Equipment Mfrs. v. William J. Janklow , 300 F.3d 842 ( 2002 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
No. 01-2062
Equipment Manufacturers Institute, *
AGCO Corporation, Case Corporation, *
Deere & Company, New Holland *
North America, Inc., *
*
Plaintiffs/Appellants, *
*
v. *
*
William J. Janklow, Governor of the * Appeal from the United States
State of South Dakota, in his Official * District Court for the District
Capacity, and Mark W. Barnett, * of South Dakota
Attorney General of the State of South *
Dakota, in his Official Capacity, *
*
Defendants/Appellees, *
*
Farm Equipment Association of *
Minnesota and South Dakota, *
*
Intervenor Defendant/ *
Appellee. *
Submitted: November 15, 2001
Filed: August 6, 2002 (Corrected 8/6/02)
Before BYE and BEAM, Circuit Judges, and GOLDBERG,1 Judge.
GOLDBERG, Judge.
Plaintiffs-Appellants Equipment Manufacturers Institute (“EMI”), AGCO
Corporation (“AGCO”), Case Corporation (“Case”), Deere & Company (“John
Deere”), and New Holland North America, Inc. (“New Holland”) (collectively the
“Manufacturers”), filed a declaratory judgment action, through a complaint dated
August 16, 1999, alleging that portions of the Act entitled “An Act to provide certain
restrictions for dealership contracts for machinery” (the “Act”) (1) violate the
Contract Clauses of the United States and South Dakota Constitutions because they
impair pre-existing dealership contracts; (2) are preempted by the Federal Arbitration
Act; (3) are unconstitutionally vague in the use of the term “community”; and (4)
otherwise violate substantive due process. The Manufacturers filed a motion for
summary judgment on April 28, 2000. Defendants-Appellees, the Governor and
Attorney General of South Dakota (the “State”), subsequently filed a cross-motion
for summary judgment. The Farm Equipment Association of Minnesota and South
Dakota (“FEA”) intervened as a defendant in this action.
On March 30, 2001, the district court granted partial summary judgment in
favor of the Manufacturers on their Contract Clause claim, ruling that the Act’s
restrictions on establishing new dealerships violated the Contract Clause. Equip.
Mfrs. Inst. v. Janklow, 136 F. Supp. 2d. 991 (D.S.D. 2001). The district court also
granted partial summary judgment in favor of the State on the remaining part of the
Contract Clause claim, holding that the Act’s restrictions on dealership termination
were simply a “fine tuning” of pre-existing South Dakota law. The district court
further granted summary judgment in favor of the Manufacturers on their preemption
1
The Honorable Richard W. Goldberg, Judge of the United States Court of
International Trade, sitting by designation.
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claim, and summary judgment in favor of the State on the void for vagueness and
substantive due process claims, holding that the record established that the Act had
been adopted to protect farmers, and that the Act bore a real and substantial
relationship to the protection of farmers.
The Manufacturers appeal the district court’s grant of partial summary
judgment in favor of the State on the Contract Clause claim, and grant of summary
judgment in favor of the State on the substantive due process claim.
We conclude that the district court erred in determining as a matter of law that
the restrictions on dealership termination of South Dakota Codified Laws § 37-5-14,
1999 S.D. Laws Ch. 200, § 2 (“Section 2”), do not violate the Contract Clause. This
Court finds that as a matter of law, Section 2 is a substantial impairment on pre-
existing contractual relationships, and that there is no legitimate and significant
public purpose. As a result, Section 2 is an unconstitutional burden on pre-existing
dealership agreements under the Contract Clause. The grant of partial summary
judgment in favor of the State by the district court is reversed, and the Manufacturers’
motion for summary judgment is granted. Ordinarily, an order denying summary
judgment (which by implication occurred here) may not be appealed until completion
of the case below. However, in certain instances, we may exercise jurisdiction over
“pendent” issues:
[A] pendent appellate claim can be regarded as inextricably intertwined
with a properly reviewable claim on collateral appeal only if the pendent
claim is coterminous with, or subsumed in, the claim before the court on
an interlocutory appeal–that is, when the appellate resolution of the
collateral appeal necessarily resolves the pendent claim as well.
Kincade v. City of Blue Springs, 64 F.3d 389, 394 (8th Cir. 1995) (quoting Moore v.
City of Wynnewood, 57 F.3d 924, 930 (10th Cir. 1995)). In reviewing the district
court’s grant of summary judgment to the State, we have resolved in the
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Manufacturer’s favor every issue raised by its motion for partial summary judgment.
Accordingly, we invoke our pendent jurisdiction and grant the Manufacturer’s
motion. Because we grant summary judgment in favor of the Manufacturers on the
Contract Clause claim, we do not address the Manufacturers’ substantive due process
claim regarding pre-existing dealership contracts. We affirm the district court’s
disposition of the Manufacturers’ substantive due process claims regarding future
dealership contracts.
I. BACKGROUND
Plaintiff-Appellant EMI is a trade association consisting of 141 manufacturers
of agricultural, construction, forestry, materials handling, and utility equipment.
Many of EMI’s members enter into individual contractual relationships with dealers
whom they have determined are qualified to market and service their machinery to
consumers in specified markets. Plaintiffs-Appellants AGCO, Case, John Deere, and
New Holland are manufacturers of agricultural equipment, and members of EMI. The
relationships between the manufacturers and dealers are governed by dealership
agreements, which establish the respective rights and duties of each party and the
essential structure of the business relationship between them.
Sections 37-5-1, 37-5-2, and 37-5-3 of the South Dakota Codified Laws, in
force since 1951, make it a Class 1 misdemeanor for a manufacturer “to coerce or
attempt to coerce” a dealer to take certain actions, or to cancel a dealership agreement
“unfairly, without due regard to the equities of the dealer and without just
provocation.” S.D. CODIFIED LAWS §§ 37-5-1 to 3 (2001), 1951 S.D. Laws Ch. 262,
§ 1. These protections were augmented by the passage of the Act, which
took effect on July 1, 1999.2 S.D. CODIFIED LAWS §§ 37-5-13 to 15 (2001), 1999
2
The challenged portion of the Act under the Contract Clause is Section 2,
codified at § 37-5-14. Section 37-5-13 defines the terms in § 37-5-14, and § 37-5-15,
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S.D. Laws Ch. 200. Section 2 sets forth five circumstances that do not constitute
cause for termination of a dealership contract.
