Court of Appeals of Texas, Sixth District, Texarkana
Submitted: September 6, 2019
Appeal from the 126th District Court Travis County, Texas
Trial Court No. D-1-GN-17-004072
Morriss, C.J., Burgess and Stevens, JJ.
K. BURGESS JUSTICE.
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 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
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.
Statutory Structure and Procedure
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
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.
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.
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
(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;
(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).
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.
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.
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).
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).
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.
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.
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
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.
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.
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.
Issues on Appeal
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.
Did the Board Err in Concluding that Bates' Sales
Performance Did Not Breach the Dealer Agreement?
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.
Bates' Obligations Under the Agreement 1.
The Contract's Terms
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.
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
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 ...