Southern Implement v. Deere & Co. ( 1997 )

UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
Nos. 96-3095 and 96-3281
Southern Implement Company, *
Inc., *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* Eastern District of Arkansas.
Deere & Company, *
*
Appellee. *
Submitted: March 13, 1997
Filed: July 29, 1997
Before FAGG and HEANEY, Circuit Judges, and NANGLE,1 Senior
District Judge.
HEANEY, Circuit Judge.
The Honorable John F. Nangle, Senior United States District Judge for the Eastern
District of Missouri, sitting by designation.
Southern Implement Company (“Southern Implement”) appeals the district
court’s grant of summary judgment in favor of Deere & Company (“Deere”) on
Southern Implement’s breach of contract and statutory violation claims. We affirm in
part and reverse in part.
FACTS
Given the posture of this case, we consider the facts in the light most favorable
to the nonmoving party, Southern Implement. See, e.g., Adickes v. Kress & Co., 398
U.S. 144, 157 (1970). Southern Implement is a farm equipment dealer for Deere in
Phillips County, Arkansas. Following a history of business relations with Deere,2
Southern Implement entered into a contract with the company entitled John Deere
Company Authorized Agricultural Dealer Agreement (“Agreement”) in 1987. The
terms and conditions of the Agreement are virtually identical to Deere’s agreements
with its dealers nationwide. J.A. at 65. The contract assigns to Southern Implement
an area of responsibility (“AOR”) that includes the towns of Helena, Marvell, and
Southern Implement became a Deere dealer in 1951, located in Helena, Arkansas.
In 1964, Southern Implement opened another dealership in Elaine, Arkansas. In 1978,
the company purchased the dealership in Marvell, the only other Deere dealership in
Phillips County.
Until 1985, Deere renewed annual dealership agreements with Southern
Implement. After that time, Deere and Southern Implement executed three open-ended
dealership agreements with no fixed term. The 1985 contracts ended in January 1987,
when the parties entered into the agreement at issue.
2
Elaine, Arkansas, and the surrounding area.3 The Agreement requires a dealer such as
Southern Implement to “thoroughly canvass his [AOR], to actively promote the sale of
all Goods which are usable in his [AOR], and to maintain an inventory of Goods in
proportion to the sales possibilities in such area.” Agreement, § 1(f).
The Agreement also requires a dealer to “maintain his principle place of business
at the location set forth [by the Agreement].” Agreement, § 1(k). The Agreement
prohibits dealers from “either directly or indirectly, establish[ing], maintain[ing], or
operating a facility at any other location for displaying, selling, renting, leasing, or
servicing of new or used goods, without the prior written approval of [Deere].” Id.
If a dealer’s franchise is canceled or terminated according to the terms of the
agreement, Deere “may negotiate and/or enter a Dealer Agreement with another party
for the Dealer’s [AOR].” Agreement, § 4.
One of the largest farming operations in Southern Implement’s AOR during the
mid-1980's belonged to David Brooks Griffin. Griffin and his father owned an
International Harvester (“I.H.”) dealership in Elaine until 1985 and Griffin used I.H.
equipment on his 23,000 acre farming operation. After the I.H. dealership closed,
Griffin operated Elaine Parts, an agricultural parts and equipment store, in the building
that had housed the dealership.
The introduction to the contract contains the statement that “[a] Dealer accepts as
his area of responsibility the town in which his place of business is located and
vicinity.”
3
In 1989, Griffin bought Producer’s Tractor Company, Inc. (“Producer’s”), a
Deere dealership located in Brinkley, Arkansas, seventy miles from Elaine. Producer’s
began supplying Griffin’s Elaine farming operation with Deere parts and equipment
through Elaine Parts. Southern Implement alleges that sometime in late 1990 or early
1991 Producer’s expanded its efforts to supply Deere parts to the general public.
Southern Implement’s Elaine facility took a downward financial turn in late
1991. In February 1992, Southern Implement’s management met with Bill Hubbard,
Manager of Deere’s Dallas branch, the unit that supervises dealership activity in
Arkansas. Southern Implement alerted Hubbard that Producer’s was distributing Deere
parts through Griffin’s Elaine Parts facility. Hubbard said he would investigate and
report the results to Southern Implement.
Hubbard never reported back to Southern Implement regarding its complaint.
Rather, Southern Implement asserts that Deere encouraged Producer’s to operate the
unauthorized facility.4 Southern Implement continued to complain to Deere
management that Elaine Parts was selling Deere equipment. Deere’s representatives
asked Producer’s employees if they were selling Deere products to the general public
through Elaine parts, and the response was, “no.” They claimed that they only sold
parts to Griffin’s farming operations.