The following circumstances are not cause for the termination or
discontinuance of a dealership contract, nor for entering into a
dealership contract for the establishment of an additional dealership in
a community for the same line-make:
(1) The change of executive management or ownership of the
dealer, unless the manufacturer can show that the change would
be detrimental to the representation or reputation of the
manufacturer’s product;
(2) Refusal by the dealer to purchase or accept delivery of any
machinery, parts, accessories, or any other commodity or service
not ordered by the dealer unless such machinery, parts,
accessories, or other commodity or service is necessary for the
operation of machinery commonly sold in the dealer’s area of
responsibility;
(3) The sole fact that the manufacturer desires further penetration
of the market;
(4) The fact that the dealer owns, has an investment in,
participates in the management of, or holds a dealership contract
for the sale of another line-make of machinery, or that the dealer
has established another line-make of machinery in the same
dealership facilities as those of the manufacturer, if the dealer
maintains a reasonable line of credit for each line-make of
machinery; or
(5) Refusal by the dealer to participate in any national advertising
campaign or contest or purchase any promotional materials,
display devices, or display decoration or materials which are at
the expense of the dealer.
by its terms, can not apply to pre-existing contracts. Footnote 8 of the Manufacturer’s
Brief mentions a challenge to § 37-5-15(3) under the substantive due process claim,
but this Court will not consider a claim improperly presented in a footnote. Falco
Lime, Inc. v. Tide Towing Co., 29 F.3d 362 (8th Cir. 1994).
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S.D. CODIFIED LAWS § 37-5-14, 1999 S.D. Laws Ch. 200, § 2.
AGCO, Case, John Deere, New Holland, Komatsu America International
Company (“Komatsu”), and Gehl Company (“Gehl”), manufacturers of machinery as
defined by the Act, SDCL § 37-5-13(4), 1999 S.D. Laws Ch. 200, § 1, are active
members of EMI.3 EMI member companies have “dealership contracts” with South
Dakota “dealers,” as those terms are defined by the Act. S.D. CODIFIED LAWS §§ 37-
5-13(1), (2), 1999 S.D. Laws Ch. 200, § 1. Each of the aforementioned EMI members
has dealership agreements with dealers in South Dakota; specifically, AGCO has 59,
Case has 33, Deere has 24, New Holland has 22, Gehl has 10, and Komatsu has one
dealer located in South Dakota. See Appellants’ Separate Appendix (“Appellants’
App.”) 76, 99, 121, 139, 185, 206. Each of the manufacturers reports that a
substantial number of their relationships with South Dakota dealers are governed by
dealership agreements in existence before July 1, 1999, the effective date of the Act
(“pre-existing dealership agreements”). Id. at 76, 99, 121, 139, 185, 207.
II. DISCUSSION
This Court reviews the district court’s grant of summary judgment de novo, and
applies the same standards as did the district court. Wildman v. Marshalltown Sch.
Dist., 249 F.3d 768, 771 (8th Cir. 2001); Educational Employees Credit Union v.
Mut. Guar. Corp., 50 F.3d 1432, 1436 (8th Cir. 1995). Summary judgment is
appropriate if there is no genuine issue as to any material fact and the moving party
is entitled to a ruling in its favor as a matter of law. Fed. R. Civ. P. 56(c); Jensen v.
Taco John’s Int’l, 110 F.3d 525, 527 (8th Cir. 1997).
3
Komatsu America International Company and Gehl Company, are not
plaintiffs or appellants here, but as members of EMI their dealership agreements and
affidavits are relevant to this case.
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The central question to this appeal is whether Section 2 of the Act entitled “An
Act to provide certain restrictions for dealership contracts for machinery,”
impermissibly impairs dealership agreements between manufacturers and South
Dakota dealers that were in effect prior to July 1, 1999. On appeal, the Manufacturers
argue that Section 2 impairs the obligations within the pre-existing dealership
agreements in violation of the Contract Clauses of the South Dakota and United
States Constitution. Under South Dakota law, the determination of whether a statute
violates the Contract Clause is the same under both the South Dakota and United
States Constitutions. S.D. CONST. art. VI, § 12; Engelcke v. Farmers' State Bank, 246
N.W. 288, 290, 61 S.D. 92 (S.D. 1932). Therefore, the Court’s analysis focuses on
the Contract Clause of the United States Constitution, which provides: “No State shall
. . . pass any . . . Law impairing the Obligations of Contracts.” U.S. CONST. art. I, §
10.
The test to determine if a statute violates the Contract Clause has three parts:
(1) The first inquiry is whether the state law has, in fact, operated as a
substantial impairment on pre-existing contractual relationships. Energy Reserves
Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411, 103 S. Ct. 697, 704
(1983); Educational Employees Credit Union, 50 F.3d at 1438. If there is no
substantial impairment on contractual relationships, the law does not violate the
Contract Clause. If, however, the law does constitute a substantial impairment, the
second part of the test is addressed:
(2) The State must have a “significant and legitimate public purpose behind the
regulation.” Educational Employees Credit Union, 50 F.3d at 1438, Energy Reserves
Group, 459 U.S. at 412, 103 S. Ct. at 705 (“The requirement of a legitimate public
purpose guarantees that the State is exercising its police power, rather than providing
a benefit to special interests.”). If there is no significant and legitimate public
purpose, the state law is unconstitutional under the Contract Clause. Id. If a
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significant and legitimate public purpose has been identified, the third part of the test
is applied:
(3) This Court must determine “whether the adjustment of ‘the rights and
responsibilities of contracting parties [is based] upon reasonable conditions and [is]
of a character appropriate to the public purpose justifying [the legislation’s]
adoption.’” Energy Reserves Group, 459 U.S. at 412, 103 S. Ct. at 705 (quoting
United States Trust Co. v. New Jersey, 431 U.S. 1, 22, 97 S. Ct. 1505, 1518 (1977)).
A. Section 2 of the Act is a Substantial Impairment on Pre-existing
Dealership Agreements
The first part of the Contract Clause test is whether Section 2 of the Act
substantially impairs pre-existing dealership agreements. In General Motors Corp.
v. Romein, 503 U.S. 181, 112 S. Ct. 1105 (1992), the Supreme Court set forth a three-
part test to determine whether a substantial impairment of a contractual relationship
exists. This “inquiry has three components: [1] whether there is a contractual
relationship, [2] whether a change in law impairs that contractual relationship, and
[3] whether the impairment is substantial.” Id. at 186, 112 S. Ct. at 1109 (holding
there was no contractual relationship regarding the statutory terms at issue, and
therefore no violation of the Contract Clause). In the current case the first component
is clearly satisfied, as neither party disputes that contracts between the manufacturers
and dealers exist.4 It remains, then, to determine whether Section 2 impairs the pre-
4
The Manufacturers submitted to the district court Dealership Agreements for
AGCO (Appellants’ App. 82-97), Case (Appellants’ App. 105-19), John Deere
(Appellants’ App. 128-37), New Holland (Appellants’ App. 146-62), Gehl
(Appellants’ App. 189-205), and Komatsu (Appellants’ App. 212-39). The State does
not dispute that these are true and correct copies, Appellees’ App. 274-76; the State
also submitted the Dealership Agreement signed in 1985 between Case and Van Der
Werff Implement (Appellees’ Separate Appendix (“Appellees’ App.”) 212-20).
