial contract that is intangible, not quantified with respect to an inventory, and incapable of possessing attributes like a ship date from a distribution center.”
Relying on a dictionary definition of the word “accessory”, the court stated: “[W]e cannot reasonably conclude that “Volvo Accessory” includes something like the Volvo PPM — a financial contract that is intangible, not quantified with respect to an inventory, and incapable of possessing attributes like a ship date from a distribution center. This reading of “accessory” also accords with its plain meaning: “an object or device that is not essential in itself but adds to the beauty, convenience, or effectiveness of something else.” Accessory, Merriam-Webster’s Collegiate Dictionary (11th ed. 2003)
The court next pointed out that “neither party disputes that at least nineteen Volvo dealers, out of 281 total authorized Volvo dealerships nationwide, do not sell the Volvo PPM. They do not do so despite the Retailer Agreement incorporating “standard provisions” written by Volvo USA which the dealers contend are identical for all Volvo dealers nationwide.” As the court concluded: “It then follows that these nineteen dealers either are in breach of their franchise obligations under the Retailer Agreement, or the Retailer Agreement does not obligate dealers to sell the Volvo PPM. Neither side asserts, or offers any evidence supporting, the first contention.”
The court also rejected the dealers’ third argument that “the Volvo PPM is far from the only finance and insurance product listed in the Administrative Agreement between the dealers and Fidelity.” The court further noted that “the dealers’ designated corporate representative, Joseph Laham, testified at deposition that it is within the dealers’ discretion whether to sell these other, non-PPM finance and insurance products offered by Fidelity and, in turn, that dealers affirmatively choose not to sell certain such products. Yet the dealers fail to explain how these non-PPM products differ meaningfully from the Volvo PPM such that one is a Volvo Accessory, but the others are not. In other words, the dealers impliedly concede that they have discretion to sell an entire category of finance and insurance products — a category that includes the Volvo PPM.”
The dealers’ next argument that they were constantly pressured by Volvo USA and Volvo Financial to sell the PPM to retail car customers also made little headway with the court:
The dealers also make a more general argument that Volvo USA and Volvo Financial consistently pressure dealers to sell the Volvo PPM, essentially rendering the sale of the Volvo PPM obligatory. In support, they point to (1) Volvo USA’s advertisements which categorically state, without firm contractual basis, that “Prepaid Maintenance will be honored at any authorized Volvo dealership”; (2) a provision in the Master Services Agreement between Fidelity and Volvo Financial that requires Fidelity to notify Volvo Financial of the names of any dealers who decline to sell Volvo-branded contracts, after which Volvo Financial may contact those dealers to “discuss” that decision; and (3) mandatory monthly meetings between Volvo USA and Volvo Financial managers and Volvo dealers, including the dealers here, where they review and discuss “penetration reports” generated by Fidelity on the regional sales of the Volvo PPM and other finance and insurance products.
In rejecting this ‘consistent pressure’ argument, the court stated that the above “facts however, do not by themselves create a franchise obligation under the Retailer Agreement. Rather, these facts clarify what is already apparent from the thicket of contractual relationships at issue in this case: Volvo has a vested interest in its dealers selling as many Volvo PPM contracts as possible, evidenced, in part, by the referral and incentive fees that trickle up to Volvo Financial with every Volvo PPM contract sold. While the dealers may feel acute commercial pressure from Volvo USA to sell the Volvo PPM, that alone does not mean they have any contractual obligation to do so.” Pressure does not mean obligation.
The dealers, however, were not yet out of potential arguments to find ‘contractual obligation.’ Next, the dealers argued that it is a franchise obligation to accept and service the Volvo PPM no matter which dealer originally sold a given PPM contract. In support, they identified the following contract provisions that:
- Permit Volvo USA to terminate the Retailer Agreement if a dealer breaches a separate agreement with a Volvo Affiliate; and
- Require the dealers to “give the highest priority to resolving customer complaints and questions and addressing any shortcomings in [dealers’] operations highlighted in customer feedback” and relatedly, permit Volvo USA to set “reasonable business objectives for [dealers’] sales of Volvo Products and how satisfied [dealers’] customers are” and provide for sanctions if the objectives are not met.
Again, unfortunately for the dealers, the court examined – and rejected – each of these alleged bases. Regarding the first provision, the dealers argued that the first provision forces them into a position of either accepting all Volvo PPM contracts they encounter, or breaching their Administrative Agreement with Fidelity. Assuming, without deciding, that Fidelity is a Volvo Affiliate as defined in the Retailer Agreement, the dealers failed to show how refusing to service a given Volvo PPM contract purchased from a different dealer results in a breach of their own Administrative Agreement with Fidelity. To recap, the Administrative Agreement is between the dealers and Fidelity. The dealers are not in contractual privity with other dealers, and the Administrative Agreement contains no express provisions requiring the dealers to honor PPM contracts sold by other dealers. Even assuming otherwise, if the dealers no longer wish to service the Volvo PPM, they are free to unilaterally terminate their agreement with Fidelity at any time after the initial one-year period (which has long since passed) with thirty days’ written notice.