For example, Deere initially permitted the placement of a computer system at Elaine
Parts that would allow Producer’s to take parts orders there, despite Deere’s internal
guidelines that restrict the systems to a dealer’s AOR. Deere revoked its permission
to install the system after it recognized the violation of its rules.
4
5
In 1993, Griffin ceased his farming operations. The land previously farmed by
Griffin was taken over by Tyler Farms, a partnership that included multiple corporate
entities. Griffin remained the landlord, although he did not participate in farming the
land himself. Elaine Parts continued to provide Deere parts to customers in the area,
including Tyler Farms.
In February 1993, Southern Implement closed its Elaine facility due to mounting
losses.5 Following the closure, Southern Implement filed a complaint alleging that
Deere, by allowing Producer’s to operate through a facility within Southern
Implement’s Elaine AOR: (1) breached its dealer agreement with Southern Implement,
(2) broke the implied covenant of good faith and fair dealing, (3) breached its duty to
act with commercial reasonableness under the Arkansas Franchise Practices Act, Ark.
Code Ann. § 4-72-206, and (4) changed the competitive circumstances of the
dealership in violation of the Arkansas Farm Equipment Retailer Franchise Protection
Act, Ark. Code Ann. § 4-72-310.
After Southern Implement filed its complaint, Deere conducted a survey to
discover whether Producer’s was selling parts to the general public through Elaine
Parts. Deere discovered that on at least one occasion Elaine Parts sold equipment to
a member of the general public. J.A. at 131. Deere also discovered that several large
producers in the area were acquiring equipment at Elaine Parts through what was
described as “borrowing” from the Tyler Farm inventory at Elaine Parts. Id.
Griffin requested that Deere take the Elaine AOR from Southern Implement and
assign it to Producer’s, but Deere refused, allowing Southern Implement to retain the
Elaine AOR.
6
Moreover, two Producer’s sales representatives had offices at Elaine Parts.
Deere responded to Southern Implement’s complaint by moving for summary
judgment. Deere asserted that the Agreement does not give the franchisee an exclusive
right to sell Deere products in its AOR. Nor does the Agreement require Deere to
police a franchisee’s AOR to prevent other dealers from establishing facilities in the
AOR.
The district court granted Deere’s motion for summary judgment. The court
construed the Agreement to allow other dealers to maintain facilities within a dealer’s
AOR. The court further held that, even if the Agreement prohibited such an
encroachment, Southern Implement failed to present evidence that Deere knew about
the violative facility or that Deere had any obligation to police Southern Implement’s
AOR. Therefore, the court determined that Deere did not breach the Agreement.
The court also held that, in the absence of a contractual obligation, Deere could
not have breached the covenant of good faith and fair dealing. Moreover, Southern
Implement did not present evidence of bad faith by Deere. The court rejected Southern
Implement’s commercial reasonableness claim, holding that Deere’s actions conformed
to the contract and were thus reasonable. Finally, the court held that the Arkansas
Farm Equipment Retailer Franchise Protection Act was inapplicable.
7
DISCUSSION
Southern Implement appeals the district court’s grant of summary judgment. For
the reasons below, we reverse the district court with respect to Southern Implement’s
breach of contract, breach of the implied covenant of good faith and fair dealing and
commercial reasonableness claims. We affirm the district court’s grant of summary
judgment on Southern Implement’s claim under the Arkansas Farm Equipment Retailer
Franchise Law.
Breach of Contract
We review a grant of summary judgment de novo. Crawford v. Runyon, 37 F.3d
1338, 1340 (8th Cir. 1994). Under Arkansas law, the court ascertains the plain and
ordinary meaning of a contract. Moore v. Columbia Mut. Cas. Ins. Co., 821 S.W.2d
59, 60 (Ark. App. 1991). The initial determination whether a contract is ambiguous is
a legal determination for the court. Cate v. Irvin, 866 S.W.2d 423, 426 (Ark. App.
1993). When a contract is unambiguous, the court determines its construction as a
matter of law. Id. Where there is ambiguity in a contract, the meaning of the terms of
the contract becomes a question of fact. Stacy v. Williams, 834 S.W.2d 156, 158 (Ark.
1992).
We believe that the Agreement is ambiguous with respect to a dealer’s right to
operate in an AOR free of other dealers’ facilities. Although the Agreement describes
an AOR and the dealer’s duties within its AOR, the Agreement does not explicitly
8
provide a dealer with an exclusive right to operate a facility to sell and service Deere
products within an AOR. It does, however, contain two clauses that strongly support
a dealer’s right to operate without the encroachment of other dealers’ umauthorized
facilities within the AOR.
Under the terms of the agreement, Deere permits a dealer to create and operate
facilities outside its AOR only by written permission from Deere. Agreement, § 1(k).