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existing dealership contracts, and whether that impairment is substantial.
1. Section 2 of the Act is an Impairment on Dealership Agreements
The second component of the inquiry into whether there is a substantial
impairment of a contractual relationship is to find the contractual rights that are
impaired. “In assessing the validity of [the Manufacturers’] Contracts Clause claim
in this case, we begin by identifying the precise contractual right that has been
impaired . . . .” Keystone Bituminous Coal Ass’n. v. DeBenedictis, 480 U.S. 470,
504, 107 S. Ct. 1232, 1251-52 (1987). In other words, before the Court can determine
whether the impairment is substantial, it must first identify what contractual rights,
if any, have been impaired. The Manufacturers contend, and this Court agrees, that
several contractual terms within the pre-existing dealership agreements have been
impaired, including: (a) terms governing a change in dealership executive
management or ownership; (b) terms about dealers’ stocking machinery parts and
accessories; (c) terms covering the manufacturer’s attempts to further penetrate the
market; (d) terms regarding a dealer’s sale of another line-make of machinery; and (e)
terms about required dealer participation in advertising and promotional activities.
a. Dealership Agreement Terms Governing a Change in
Dealership Executive Management or Ownership
All of the dealership contracts before this Court contain language prohibiting
a dealer from selling the dealership, or changing executive management, without
approval by the manufacturer.5 Under Section 2(1) of the Act, a manufacturer does
5
See, e.g., AGCO dealership agreement, Appellants’ App. 89 (permitting
termination if there is a “change in the partners of Dealer,” or “change in the
shareholders or principal officers of Dealer,” or “[a]ny significant change in the
management structure of Dealer”); Case dealership agreement, Appellants’ App. 110
(Case will give “good faith consideration” to any plan to alter control or ownership
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not have cause to terminate a dealership contract if there is a “change of executive
management or ownership of the dealer, unless the manufacturer can show that the
change would be detrimental to the representation or reputation of the manufacturer’s
product.” S.D. CODIFIED LAWS § 37-5-14(1), 1999 S.D. Laws Ch. 200, § 2(1).
b. Dealership Contract Terms Regarding Dealers’ Stocking
Machinery Parts and Accessories
All of the dealership contracts at issue contain language requiring the dealer
to maintain an adequate stock, as determined by the manufacturer, of parts and
accessories.6 Under Section 2(2) of the Act, a manufacturer does not have cause to
of the dealership, but if Case does not consent to the plan and the plan is still
implemented, the dealership agreement “shall terminate immediately.”); accord 1985
J I Case Company Agricultural Dealer Agreement with Van Der Werff Impl, Inc.,
Appellee’s App. 215; John Deere dealership agreement, Appellants’ App. 131
(permitting termination upon “[w]ithdrawal of an individual proprietor, partner, major
shareholder, or the manager of the dealership or a substantial reduction in interest of
a partner or major shareholder, without the prior written consent of the Company”);
New Holland dealership agreement, Appellants’ App. 146, 160 (giving the
manufacturer “sole discretion to approve or disapprove any proposed change in dealer
ownership or managerial authority,” and any disapproved change is grounds for
immediate termination of the dealership agreement); Gehl dealership agreement,
Appellants’ App. 196 (permitting immediate termination upon “any change in the
principal officers, directors, [or] management” of the dealer “without the written
consent of [Gehl]”); Komatsu dealership agreement, Appellants’ App. 229-30 (the
manufacturer can terminate the dealership agreement immediately if there is “any
sale, transfer or relinquishment . . . of any interest . . . [in] ownership or control of the
[dealer], which effects a material change in the operation, management or control of
the [dealer]”).
6
See, e.g., AGCO dealership agreement, Appellants’ App. 85 (dealer agrees
to “order, stock, prominently display, and promote a representative sample of each
type of Product applicable to Dealer’s trade area”); Case dealership agreement, App.
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terminate a dealership contract if the dealer refuses to “purchase or accept delivery
of any machinery, parts, accessories, or any other commodity or service not ordered
by the dealer unless such machinery, parts, accessories, or other commodity or service
is necessary for the operation of machinery commonly sold in the dealer’s area of
responsibility.” S.D. CODIFIED LAWS § 37-5-14(2), 1999 S.D. Laws Ch. 200, § 2(2).
c. Dealership Contract Terms Covering Manufacturers’
Attempts to Further Penetrate the Market
All of the dealership contracts proffered by Plaintiffs-Appellants contain
language which allows a manufacturer to terminate a dealership contract for the sole
reason that the manufacturer desires further penetration of the market.7 Under
107 (dealer agrees to “maintain an inventory . . . adequate in relation to the sales and
service potential for such area”); John Deere dealership agreement, Appellants’ App.
24 (dealer required to “to maintain an inventory of Goods in proportion to the sales
possibilities in [his area of responsibility]” and to maintain “[s]ervice equipment, an
adequate stock of service parts and those appropriate special tools”); New Holland
dealership agreement, Appellants’ App. 154 (dealer required to maintain “stocks of
PRODUCTS of an assortment and in quantities adequate to meet the current and
anticipated demand therefor”); Komatsu dealership agreement, Appellants’ App. 224
(dealer must “maintain an inventory of the Products in keeping with the sales
possibilities of the Territory”).
