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Nissan North America, Inc. v. Texas Department of Motor Vehicles

Court of Appeals of Texas, Sixth District, Texarkana

November 22, 2019


          Date Submitted: September 6, 2019

          On Appeal from the 126th District Court Travis County, Texas Trial Court No. D-1-GN-17-004072

          Before Morriss, C.J., Burgess and Stevens, JJ.



         Nissan North America, Inc., sought to terminate its 1989 Dealer Sales and Service Agreement (Agreement) with Bates Nissan due to Bates' poor sales performance and violation of accepted accounting practices. After an administrative hearing, the Board of the Texas Department of Motor Vehicles[1] adopted the administrative law judge's proposal for decision, finding that Nissan failed to establish good cause to terminate the agreement. The 126th Judicial District Court of Travis County affirmed the Board's order.[2]

         On appeal, Nissan contends that (1) the Board erred in concluding that Bates' sales performance did not amount to a breach of the Agreement, (2) the Board erred in concluding that Bates did not breach the Agreement by willfully falsifying its tax returns and by knowingly submitting false financial statements to Nissan, and (3) the Board erred by considering evidence of the dealer's performance after Nissan issued its notice of termination. We affirm the trial court's ruling.[3]

         I. Statutory Structure and Procedure

         The TDMV has the exclusive statutory authority to regulate franchise relationships between dealers and motor vehicle manufacturers, including manufacturers of motor homes. See Tex. Occ. Code Ann. §§ 2301.001-2401.253 (Supp.). Under the Texas Occupations Code, a franchise is one or more contracts between a motor vehicle manufacturer and a dealer setting out their relationship and obligations, including the right of the dealer to sell and service motor vehicles and any duty or obligation granted or imposed by the Texas Occupations Code. Tex. Occ. Code Ann. § 2301.002(15). One of the primary goals of the provisions of the occupations code is to "ensure a sound system of distributing and selling motor vehicles" in our state. Tex. Occ. Code Ann. § 2301.001. To accomplish this goal, the Code authorizes the Board to

(1) administer this chapter [of the Occupations Code]; . . . (3) ensure that the distribution, sale, and lease of motor vehicles is conducted as required by [the Occupations Code] and [B]oard rules; . . . and (5) prevent fraud, unfair practices, discrimination, impositions, and other abuses in connection with the distribution and sale of motor vehicles.

Tex. Occ. Code Ann. § 2301.152(a); see also Subaru of Am., Inc. v. David McDavid Nissan, 84 S.W.3d 212, 224 (Tex. 2002).[4]

         Once a manufacturer and dealer have entered into a franchise agreement, certain requirements must be met for an automobile manufacturer to terminate the agreement. Tex. Occ. Code Ann. § 2301.453. First, the manufacturer must give timely written notice to the Board and to the dealer before the proposed termination date that sets out the specific reasons for the termination and contains a conspicuous statement on the first page notifying the dealer of its right to protest the termination and have a hearing. Tex. Occ. Code Ann. § 2301.453(c)-(d). If, after receiving the notice, the dealer does not file a protest, the franchise agreement will be terminated after notice of termination if the dealer consents in writing or the time to file a protest has expired. Tex. Occ. Code Ann. § 2301.453(a). If the dealer files a protest within the required time, a statutory stay is entered, preventing the parties from committing any act or omission that would affect a legal right, duty, or privilege of any party before the Board, and the Board schedules a hearing in which the manufacturer must demonstrate good cause for the termination by a preponderance of the evidence. Tex. Occ. Code Ann. §§ 2301.453(e), (g), 2301.803.

         All contested hearings "must be held by an administrative law judge of the State Office of Administrative Hearings" (ALJ). Tex. Occ. Code Ann. § 2301.704(a). In conducting the hearing, the ALJ acts with "all the board's power and authority," including the power to "make findings of fact and conclusions of law" and "issue a proposal for decision and recommend a final order." Tex. Occ. Code Ann. § 2301.704(b)(7)-(8). In making its final decision, the Board reviews the ALJ's proposal for decision, findings of fact and conclusions of law, recommended order, as well as any exceptions and replies to the same filed by the parties, and issues a final order. Tex. Occ. Code Ann. § 2301.709-.711.

         In determining whether good cause has been established, the Board shall consider "all existing circumstances," including the following seven factors:

(1) the dealer's sales in relation to the sales in the market;
(2) the dealer's investment and obligations;
(3) injury or benefit to the public;
(4) the adequacy of the dealer's service facilities, equipment, parts, and personnel in relation to those of other dealers of new motor vehicles of the same line-make;
(5) whether warranties are being honored by the dealer;
(6) the parties' compliance with the franchise, except to the extent that the franchise conflicts with this chapter; and
(7) the enforceability of the franchise from a public policy standpoint, including issues of the reasonableness of the franchise's terms, oppression, adhesion, and the parties' relative bargaining power.

