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“The More Things Change…”: Business Litigation and Governance in the American Automobile Industry

Published online by Cambridge University Press:  27 December 2018

Lane Kenworthy ,
Stewart Macaulay  and
Joel Rogers
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Abstract

Business litigation is a relatively neglected area of corporate governance, particularly given its enormous rise in the United States over the past generation. As a preliminary effort to engage this issue, we examine dispute avoidance and resolution in the automotive sector since the early 1970s-focusing on relationships between auto manufacturers and their suppliers and dealers. We generally presume intercorporate litigation to be a “last resort” in business practice, chosen only on the breakdown of less costly means of dispute avoidance or resolution; we take such breakdown typically to be caused by shifts in the terms of competition among firms (e. g., increased competition, instability, uncertainty); and we expect that, over time, the costs of litigation will motivate efforts to construct new structures of nonlitigious dispute resolution. In the case of the U. S. auto industry, we find disruptive shifts in the terms of competition and increased recourse to litigation. Throughout, however, this litigation effect is mitigated by the dominance of major manufacturers over their suppliers and dealers. Over time, it is further dampened by industry development of mechanisms for arbitration or other nonlitigious dispute resolution.

Type
Symposium: Business Disputing
Information
Law & Social Inquiry , Volume 21 , Issue 3 , Summer 1996 , pp. 631 - 678
Copyright
Copyright © American Bar Foundation, 1996 

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References

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36 “Betting on a Single Source,”Industry Week, 1 Feb. 1988, at 34.Google Scholar

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39 Cusumano & Takeishi, 12 Strategic Mgmt. J. 570.Google Scholar

40 Helper, S., “How Much has Really Changed between U. S. Automakers and Their Suppliers?” 15 Sloan Mgmt. Rev. 19 (Summer 1991).Google Scholar

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42 “Supplier-Side Economics: The Silent Majorities Speak,”Automotive Indus. 56, 57 (Dec. 1986).Google Scholar

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45 M. Keller, “Problems with Partnerships,”Automotive Indus. 9, 9 (Jan. 1992).Google Scholar

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47 Helper asked a similar question in her survey. Of the respondents, 31% said their customer would help match the competitor's efforts, while 39% indicated that their customer would likely switch to a rival as soon as technically feasible. See Helper, 15 Sloan Mgmt. Rev. 19.Google Scholar

48 Z. Schiller, “GM Tightens the Screws,”Bus. Week, 22 June 1992, at 30.Google Scholar

49 Id.; J. Treece, “The Lessons GM Could Learn for Its Supplier Shakeup,”Bus. Week, 31 Aug. 1992; “Balking U. S. Automotive Suppliers Talk of Giving Up Business with Car Maker,”Wall St. J., 2 Nov. 1992.Google Scholar

50 Treece, Bus. Week, 31 Aug. 1992, at 29.Google Scholar

51 Within a year Lopez had moved to Volkswagen, where he instituted a similar system. See J. Templeman, “How Many Parts Makers Can Stomach the Lopez Diet?”Bus. Week, 28 June 1993.Google Scholar

52 But shouldn't we expect the automakers, as profit-maximizing firms, to already have been “squeezing” suppliers as much as possible? We think not. Certainly there is evidence that the big three manufacturers structured their relationships with suppliers to their advantage during the “golden” years preceeding the early 1970s. But given the healthy, stable market share and profits the automakers enjoyed during those years, they were probably guided at least to some extent by a desire for stability and regularity in their dealings with suppliers (and dealers, employees, and so on), and for this they needed to establish reputation. Although their leverage permitted it, there is thus reason to expect the automakers not to have squeezed suppliers as hard as possible during this time. Conversely, reputation may only be valuable in a stable economic environment; as that environment becomes less stable-more competitive, more uncertain, with different players-we should expect departures from satisfying reputational requirements. See A. Okun, Prices and Quantities: A Macroeconomic Analysis 134–82 (Washington: Brookings Institution, 1981); Williamson, Economic Institutions (cited in note 3).Google Scholar