7
See, e.g., AGCO dealership agreement, Appellants’ App. 87 (dealer agrees
to represent AGCO by “utilizing its best efforts to obtain and retain an appropriate
market share for AGCO”); Case dealership agreement, Appellants’ App. 106
(requires dealers to “[p]romote and sell Products sufficient to achieve . . . a share of
the market satisfactory to the Company”); John Deere dealership agreement,
Appellants’ App. 130 (dealers required to achieve market penetration satisfactory to
John Deere); New Holland dealership agreement, Appellants’ App. 153 (requires
dealers to “obtain . . . a reasonable share of the total market comprised of
PRODUCTS and products of other manufacturers that compete with PRODUCTS”);
Gehl dealership agreement, Appellants’ App. 193 (“The Dealer shall provide
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Section 2(3) of the Act, a manufacturer does not have cause to terminate a dealership
contract, or establish a new dealership in the original dealer’s community for the same
line-make, for “[t]he sole fact that the manufacturer desires further penetration of the
market.” S.D. CODIFIED LAWS § 37-5-14(3), 1999 S.D. Laws Ch. 200, § 2(3).8
d. Dealership Contract Terms Regarding a Dealer’s Sale of
Another Line-Make of Machinery
Two of the dealership agreements are terminable if the dealer does not comply
with the conditions of selling another line-make of machinery.9, 10 Under Section 2(4)
of the Act, a manufacturer does not have cause to terminate a dealership contract if:
satisfactory sales performance” and evaluation will be based (in part) on “the market
penetration.”); Komatsu dealership agreement, Appellants’ App. 193 (dealers agree
to “achieve a reasonable share of the market for all or any portion of the Products”).
8
As stated earlier in this opinion, the district court found that the portion of
the SDCL which restricted a manufacturer from establishing a new dealership in the
original dealer’s community was unconstitutional. The State did not appeal that
determination.
9
An example of a dealership selling another line-make of machinery would
be a dealership that sells both John Deere and Komatsu machinery.
10
The AGCO dealership agreement requires that “in no event will the Product
display of [AGCO’s] Products be less desirable than that furnished by Dealer to
competitive product lines.” Appellants’ App. 85. John Deere requires that
[i]f the Dealer undertakes to carry another major product line or engage
in another major business activity, either of which involves an important
commitment of effort and resources, the Dealer agrees to make such
separation of the personnel, facilities, capital and other resources
devoted to that business as is satisfactory to the Company.
Appellants’ App. 130.
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the dealer owns, has an investment in, participates in the management
of, or holds a dealership contract for the sale of another line-make of
machinery, or that the dealer has established another line-make of
machinery in the same dealership facilities as those of the manufacturer,
if the dealer maintains a reasonable line of credit for each line-make of
machinery.
S.D. CODIFIED LAWS § 37-5-14(4), 1999 S.D. Laws Ch. 200, § 2(4).
e. Dealership Contract Terms Regarding Required Dealer
Participation in Advertising and Promotional Activities
Several of the dealership agreements contain specific provisions that set forth
the dealer’s responsibilities concerning advertising and sales promotion activities.11
Under Section 2(5) of the Act, a manufacturer does not have cause to terminate a
dealership contract if the dealer refuses “to participate in any national advertising
campaign or contest or purchase any promotional materials, display devices, or
display decoration or materials which are at the expense of the dealer.” S.D.
CODIFIED LAWS § 37-5-14(5), 1999 S.D. Laws Ch. 200, § 2(5).
11
See, e.g., AGCO dealership agreement, Appellants’ App. 87 (dealers agree
“to maintain suitable display areas for Products and to use AGCO sales promotion
and advertising programs”); New Holland dealership agreement, Appellants’ App.
154, 158 (requires dealers to “acquire, erect and maintain signs of good appearance”
and “conduct aggressive advertising and sales promotion activities, making use of the
greatest reasonable extent the Company’s advertising, sales promotion and
merchandising programs and materials”); Komatsu dealership agreement, Appellants’
App. 224, 227 (requires dealers to “use the promotional and advertising materials and
services made available by the Company and to advertise the Products as provided
for in the Agreement” and “at its cost [to] advertise the Products in the Territory
through appropriate advertising media and display and demonstrate the Products at
industrial or trade fairs, exhibitions and shows and to good prospective customers in
the Territory”).
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As outlined above, Section 2 of the Act impairs specific contractual rights
contained in the pre-existing dealership agreements. Therefore, the second
component for determining whether the dealership agreements are substantially
impaired by Section 2 of the Act is satisfied.
2. The Impairments on Pre-existing Dealership Agreements by Section
2 of the Act are Substantial
The third component of the inquiry for determining whether the dealership
agreements are substantially impaired is to ascertain whether Section 2 of the Act
“has, in fact, operated as a substantial impairment of a contractual relationship.”
Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411, 103
S. Ct. 697, 704 (1983) (quoting Allied Structural Steel Co. v. Spannus, 438 U.S. 234,
244, 98 S. Ct. 2716, 2722 (1978)). This Court will consider “the extent to which the
[parties’] reasonable contract expectations have been disrupted” to determine whether
the impairment is substantial. In re: Workers’ Compensation Refund, 46 F.3d 813,
819 (8th Cir. 1995).12 “In determining the extent of the impairment, we are to
consider whether the industry the complaining party has entered has been regulated
in the past.” Energy Reserves Group, 459 U.S. at 411, 103 S. Ct. at 704. The
impairment does not need to be total, but the more severe the impairment, the closer
12
In Allied Structural Steel Co., the Supreme Court explained why contract
expectations are important:
The severity of an impairment of contractual obligations can be
measured by the factors that reflect the high value the Framers placed on
the protection of private contracts. Contracts enable individuals to order
their personal and business affairs according to their particular needs
and interests. Once arranged, those rights and obligations are binding
under the law, and the parties are entitled to rely on them.
438 U.S. at 245, 98 S.Ct. at 2723.
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scrutiny the statute will receive. Allied Structural Steel Co., 438 U.S. at 245, 98 S. Ct.
at 2723, United States Trust Co. v. New Jersey, 431 U.S. 1, 26-27, 97 S. Ct. 1505,
1515 (1977), Workers’ Compensation Refund, 46 F.3d at 819. Therefore, to analyze
the nature of the impairment, we (a) first set forth the nature of the impairment
produced by each subsection of Section 2 of the Act on the pre-existing dealership
agreements; and then (b) consider how previous regulation affects the extent of the
impairment.
a. The Nature of the Impairment
i. Section 2(1) of the Act
Under all the dealership contracts before this Court, the dealer has the burden
of proving to the manufacturer the fitness of a prospective owner or manager of a
dealership.13 Any change in ownership or executive management without the
manufacturer’s approval is cause for termination of the dealership agreement. See
supra n.5. Section 2(1) of the Act shifts that burden to the manufacturer, requiring
it to “show that the change would be detrimental to the representation or reputation
of the manufacturer’s product.” S.D. CODIFIED LAWS § 37-5-14(1), 1999 S.D. Laws
Ch. 200, § 2(1). Shifting the burden to the manufacturer substantially impairs the
terms of the pre-existing dealership agreement, especially given the special nature of
the relationship between dealers and manufacturers. Among the distinctive features
typical of that relationship are the credit that manufacturers extend to dealers;
intangible factors manufacturers use in choosing dealers; and the extensive degree to
which dealers represent the manufacturers to the public. See Appellees’ Separate
Appendix (“Appellees’ App.”) 277-79.