Tex. Occ. Code Ann. § 2301.455(a)(1)-(7). A manufacturer's desire for market penetration, alone, does not constitute good cause. Tex. Occ. Code Ann. § 2301.455(b). The Board has exclusive discretion to determine the weight of the evidence for each factor and to determine whether the petitioner has shown good cause. Tex. Gov't Code Ann. § 2001.174; Austin Chevrolet, Inc. v. Motor Vehicle Bd. & Motor Vehicle Div. of Tex. Dep't of Transp., 212 S.W.3d 425, 432 (Tex. App.-Austin 2006, pet. denied).

         A party may seek judicial review of the Board's final order. Tex. Occ. Code. Ann. § 2301.751(a). Judicial review is performed under the substantial evidence standard where the court presumes that the Board's order is supported by substantial evidence, and the appellant has the burden of overcoming this presumption. See Tex. Gov't Code Ann. §§ 2001.171, 2001.174; Austin Chevrolet, Inc., 212 S.W.3d at 430-31. Under this standard of review, the court cannot substitute its judgment on the weight of the evidence for that of the Board. Tex. Gov't Code Ann. § 2001.174.

         The court is not bound by the reasons stated in the Board's order. Tex. Health Facilities Comm'n v. Charter Medical-Dallas, 665 S.W.2d 446, 452 (Tex. 1984). The test is not whether the Board reached the correct conclusion, but whether some reasonable basis exists in the record for the Board's decision. Tex. Dep't of Pub. Safety v. Latimer, 939 S.W.2d 240, 244 (Tex. App.- Austin 1997, no writ) (citing Tex. Health Facilities Comm'n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 452-53 (Tex. 1984)). An order may not be set aside "merely because testimony was conflicting or disputed or because it did not compel the same factual conclusion made by the agency." Firemen's & Policemen's Civil Serv. Comm'n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex. 1984). The evidence in the record may even preponderate against the Board's decision, but the reviewing court must uphold the Board's decision if there is more than a scintilla of evidence to support the final order. Charter Med.-Dallas, Inc., 665 S.W.2d at 452.

         "[O]n questions of law, neither the trial court nor the administrative law judge is entitled to deference on appeal." Tex. Dep't of Pub. Safety v. Alford, 209 S.W.3d 101, 103 (Tex. 2006). Even under the substantial evidence standard, questions of law are reviewed de novo. El Paso Nat. Gas Co. v. Minco Oil & Gas, Inc., 8 S.W.3d 309, 312 (Tex. 1999); Nobles v. Emps. Ret. Sys. of Tex., 53 S.W.3d 483, 490 (Tex. App.-Austin 2001, no pet.). In a de novo review, the reviewing court conducts a review of the record to make its own legal determinations and conclusions. Quick v. City of Austin, 7 S.W.3d 109, 116 (Tex. 1998).

         Section 2001.174 of the Texas Government Code states, in relevant part, that a reviewing court

shall reverse or remand the case for further proceedings if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions or decisions, are:
(A) in violation of a constitutional or statutory provision;
(B) in excess of the agency's statutory authority;
(C) made through unlawful procedure;
(D) affected by other error of law;
(E) not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole; or
(F) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

See Tex. Gov't Code Ann. § 2001.174(2).

         It is not clear from the code or caselaw when the Board's error affects a party's substantial rights. Tex. Gov't Code Ann. § 2001.003; see R.R. Comm'n v. Rio Grande Valley Gas Co., 683 S.W.2d 783, 789 (Tex. App.-Austin 1984, no writ). An administrative decision is generally not arbitrary and capricious if it is supported by substantial evidence. Gerst v. Nixon, 411 S.W.2d 350, 354 (Tex. 1966). However, even if the Board's action is supported by substantial evidence, it can still be arbitrary and capricious and require reversal or remand "when a denial of due process has resulted in the prejudice of substantial rights of a litigant." Charter Med.-Dallas, Inc., 665 S.W.2d at 454. A court may reverse and remand the Board's decision if it appears that improperly excluded evidence affected the result. Lewis v. Metro. Sav. & Loan Ass'n, 550 S.W.2d 11, 14-16 (Tex. 1977).

         Nevertheless, an error is not prejudicial if a remand would amount to "nothing more than 'a postponement of the inevitable.'" Id. at 15 (quoting 1 Frank Edward Cooper, State Administrative Law, at 403-04 (1965)). This results-focused standard parallels that of Rule 44.1(a) of the Texas Rules of Appellate Procedure, which states, "No judgment may be reversed on appeal on the ground that the trial court made an error of law unless the court of appeals concludes that the error complained of: (1) probably caused the rendition of an improper judgment; or (2) probably prevented the appellant from properly presenting the case to the court of appeals." Tex.R.App.P. 44.1(a).[5]

         II. Factual Background

         A. Procedural History

         Bates Nissan is the only franchised Nissan dealer in the greater area of Killeen, Texas. Bates has been a franchised dealer for Nissan and its predecessor for more than forty years. At the time of this case, Bates and Nissan were operating under the Agreement and its subsequently incorporated amendments and addendums.