53 The WISRAND database of federal litigation involving the Fortune 500 companies is not in a form such that we can pull out litigation filed between auto manufacturers and their suppliers.Google Scholar

54 Many of the six other cases involve determinations of responsibility for product liability. The actual plaintiff is an injured buyer of a car or his or her insurer.Google Scholar

55 See M. Galen, A. Cuneo, & D. Greising, “Too Many Lawyers and Too Much Litigation: Here's a Better Way,”Bus. Week, 13 April 1992, at 60.Google Scholar

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57 Only within the past decade have foreign-based (mostly Japanese) automakers begun production in the United States, and even so their purchases from U. S. suppliers accounted for less than 5% of American auto parts sales as of 1993. See J. Treece, “U. S. Parts Makers Get More Mileage Out of Japan,”Bus. Week, 12 April 1993, at 74.Google Scholar

58 However, a lawyer for one of the largest automotive suppliers noted with amusment: The negotiations take place on the auto manufacturer's purchase order calling for X% of its requirements, which it [the supplier] then acknowledges by [its own] form which will have inconsistent terms and conditions. We never reach a total agreement with both firms signing a single document. [The supplier] doesn't want to reach such an agreement because it will then be bound to the [auto manufacturer's] terms. If it came to that, a manufacturer could say, “if you want our business, sign our form.” Rather a lot is left open.Google Scholar

59 884 F. 2d 580 (6th Cir. 1989).Google Scholar

60 The case also illustrates how slowly the American legal system moves and how difficult it is to litigate against a major corporation. The “approximate requirements contracts” were made in early 1980, covering GMs requirements of various screw machine parts from August 1980 to July 1981. GM did not order all the parts which Pro-Par expected to supply during this period. Pro-Par sued GM in November 1984. GM moved for summary judgment in 1986, and the trial court granted partial summary judgment in 1987 and rhen modified its opinion in 1988. Pro-Par filed notice of appeal to the Sixth Circuit in July 1988, and the court issued its short opinion in 1989. It is hard to judge the case on a cost-benefit basis for Pro-Par because we may be too influenced by hindsight. (Pro-Par got only a $3,000 settlement to end certain claims not appealed to the Sixth Circuit.) Nonetheless, the record makes it clear that tangling with GM calls for much costly legal work. The case involves difficult questions under UCC § 2–306, governing requirements contracts, the parol evidence rule, and promissory estoppel. Pro-Par's lawyer did a good job in defeat, but GM's briefs are very well done. Its lawyers know the cases, use the favorable law review writers, and make good policy arguments.Google Scholar

61 Plaintiff also wanted to apply promissory estoppel to the estimates. This doctrine protects reliance on promises which do not form contracts. The court said that there must be an express representation or a promise for that doctrine to apply, but GM's estimate was just an opinion. On appeal, the Court of Appeals did not consider the point.Google Scholar

62 Our discussion in this section and the next draws on S. Macaulay, Law and the Balance of Power: The Automobile Manufacturers and Their Dealers (New York: Russell Sage Foundation, 1966); Macaulay, “Standardized Contracts” at 23–25. See also White, Automobile Industry ch. 9 (cited in note 10).Google Scholar

63 L. White, “The Automobile Industry,”in W. Adams, ed., The Structure of American Industry 140 (New York: Macmillan, 1982).Google Scholar

64 Ford Motor Co. v. Kirkmeyer Motor Co., 65 F. 2d 1001 (4th Cir. 1933).Google Scholar

65 Wis. Stat. § 218.01 (1994).Google Scholar

66 See S. Macaulay, “Long-Term Continuing Relations: The American Experience Regulating Dealerships and Franchises,”in C. Joerges, ed., Franchising and the Law: Theoretical and Comparative Approaches in Europe and the United States 179, 197–203 (Baden-Baden: Nomos Verlagsgesellschaft, 1991) (“Macaulay, ‘Long-Term Continuing Relations”’).Google Scholar

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69 Id. at § 218.01(f)(2).Google Scholar