13
The State asserts that previous regulation would not have allowed
manufacturers to enforce the contractual terms. Appellees’ App. 280. We address this
argument infra at Part II(A)(2)(b).
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The identity of the owner or executive management of the dealership is
important to the manufacturer because, as the State acknowledges, many
manufacturers provide machinery to dealers on credit. See Appellees’ App. 277-78.
A manufacturer reasonably may be concerned that a mismanaged dealership will sell
the machinery, provided on credit, and fail to reimburse the manufacturer. For this
reason, manufacturers routinely place the burden on dealers to show that a change in
ownership or management of the dealership would not be injurious to the
manufacturer’s interests. See supra n.6.
Shifting the burden from the dealers to the manufacturers is a significant
impairment on the contractual terms of the pre-existing dealership agreements
because manufacturers consider many tangible and intangible factors to evaluate the
fitness of dealers, not solely whether the dealers are a detriment to the representation
of the manufacturers’ products. See Appellees’ App. 278-79; accord Appellants’
App. 123, 208 (“In no case is the evaluation limited to a determination of whether
transferring the management or ownership of a distributorship to a particular
candidate would be ‘detrimental to the representation or reputation’ of Komatsu
products.”). To evaluate prospective dealers, manufacturers typically consider factors
such as experience in agricultural and other equipment sales; financial status;
development of a business, personnel and marketing plan; management talent;
willingness to be involved in the day-to-day operations of the dealership; dedication,
character, trustworthiness, personality, energy, enthusiasm, intelligence, customer
relations skills, and similar qualities; competency of staff; business acumen; and
commitment to the manufacturer’s products. See Appellees’ App. 278, accord
Appellants’ App. 77-78, 102 (“Case’s evaluation of dealer prospects is based
substantially on subjective and intangible determinations that would make any
showing of detriment difficult and, moreover, it is unclear to us just how detrimental
the dealer prospect would have to be under the Act.”), 122-24, 140-42, 185-87, 207-
09. Manufacturers conduct this extensive review of potential dealers because if the
dealership becomes insolvent, the manufacturer’s reputation in the community may
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suffer and its customers may be left without a local dealership for repairs and parts.
Cf. Appellees’ App. 10 (manufacturers entrust dealers with “significant responsibility
for marketing, selling and servicing the companies’ products”).
Therefore, assuming that Section 2(1) of the Act was not reasonably
foreseeable, infra Part II(A)(2)(b), manufacturers’ contract expectations about their
control of the representatives of their products are substantially disrupted under
Section 2(1) of the Act. See McDonald’s Corp. v. Nelson, 822 F. Supp. 597, 600,
605-07 (S.D. Iowa 1993) (pre-existing franchise agreements were substantially
impaired by the Iowa Franchise Act, in part because it shifted the burden to
franchisors to show that prospective franchisees could not satisfy the “reasonable
current qualifications” as set out in the franchise agreements), aff’d sub nom., Holiday
Inns Franchising, Inc. v. Branstad, 29 F.3d 383 (8th Cir. 1994). Section 2(1) of the
Act is therefore a substantial burden on the contractual rights of manufacturers under
the pre-existing dealership agreements. See Workers’ Compensation Refund, 46 F.3d
at 819.
ii. Section 2(2) of the Act
Section 2(2) of the Act prohibits a manufacturer from terminating a dealership
contract if the dealer does not purchase or accept any machinery, parts, or other
product or service not ordered by the dealer, unless it is “necessary for the operation
of machinery commonly sold in the dealer’s area of responsibility.” S.D. CODIFIED
LAWS § 37-5-14(2), 1999 S.D. Laws Ch. 200, § 2(2). Dealers agreed to stock more
than what Section 2(2) requires in the pre-existing dealership agreements. See supra
n.6. Thus, manufacturers’ contract expectations under Section 2(2) are significantly
impaired, in part because a dealer is often the sole representative and sales and
service outlet for customers and potential customers in a given area. See Appellees’
App. 15-16; accord Appellants’ App. 102-03, 124-26, 142, 207. The manufacturers
are reasonably concerned that without the ability to require dealers to purchase certain
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machinery, the manufacturers’ products would not be represented in certain areas to
their fullest potential.
It is also important to manufacturers’ contract expectations that dealers be
required to stock a full range of parts and service equipment because prompt service
is important to farmers. The State acknowledges that the current inventory of farm
machinery on South Dakota farms is “aged and requires adequate facilities for repair
and servicing equipment.” Appellees’ App. 5, 160-61, 193. Thus, it is important that
parts and service equipment are available to promptly repair machinery in order to
enhance the manufacturer’s reputation with customers and potential customers. See
Appellees’ App. 277, 282-84. Therefore, assuming that Section 2(2) of the Act was
not reasonably foreseeable, infra Part II(A)(2)(b), Section 2(2) of the Act
substantially impairs the contractual rights of manufacturers under the pre-existing
dealership agreements.
iii. Section 2(3) of the Act
Under the pre-existing dealership agreements, unsatisfactory market
penetration alone was grounds for termination of the dealership agreement. See supra
n.7. Section 2(3) of the Act, however, prohibits the manufacturer from using the
market penetration measure as the sole reason for dealer termination. S.D. CODIFIED
LAWS § 37-5-14(3), 1999 S.D. Laws Ch. 200, § 2(3). The Manufacturers point out
that market penetration is an easily quantified proxy for dealer performance, and that
dealer termination for poor market penetration is permissible under all the pre-
existing dealership agreements. Appellants’ App. 80, 103-04, 126-27, 143, 187, 210-
11. The State does not dispute this claim, except to argue that pre-existing regulation
in South Dakota would not have allowed the manufacturers to enforce contract
clauses which allowed termination for poor market penetration.14 See Appellees’
14
This argument is addressed infra at Part II(A)(2)(b).
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App. 288-89 (citing Appellees’ App. 196-97, 201). Section 2(3) of the Act limits the
manufacturers’ ability to ensure that dealers are using their best efforts to sell and
service the products. So long as Section 2(3) of the Act was not reasonably
foreseeable, infra Part II(A)(2)(b), it substantially impairs manufacturers’ rights under
the pre-existing dealership agreements.
iv. Section 2(4) of the Act
Section 2(4) of the Act provides that a dealer’s participation in the ownership
or management of a dealership contract for the sale of another line-make of
machinery cannot be the sole grounds for the manufacturer to terminate the dealership
contract, unless the dealer does not maintain a reasonable line of credit for each line-
make of machinery. S.D. CODIFIED LAWS § 37-5-14(4), 1999 S.D. Laws Ch. 200, §
2(4). Clauses in pre-existing contracts typically permit manufacturers to terminate
dealers who begin dealing in another line-make of machinery. See supra n.10.