         In July 2010, Nissan issued a notice of default stating that Bates had failed to meet its sales obligation under the Agreement. In order to give Bates an opportunity to improve its sales performance, Nissan granted Bates several extensions over the next three years. When Bates' sales performance did not improve to Nissan's satisfaction, Nissan issued a notice of termination to Bates on December 23, 2013, informing Bates that Nissan intended to terminate Bates' franchise because, under Nissan's Regional Sales Effectiveness (RSE) metric, Bates had breached the Agreement by failing to meet its sales obligations. A year later, Nissan issued a supplemental notice of termination alleging an additional ground that Bates had also willingly falsified its tax returns to the Internal Revenue Service (IRS) and knowingly submitting false financial statements to Nissan. In response, Bates filed protests with the Board.

         Bates' protests were consolidated, and the Board referred the matter to the State Office of Administrative Hearings (SOAH) for a contested hearing. The matter was heard before Administrative Law Judge Craig R. Bennett in Austin, Texas. The administrative hearing concluded on September 24, 2015, and the record was closed on February 8, 2016. The ALJ issued a proposal for decision that recommended that Nissan's petition for termination be denied because it had failed to establish good cause for termination. The proposal included an overview of the statutory framework, a discussion of the relevant facts established by the testimony and exhibits presented at the hearing, and an analysis of the seven statutory good-cause factors for the termination of a franchise agreement. The ALJ found that the first three good-cause factors weighed against termination and that the fourth, fifth, sixth, and seventh factors were neutral. Based on that information and analysis, the ALJ made 125 findings of fact and fourteen conclusions of law.

         The Board considered the ALJ's proposal for decision, Nissan's exceptions to the proposal, Bates' response to the exceptions, and the ALJ's letter in response to the exceptions. The Board issued a final order on June 1, 2017, adopting the ALJ's findings of fact and conclusions of law, granting Bates' protests, and denying Nissan's proposed termination. After Nissan's motion for rehearing was denied, it petitioned for judicial review. The 126th Judicial District Court of Travis County affirmed the Board's final order.

         B. Issues on Appeal

         On appeal, Nissan raises three points of error challenging only the sixth good-cause factor, "the parties' compliance with the franchise" agreement. Tex. Occ. Code Ann. § 2301.455(a)(6). Specifically, Nissan contends that under Section 2001.174(2)(D), its substantial rights were prejudiced because the Board's findings and/or conclusions were affected by the Board's errors of law (1) in concluding that Bates' sales performance did not breach the Agreement, (2) in concluding that Bates' accounting practices did not breach the Agreement, and (3) in considering Bates' sales performance from the time period after Nissan issued its notices of termination. See Tex. Gov't Code Ann. § 2001.174(2)(D). Nissan does not challenge the Board's findings of fact or the remaining good-cause factors.[6]

         III. Did the Board Err in Concluding that Bates' Sales Performance Did Not Breach the Dealer Agreement?

         In its first point of error, Nissan contends that the Board erred as a matter of law in finding that Bates did not fail to fulfill its sales obligations under the Agreement. Specifically, Nissan argues that the Board erred by failing to use RSE to measure Bates' compliance with its contractual sales obligations under the Agreement.

         A. Bates' Obligations Under the Agreement 1. The Contract's Terms

         Section 12.B.1 of the Agreement allows Nissan to terminate "[i]f, based upon evaluations thereof made by [Nissan], Dealer shall fail to substantially fulfill its responsibilities with respect to: a. Sales of New Nissan Vehicles and the other responsibilities set forth in Section 3 of this Agreement." Section 3 governs the dealer's sales responsibilities. Section 3.A, entitled "General Obligations of Dealer," provides:

Dealer shall actively and effectively promote through its own advertising and sales promotion activities the sale at retail (and if Dealer elect, the leasing and rental) of Nissan Vehicles to customers located within Dealer's Primary Market Area. Dealer's Primary Market Area is a geographic area which Seller uses as a tool to evaluate Dealer's performance of its sales obligations hereunder.

         Section 3.B provides that a "Dealer's performance of its sales responsibility . . . will be evaluated by Seller on the basis of such reasonable criteria as Seller may develop from time to time." Section 3.B then gives four examples of "reasonable criteria":

3.B.1. Achievement of reasonable sales objectives which may be established from time to time by Seller for Dealer as standards for performance;
3.B.2. Dealer's sales of Nissan Cars and Nissan Trucks in Dealer's Primary Market Area and/or the metropolitan area in which Dealer is located, as applicable, or Dealer's sales as a percentage of:
3.B.2. (i) registrations of Nissan Cars and Nissan Trucks;
3.B.2. (ii) registrations of Competitive ...

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