Deere will only reassign an AOR if the existing dealer’s operation ceases. Agreement,
§ 4. Based on the language of these two provisions and the long-standing history and
conditions of Southern Implement’s prior dealings with Deere, a jury could reasonably
find that Southern Implement has a contractual right to an AOR free of unauthorized
facilities, provided Southern Implement continued to operate and Deere had not given
written permission to another dealer to place a facility in Southern Implement’s AOR.
We agree with the district court that the provisions above do not place a
requirement on Deere to police every dealer’s AOR for encroachment by other dealer’s
facilities. We believe, however, that a jury could find that once Deere was informed
that a dealer was operating an unauthorized facility in another dealer’s AOR, Deere had
a duty to investigate and, if necessary, to prevent the dealer from operating the
unauthorized facility by the same mechanisms Deere would use to prevent other
unauthorized dealer activity.
Southern Implement has presented evidence to support a finding that Producer’s
was operating an unauthorized facility that sold Deere parts to the general public in
9
Southern Implement’s AOR. Southern Implement also presented evidence to support
that Deere was bound by and failed to meet its obligation to prevent the unauthorized
facility from operating in Southern Implement’s AOR, and that the failure resulted in
lost revenue to Southern Implement’s Elaine store. Therefore, summary judgment was
improper.
Good Faith
Arkansas law states that every contract imposes an obligation of good faith in
the performance of the contract. Ark. Code Ann. § 4-1-203. To establish a breach of
that obligation, the plaintiff must demonstrate that the defendant was not honest in fact
and that he acted with a bad motive. JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734,
736 (8th Cir. 1995). Similarly, The Arkansas Franchise Practices Act requires a
franchisor to act in a commercially-reasonable manner and in good faith in its
relationship with a franchisee.6 Ark. Code Ann. § 4-72-206.
The Arkansas Franchise Practices Act provides, in pertinent part:
Unlawful practices of franchisors.
It shall be in violation of this chapter for any franchisor . . . to engage
directly or indirectly in any of the following practices:
...
(6) To refuse to deal with a franchise in a commercially reasonable
manner and in good faith . . . .
Ark. Code Ann. § 4-72-206.
10
11
The district court held that because Deere had no contractual obligation to
prevent Producer’s from operating a facility in Southern Implement’s AOR Southern
Implement could not show Deere acted in bad faith by failing to do so. We have
determined that a jury could find that Deere had an obligation to investigate and prevent
Producer’s from operating an unauthorized facility. Therefore, we must consider
whether Southern Implement presented evidence to support a claim that Deere’s failure
to do so constitutes bad faith.
Deere clearly knows the language contained in the Agreement. Southern
Implement presented evidence of its agents informing Deere that Producer’s was using
an unauthorized facility to sell and service Deere equipment in Elaine. Because they
were the largest operations in Phillips County, Deere had an interest in maintaining the
Griffin and Tyson farm accounts. Given this and the evidence that Deere failed to
respond to Southern Implement’s concerns, a jury could reasonably conclude that
Deere was not honest in fact and acted with a bad motive with respect to Deere’s
contractual obligations to Southern Implement. Therefore, we reverse summary
judgment on both the breach of the implied covenant of good faith and fair dealing and
the violation of the Arkansas Franchise Practices Act claims.
Violation of the Arkansas Farm Equipment Retailer Franchise Protection Act
The district court granted summary judgment on Southern Implement’s claim
under the Arkansas Farm Equipment Retailer Franchise Protection Act, Ark. Code Ann.
§ 4-72-310, holding that the law does not apply to the circumstances of this case. We
agree. The only section of the law arguably applicable to the present case is § 4-72-
12
310(b)(4), which requires a “natural disaster” to trigger the law’s prohibition.7 While
we acknowledge that the law includes “labor disputes” as natural disasters and that
“other circumstances beyond the dealer’s control” is rather broad, we do not believe
that Deere’s relationship with Producer’s qualifies as a natural disaster for the purposes
of the law. We therefore affirm the district court’s grant of summary judgment on that
statutory claim.
CONCLUSION
Accordingly, the district court’s grant of summary judgment is reversed in part
and affirmed in part. We remand the case for further proceedings consistent with this
opinion.
Section 4-72-310(b)(4) provides:
(b) It is a violation of this subchapter for a manufacturer to:
...
(4) Attempt to threaten to terminate, cancel, fail to renew, or substantially
change the competitive circumstances of the dealership agreement based
on the result of a natural disaster, including a sustained drought in the
dealership market area, labor dispute, or other circumstances beyond the
dealer’s control.
§ 4-72-310(b)(4).
13
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS FOR THE EIGHTH CIRCUIT.
14