Manufacturers’ concerns with dealers selling other line-makes of machinery are not
limited to whether the dealer has a reasonable line of credit for each line-make of
machinery. Rather, they are concerned that dealers will not devote enough sales staff,
service equipment, service personnel, showroom space, and advertising efforts to the
individual manufacturer’s line-make of machinery. See Appellants’ App. 80-81, 104,
125-26, 144. Since dealers are often the sole representative of the manufacturer in
a region, manufacturers are reasonably concerned that their products will not be
effectively represented to the consumers in that sales area, absent contractual
limitations on the ability of dealers to represent other line-makes. See Appellees’
App. 282-83 (admitting that a dealer is frequently the manufacturer’s sole
representative in an area). By not allowing manufacturers to terminate dealers who
undertake to represent another line-make of machinery, Section 2(4) of the Act
substantially impairs the manufacturers’ rights under the pre-existing dealership
agreements, provided that Section 2(4) of the Act was not reasonably foreseeable.
See infra Part II(A)(2)(b).
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v. Section 2(5) of the Act
Section 2(5) of the Act prohibits a manufacturer from terminating a dealership
agreement solely because the dealer refuses to participate in any national advertising
campaign or purchase any promotional materials, that are at the expense of the dealer.
S.D. CODIFIED LAWS § 37-5-14(5), 1999 S.D. Laws Ch. 200, § 2(5). Three of the pre-
existing dealership agreements before this Court include provisions outlining dealers’
responsibilities for sales promotion and advertising activities. See supra n.11.
Manufacturers develop their advertising and promotion programs based on dealers’
participation in the programs, and manufacturers use dealer advertising and
promotion involvement to gauge whether dealers are using their best efforts to
promote the manufacturers’ products. See Appellants’ App. at 81, 104, 144-45, 211.
The State does not dispute manufacturers’ reliance on dealer participation in
advertising and promotion activities.15 Section 2(5) is a substantial impairment on the
pre-existing dealership agreements because it realigns the contract rights between
manufacturers and dealers, assuming that Section 2(5) of the Act was not reasonably
foreseeable, infra Part II(A)(2)(b).
b. The Impairment was not Foreseeable
The second step in analyzing the nature of Section 2 of the Act’s impairment
on pre-existing dealership agreements is to ascertain whether previous regulation
affects the nature of the impairment, i.e., whether the impairment was foreseeable.
Although Section 2 of the Act substantially impairs the contractual rights bargained
for in the pre-existing dealership agreements, supra Part II(A)(2)(a), if previous
regulation of the relationship between manufacturers and dealers made the terms of
15
The State asserts that previous regulation would not have allowed
manufacturers to enforce this contractual term. Appellees’ App. 292 (citing
Appellees’ App. 196-97, 201). This argument is addressed infra at Part II(A)(2)(b).
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Section 2 of the Act foreseeable, then Section 2 of the Act does not substantially
impair the pre-existing dealership agreements in violation of the Contract Clause. In
re: Workers’ Compensation Refund, 46 F.3d 813, 819 (8th Cir. 1995). Parties’
expectations of future regulation are important in determining whether contractual
rights are substantially impaired because parties bargained for terms in the contract
based on those expectations; if those expectations were fulfilled, the Court will not
now relieve parties of their obligations.16 Cf. Energy Reserves Group, 459 U.S. at
411, 103 S. Ct. at 704.
In the current case, agricultural machinery manufacturer-dealer relationships
were previously regulated. These regulations, in force since 1951, made it a Class 1
misdemeanor for manufacturers “to coerce or attempt to coerce” a dealer to take
certain actions, or for a manufacturer to cancel a dealership agreement “unfairly,
without due regard to the equities of the dealer and without just provocation.”17 S.D.
16
In Energy Reserves Group, Inc., the Supreme Court placed importance on
previous regulation of the industry because if contractual rights are already subjected
to regulation, then further regulation is foreseeable. 459 U.S. at 411, 103 S. Ct. at
704.
17
The three relevant statutory regulations in force since 1951 provide as
follows:
It is a Class 1 misdemeanor for any manufacturer, . . . to coerce or
attempt to coerce any dealer in . . . farm tractors; or farm implements, to
purchase or accept delivery of any motor vehicle or vehicles, parts or
accessories therefor or any other commodity which has not been ordered
by such dealer or threatening to cancel or terminate any franchise,
agency, arrangement, or agreement existing between such manufacturer,
. . . and such dealer or by any other unfair means or by duress of any
kind.
S.D. CODIFIED LAWS § 37-5-1, 1951 S.D. Laws Ch. 262, § 1.
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CODIFIED LAWS §§ 37-5-1 to 3, 1951 S.D. Laws Ch. 262, § 1.18 However, the 1951
statutes, unlike Section 2 of the Act, do not regulate terms of a contract.
The State argues that even if sections 37-5-1 through 37-5-3 did not put the
manufacturers on notice that there would be future regulation of the type in Section
2 of the Act, section 37-5-12 did. That section, which dates to 1991, prohibits
It is a Class 1 misdemeanor for any manufacturer, . . . to coerce or
attempt to coerce any dealer in . . . farm tractors; or farm implements, to
enter into any agreement with such manufacturer, . . . or to assign, sell,
or dispose of any contract or property in any way, or to expend any
money or do any other act unfair to such dealer; by threatening to cancel
or terminate any franchise, agency, arrangement, or agreement existing
between such manufacturer, . . . and such dealer or by any other unfair
means or by duress of any kind.
S.D. CODIFIED LAWS § 37-5-2, 1951 S.D. Laws Ch. 262, § 1.
It is a Class 1 misdemeanor for any manufacturer, . . . unfairly, without
due regard to the equities of the dealer and without just provocation, to
cancel the franchise of any dealer in . . . farm tractors; or farm
implements.
S.D. CODIFIED LAWS § 37-5-3, 1951 S.D. Laws Ch. 262, § 1.
18
Section 37-5-3 does not require coercion or duress on the part of the
manufacturer to find that the manufacturer improperly terminated the dealer, and thus
committed a misdemeanor. However, the South Dakota Supreme Court has ruled that
section 37-5-3 allows a manufacturer to terminate a dealer for “some sort of
misconduct or shortcoming on the part of the dealer,” which plainly includes breach
of contract by the dealer. Groseth Int’l, Inc. v. Tenneco, Inc., 410 N.W.2d 159 (S.D.