70 Section 5A of the Saturn franchise states: “Franchisor and Dealer acknowledge that, at the state and federal levels, various courts and agencies would, in the absence of this Article 5, be available to them to resolve claims or controversies which might arise between them. Franchisor and Dealer agree that it is inconsistent with the [Saturn] Mission and Philosophy for either to use courts or government agencies to resolve such claims or controversies.”.Google Scholar

71 See Saturn Dist. Corp. v. Williams, 905 F. 2d 719 (1990).Google Scholar

72 Southland Corp. v. Keating, 465 U. S. 1 (1984); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U. S. 614 (1985). See, e. g., Speidel, R. E., “Arbitration of Statutory Rights Under the Federal Arbitration Act: The Case for Reform,” 4 Ohio St. J. Dis. Resol. 157 (1989);Atwood, B. A., “Issues in Federal-State Relations under the Federal Arbitration Act,” 37 U. Fla. L. Rev. 61 (1985); Note, ”Arbitrability of Disputes under the Federal Arbitration Act,” 71 Iowa L. Rev. 1137 (1986). Since the late 1980s, the National Automobile Dealers Association (NADA) has lobbied for legislation that would allow dealers and others subject to arbitration clauses in franchise contracts to decide not to arbitrate once a dispute has arisen. Also, under NADA's proposal, a court could vacate an arbitrator's award if the court found “the arbitrator disregarded, misapplied, or misinterpreted State law.” The American Arbitration Association opposed the bill. See D. T. Kurylko, “NADA Seeks Federal Law to Ban Binding Arbitration,”Automotive News, 25 Sept. 1989, at 4. Despite bipartisan support and hearings, this legislation remains in committee. The manufacturers have backed away from demanding mandatory arbitration in their franchises, and this has meant that legislators have not seen action as necessary. Indeed, while the entire lobbying effort may not have produced a statute, it may have been a factor in limiting the manufacturers' attempt to impose mandatory arbitration on the dealers.Google Scholar

73 The Chrysler franchise called for Chrysler and the dealer each to appoint an arbitrator, and the two arbitrators thus selected were to appoint a third. The franchise stated: “It is the intent and desire of DEALER and CMC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and finding, and subject to no judicial or administrative review.”.Google Scholar

74 “NADA considered a victory Chrysler's decision to indefinitely extend the original 18-month moratorium on mandatory binding arbitration in franchise agreements.” E. Lapham, “NADA: Politics and Promos,”Automotive News, 20 June 1988, at I. Since 1987, Chrysler has let dealers who sign franchise agreements decide whether they want binding arbitration to settle disputes. About four dealers have chosen the option; most have rejected it. S. G. Wedde, “Franchise Gray Areas Codified,”Automotive News, 26 July 1993, at 18.Google Scholar

75 See Automotive News, 26 July 1993, at 18.CrossRefGoogle Scholar

76 R. Garrity, “ADR to Become Bigger than Ever,”Mich. Lawyers' Weekly, 13 April 1992, at 19.Google Scholar

77 The relevant statute is Wisconsin Statutes, § 218.01(lr), (lbm (1) (2a) (2b) (3)), (36d), 7m, b, d, 7r (1994); amendments are reported in AB (1993, 565). All quotes in this and the next three paragraphs are from M. A. Gerrard, “How Your New Mediation-Arbitration Program Works,”Dealer Point, Summer 1993. Dealer Point is a publication of the Wisconsin Automobile and Truck Dealers Association (WATDA).Google Scholar

78 Jacobs, J., “Keeping It Out of Court: Alternative Dispute Resolution,” 81 Mgmt. Rev. 54 (1992).Google Scholar

79 Marx, T., “The Development of the Franchise Distribution System in the U. S. Automobile Industry,” 59 Bus. Hist. Rev. 465, 468 (1985). According to Spinella, “the number of dealer principals tumbled from 45,000 to 17,000 between 1950 and 1987, with the prospect of only 14,000 dealership owners by 1991.” A. M. Spinella, “The Dealer Dimension,”Ward's Auto World, May 1988, at 53.Google Scholar