Regarding the second provision, the court explained that “it is true that customers, unhappy with the dealers for declining to service Volvo PPM contracts purchased from other dealers, could leave the dealers bad reviews, which would interfere with the dealers’ contractual obligation to have satisfied customers. However, the possibility of spurned PPM-holders leaving bad reviews and in turn causing a breach of the Retailer Agreement is too attenuated a scenario to support the conclusion that servicing the Volvo PPM is a franchise obligation.”
In a footnote, the court similarly rejected two final claims by the dealers under two other provisions that provide in part:
A manufacturer or distributor shall not implement or continue a policy, procedure, or program to any of its dealers in the commonwealth for compensation which is inconsistent with this subsection.
Mass Gen. Laws ch. 93B § 9(b)(2)(vii).
It shall be deemed a violation of [Chapter 93B] for a:
manufacturer, distributor, or franchisor representative . . . to act to accomplish, either directly or indirectly through any parent company, subsidiary, or agent, what would otherwise be prohibited under this chapter on the part of the manufacturer or distributor.
Id. § 4(c)(12).
The court definitively rejected these claims stating that “The dealers argue that both provisions prohibit Volvo USA from skirting around Section 9(b)(1) via an “attenuated arrangement” to administer the Volvo PPM through Volvo Financial and Fidelity. However, as we discuss below, we consider the gating question of whether selling and servicing the Volvo PPM is a franchise obligation at all, regardless of who administers it. Because we conclude no, we do not address the dealers’ arguments asserted under these provisions.”
Conclusion Snapshot
The court concluded that neither selling nor servicing the Volvo PPM qualifies as a “franchise obligation” under the Retailer Agreement. Therefore, Chapter 93B does not require Fidelity to reimburse dealers for PPM services at the rates set by the statute. The court affirmed summary judgment for the defendants.
Afternote
It is difficult to imagine that Volvo did not know up front at the time it designed its PPM Program that this issue would arise. It may even be the case that Volvo designed the related but distinct three-agreement program with gaps and intentional disconnectedness intended to take advantage of the explicit language in the Massachusetts Dealer Law that could be used to support the defendants’ refusal to compensate the dealers for services rendered under the PPM Program. As a result of this court decision, the very statutory protection at issue – making sure that dealers are compensated at reasonable rates by manufacturers and distributors for products and services they are required to provide – has been undercut regarding the PPM Program.
Another interesting point from a more global perspective is that the dealers, in arguing that that the Volvo PPM qualified as a ‘franchise obligation’, asserted a two-part argument that makes sense, even though it was rejected: first, if a customer who has bought its PPM Program from Dealer A but goes to Dealer B for service and Dealer B, who does not participate in the PPM Program, refuses to render service, the customer is very likely to blame, in part, Dealer A, the original dealer. And, accordingly, it is also likely that this dissatisfied customer will give a very poor review (written or otherwise) to Dealer A. Given how heavily all dealers’ reviews are factored into the manufacturer’s perception of the adequacy of its dealers’ performance, these negative reviews can snowball and at best disqualify dealers from certain programs or at worst lead to a direct or indirect termination.
Shockingly, with no empirical evidence one way or another on this significant issue, the court summarily concluded that the above hypothetical “could not occur” because the language in the dealership agreements did not explicitly allow for the hypothesized ‘retaliation’ or ‘discipline’ against the dealers:
For one, “bad reviews from unhappy customers” is not included in the list of circumstances permitting the termination of the franchise agreement. Rather, the Retailer Agreement’s termination protocol provides for a franchise’s immediate termination in serious circumstances such as a dealer’s insolvency, violation of antitrust laws, or providing materially false statements to Volvo USA. Otherwise, the protocol enumerates other, less egregious circumstances that will begin an extended, ninety-day termination process, which includes a sixty-day “correction period.” The last enumerated circumstance is a catch-all term covering the “breach [of] any other material term of this agreement.” The Retailer Agreement then lists nine specific sections that are “material,” which include sections on the location of the dealership, what the dealership will sell, the dealership’s business plan, and Volvo’s code of conduct. Absent from that list of sections is the section requiring dealers to have satisfied customers and “give the highest priority to resolving customer complaints.” Given this context, we cannot see how the customer satisfaction provision would be considered material, especially as the dealers have pointed to nothing suggesting that the customer satisfaction provision constitutes a material term of the Retailer Agreement.
Interestingly, and perhaps correctly, the court focused on the ‘materiality’ provision as dispositive of the ‘poor reviews’ argument by the dealers. However, surprisingly, the court simply concluded that it could not see “how the customer satisfaction provision would be considered material.” Unfortunately, many franchisees and dealers are terminated on a regular basis based on a prolific array of relatively miniscule and insignificant franchisee and dealer ‘infringements’ that franchisors and manufacturers deem to be material.
Many franchisor and manufacturer groups respond to the problem by saying: “So what? We clearly have specified in our agreements the types of conduct that will support a termination. The terminated franchisee or dealer could easily have refused to sign the agreement or have signed on with a different franchisor or manufacturer at the beginning.” The problem for society is that this draconian and unsupported position not only is incredibly inefficient, it is also palpably unfair. More notably, though, in the end, all stakeholders suffer.