1987). Since a manufacturer could terminate a dealer for not fulfilling a contractual
obligation under section 37-5-3, we disagree with the dissent’s conclusion that
manufacturers were on notice that contractual provisions were subject to state
regulation.
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contract provisions which waive compliance with Chapter 37-5.19 S.D. CODIFIED
LAWS § 37-5-12, 1991 S.D. Laws Ch. 319, § 2. Section 37-5-12 establishes an
equitable remedy for violations of Chapter 37-5, in addition to the criminal sanctions,
by providing that any contractual provision purporting to waive compliance with
Chapter 37-5 is void. The State’s argument fails, however, because section 37-5-12
does not realign the rights of manufacturers and dealers under pre-existing dealership
agreements, as does Section 2 of the Act. Cf. Allied Structural Steel Co. v. Spannus,
438 U.S. 234, 245, 98 S. Ct. 2716, 2723 (1978).
Thus, previous regulations were not sufficiently pervasive to destroy the contract
expectations of the manufacturers.
In addressing the question of the foreseeability of future regulation, the
Supreme Court has focused on whether previous regulation was in the area of the
future regulation. In Allied Structural Steel Co., the Court considered the
constitutionality of a Minnesota pension regulation as applied to pre-existing
contracts. 438 U.S. at 245, 98 S. Ct. at 2723. The Court found that, although the
plaintiff company’s pre-existing pension plan had been previously subject to
regulation by the IRS, it had not previously been regulated in the area covered by the
Minnesota regulation. Id. For that reason, the Court held the Minnesota regulation
unconstitutional as applied to the plaintiff’s company, as it had no reason to anticipate
that the terms of the pension plan would be altered by subsequent legislation.
Similarly, in the instant case, the 1951 regulations prevent manufacturers from taking
19
Section 37-5-12 provides as follows:
Any condition, stipulation or provision in any agreement evidenced by
a franchise agreement, sales agreement, security agreement, or other
form of agreement or arrangement of like effect, purporting to waive
compliance with any provision of this chapter, or other provision of state
law applying to such agreements is void as a matter of public policy.
S.D. CODIFIED LAWS § 37-5-12, 1951 S.D. Laws Ch. 262, § 1.
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actions outside the obligations and rights of the dealership agreement, by coercion,
duress, or acting unfairly. In contrast, Section 2 of the Act purports to place extensive
limitations on freely-negotiated arrangements, and thus exceeds what the
manufacturers could have reasonably anticipated in light of the previous South
Dakota regulation.
In Workers’ Compensation Refund, this Court also found substantial
impairment in the context of the heavily-regulated workers’ compensation insurance
industry. 46 F.3d at 819-20. We agreed that “[h]eavy regulation of an industry may
reduce reasonable expectations. However, regulation does not automatically
foreclose the possibility of contract impairment. . . . We find that Minnesota’s
regulation of excess reinsurance premiums has not been sufficiently pervasive so as
to destroy all reasonable contractual expectations.” Id. at 820. As in that case, this
Court finds that the previous state regulation at issue here was not “sufficiently
pervasive so as to destroy all reasonable contractual expectations” by the
manufacturers. Id.
Therefore, because the pre-existing dealership agreements are impaired, and
because this substantial impairment was not foreseeable, this Court finds that the first
part of the Contract Clause test is answered in the affirmative: Section 2 of the Act
substantially impairs pre-existing dealership agreements. The second part
of the Contract Clause test must now be addressed, to ascertain whether there is a
significant and legitimate public purpose for Section 2 of the Act.
B. There is No Significant and Legitimate Public Purpose for Section
2 of the Act
Because a substantial impairment of pre-existing contractual rights exists,
South Dakota must demonstrate a significant and legitimate public purpose
underlying the Act. Workers’ Compensation Refund, 46 F.3d at 820. The State must
-24-
show that the regulation protects a “broad societal interest rather than a narrow class.”
Allied Structural Steel Co. v. Spannus, 438 U.S. 234, 249, 98 S. Ct. 2716, 2724
(1979). The State bears the burden of proof in showing a significant and legitimate
public purpose underlying the Act. "[I]f a State undertakes to alter substantially the
terms of a contract, it must justify the alteration, and the burden that is on the State
varies directly with the substantiality of the alteration." White Motor Corp. v.
Malone, 599 F.2d 283, 287 (8th Cir. 1979).
There is no statement of legislative intent or any other legislative history from
which to directly ascertain the purpose of the Act.20 The State’s post hoc
rationalization is that the Act benefits a broad social interest: serving the farmer and
rural communities in South Dakota. Such an interest is unquestionably significant
and legitimate, see Farmers Union Oil Co. v. Allied Products Corp., 162 B.R. 834,
840-41 (D.N.D. 1993), and we would be compelled to uphold the Act if we credited
the State’s rationale for the Act. Cf. Workers’ Compensation Refund, 46 F.3d at 821.
The State’s evidence contradicts this asserted broad social interest, however, in
several aspects. First, the State has produced no evidence of the harm to be avoided
by passage of the Act. See McDonald’s, 822 F. Supp. at 609 (allegations that unfair
practices can harm consumers, without more, do not sufficiently allege harm for
Contract Clause analysis purposes); Equipment Mfrs. Inst. v. Janklow, 136 F. Supp.
2d. 991, 1000 (D.S.D. 2001) (finding no evidence of the asserted purpose to protect
farmers and rural communities regarding the Act’s restrictions on manufacturers
establishing new dealerships). The alleged harm is that termination of dealers by
manufacturers will result in loss of jobs, hardship on farmers required to travel farther
for equipment and repairs, and the consequent acceleration of the decline of rural
communities and farms. See Appellees’ App. 5-9, 159-60. But the State has
produced no evidence that manufacturers currently, or will in the future, prohibit sales
20
According to the State’s Amended Answer, no statement of legislative
purpose or findings is required in South Dakota legislation. Appellees’ App. 263.
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of dealerships, require dealers to maintain inventories of machinery and parts
inappropriate for the dealers’ area, prohibit the sale of additional line-makes by
dealers, terminate dealers for inadequate market penetration, or terminate dealers for
refusing to participate in advertising activities.21 While the State cites to a decrease
in the number of farmers and farms, it does not cite to evidence that there has been
or will be an actual decrease in the number of farm equipment dealers, let alone tie
such a decrease in farms and farmers to the restrictions contained in extant dealership
agreements. But see Appellees’ App. 188 (growth in nonfarm economy contributes
to decrease in the number of farmers); 189 (advances in technology contributed to a
decrease in the number of South Dakota farms). The decline in the number of farmers
has little to do with the number of equipment dealers.