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81 In DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d326 (7th Cir. 1987). the court upheld the Dealer Policy Board appeal as a condition precedent to claims under the Dealer's Day in Court Act or based on breach of contract or fraud. It further held that substantial performance would be insufficient and the franchise's provision against waivers blocked any claim that the condition had been waived. Note that in Rea and 22 Ford, Inc. v. Ford Motor Co., 497 F.2d 577 (3d Cir. 1974), the court found that taking a case to the Dealer Policy Board was not a prerequisite to bringing suit for violation of the Dealers Day in Court Act. The court remarked: “In light of the Act's purpose, it may be that a dealer should not be denied the opportunity to pursue his statutory cause of action because of a failure to invoke a contractual grievance procedure.”.Google Scholar

82 This provision also is upheld in DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326 (7th Cir. 1987). Among other things, the court refused to find the clause to be “unconscionable.”“Ford is entitled to a valid exercise of its corporate power in offering dealers a choice of either electing benefits in exchange for a release of liability or of declining benefits altogether.” The court cites five other cases to this effect.Google Scholar

83 Honda's and Volkswagen's franchises contain similar provisions.Google Scholar

84 Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 518 F.2d 751 (2d Cir. 1975); 496 F. 2d 800 (2d Cir. 1974); 370 F. Supp. 581 (E. D. N. Y. 1973), suggests part of the difficulty. It involved an attempt by Chrysler to get the dealer's lawyer disqualified for a conflict of interest. The dealer's lawyer, Schreiber, had worked briefly for Kelley, Drye, Warren, Clark, Carr & Ellis–an 80-member Wall Street firm that had long represented Chrysler in matters related to dealers. Following graduation from the Columbia University Law School, Schreiber worked for Kelley, Drye. After about 32 months, he left to establish his own practice in White Plains, N. Y. A year later, he joined Hammond, a senior lawyer with a national reputation for representing auto dealers, to form a two-person firm. Chrysler failed to disqualify the lawyer. Kelley, Drye failed to produce the time records which would show Schreiber's assignments. However, the former Kelley, Drye associate in charge of Chrysler dealer suits offered an affidavit saying that Schreiber “did not work directly or indirectly on Chrysler dealer litigation, with the possible exception of researching a few specific points of law that may have been involved in a dealer case.” Schreiber's own statement stressed how little contact he had with Chrysler. The trial court decided that “the disqualification of plaintiff's counsel is not warranted.” He quoted Judge Charles Clark: “the dangers of using legal ethics as a club to protect monopolists or harass complainers… suggest care and concern lest we go too far.” The Second Circuit affirmed. Both courts' opinions distinguish Motor Mart, Inc. v. SAAB Motors, Inc., 359 F. Supp. 156 (S. D. N. Y. 1973). There the lawyer had represented Saab on a regular basis for five years, and he had drafted the basic dealer agreement used by Saab. He was involved extensively with Saab's legal relations to its dealers. The Saab court held that this lawyer was disqualified and could not represent a Saab dealer against SAAB. Chrysler failed to disqualify Schreiber, but the lesson of the two cases is that a lawyer cannot learn about dealer cases by representing too many manufacturers.Google Scholar

85 See M. Krebs, “GM Maps Franchise for the ‘90s,”Automotive News, 3 April 1989, at 1. See also Automotive News, 13 March 1989, at 1.Google Scholar

86 For a more thorough and formal discussion of some of the incentives and calculations involved, see Cooter, R. D. & Rubenfeld, D. L., “Economic Analysis of Legal Disputes and Their Resolution,” 27 J. Econ. Lit. 1067 (1989); Priest, G. L. & Klein, B., “The Selection of Disputes for Litigation,” 13 J. Legal Stud. 1 (1984).Google Scholar

87 Macaulay, “Long-Term Continuing Relations” 197–203 (cited in note 66). The quotation is from Kaufmann, P. J. & Stern, L. W., “Relational Exchange Norms, Perceptions of Unfairness, and Retained Hostility in Commercial Litigation,” 32 J. Conflict Resol. 534 (1988), an empirical test of Macneil's theories. See I. Macneil, The New Social Contract (New Haven, Conn.: Yale University Press, 1980).Google Scholar