Second, both the State and the Defendant-Intervenor concede that the Act’s
purpose is to level the playing field between manufacturers and dealers. See
Appellees’ App. 10 (“[I]t assists in leveling the playing field between manufacturers
and dealers.”), 196 (“It imparts a degree of security and predictability to relations
between dealers and manufacturers.”). However, leveling the playing field between
contracting parties is expressly prohibited as a significant and legitimate public
interest.22 See Allied Structural Steel, 438 U.S. at 247. See also McDonald’s Corp.
21
In fact, the evidence tends to indicate quite the opposite behavior by
manufacturers during the time that dealership agreements with the sort of provisions
that the Act would outlaw have been in force. The dealers who submitted affidavits
to the district court represent multiple lines, and a majority of dealers throughout
South Dakota have been in existence for more than 25 years. See Appellees’ App.
206 (dealer indicates he sells thirteen lines of equipment), 248 (dealer sells three lines
of equipment), 255 (dealer carries four lines of equipment), 6 (64 percent of dealers
have been dealers for more than 25 years, 85 percent have been dealers for more than
15 years).
22
The State and Defendant-Intervenor extensively complain in their Joint
Statement of Material Facts and affidavits that the relationship between manufacturer
and dealer was once a “personal agreement” based on “trust and an economically
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v. Nelson, 822 F. Supp. 597, 608 (S.D. Iowa 1993), aff’d sub nom. Holiday Inns
Franchising, Inc. v. Brandstad, 29 F.3d 383 (8th Cir. 1994).
Third, the sparse legislative history reinforces that the suspect purpose of the
Act is to directly change the obligations of the manufacturers and dealers, as
illustrated by its title, “An Act to provide certain restrictions for dealership contracts
for machinery.” Appellees’ App. 36. Cf. Whirlpool Corp. v. Ritter, 929 F.2d 1318,
1323 (8th Cir. 1991) (“Because the law at issue here directly alters the obligations
and expectations of the contracting parties, it is not merely general, social
legislation.”). Fourth, any claim that its purpose is to benefit farmers and rural
communities is belied by the fact that only implement dealers and manufacturers
attended committee hearings on the Act, and the record contains no evidence of
farmers’ participation. Appellees’ App. 54, 70, 88-89.
It is clear that the only real beneficiaries under the Act are the narrow class of
dealers of agricultural machinery. See Appellees’ App. 13 (“Dealers are the principal
class of persons protected by [the Act].”), 157-61, 190-201. As the case law makes
clear, such special interest legislation runs afoul of the Contract Clause when it
impairs pre-existing contracts. In McDonald’s Corp. v. Nelson, 822 F. Supp. 597, the
court determined that there was no significant and legitimate public purpose for the
Iowa Franchise Act. The court based its conclusion on an affidavit of the President
of the Iowa Senate, which articulated the legislature’s study of franchising and
development of the Iowa Franchise Act. The Senate, according to the affidavit, heard
balanced relationship,” and has morphed into a “one-sided economic relationship[ ]”
implemented through a “one-sided form dealership agreement[ ].” Appellees’ App.
5-9; accord Appellees’ Brief 4-5, Appellees’ App. 193-94, 206-07, 248-49, 255-56.
Whether true or not, such allegations cannot justify legislative interference in private
contracts. There is no broad public policy interest in readjusting contractual rights
and obligations in pre-existing contracts. Whirlpool Corp. v. Ritter, 929 F.2d 1318,
1323 (8th Cir. 1991).
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testimony that franchising was a growing industry in Iowa, and that “the unfair
practices of some franchisors can harm Iowa franchises, consumers, and other
businesses.” McDonald’s Corp., 822 F. Supp. at 608. A review of the record
developed for purposes of summary judgment showed that the primary purposes of
the Iowa Franchise Act were to equalize bargaining power and protect franchisees
from abuses by franchisors. The district court then contrasted valid laws under the
Contract Clause, which advanced a “broad social interest,” with invalid laws that
“directly adjusted the rights and responsibilities of contracting parties.” Id. at 608
(internal quotation marks omitted), quoting Exxon Corp. v. Eagerton, 462 U.S. 176,
191-92, 103 S. Ct. 2296, 2306 (1983). In the instant case, as in McDonald’s, the
suspect purpose of the legislation at issue is to directly adjust the rights and
responsibilities of dealers and manufacturers under the pre-existing dealership
agreements, not to advance a broad social interest.
Without evidence of a significant and legitimate public purpose underlying
Section 2 of the Act, Section 2 is void as applied to dealership agreements in
existence before July 1, 1999. Therefore, the Court does not need to address the last
step of Contract Clause analysis, whether the adjustment of contract rights is
appropriate to the public purpose. Energy Reserves Group, Inc. v. Kansas Power &
Light Co., 459 U.S. 400, 412, 103 S. Ct. 697, 705 (1983). Because we grant summary
judgment to the Manufacturers on the Contract Clause claim, we need not address
their substantive due process claims in regards to pre-existing dealership contracts.
With respect to the Manufacturers’ claims that the Act’s application to future
dealership contracts violates their substantive due process rights, the Court concludes
that the Manufacturers have not met their burden of proof to establish a violation of
the United States or South Dakota Constitutions’ due process clauses, and thus
affirms the disposition of these claims by the district court. See Wellwood v.
Johnson, 172 F.3d 1007, 1010-11 (8th Cir. 1999); Crowley v. State, 268 N.W.2d 616,
618 (S.D. 1978) (Under South Dakota Constitution’s due process clause analysis,
“[a]ll presumptions are in favor of the constitutionality of a statute and this continues
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until the contrary is shown beyond a reasonable doubt.”); State v. Nuss, 79 S.D. 522,
526, 114 N.W.2d 633, 635 (1962).
III. CONCLUSION
For all the foregoing reasons, this Court finds and concludes that Section 2 of
the Act entitled “An Act to provide certain restrictions for dealership contracts for
machinery,” is not based on a significant and legitimate public purpose, sufficient to
justify the substantial impairment that its provisions have on dealership agreements
in effect prior to the Act’s effective date. The grant of partial summary judgment of
the district court on the Contract Clause claim is reversed, and the Manufacturers’
motion for summary judgment is granted. The grant of partial summary judgment of
the district court on the substantive due process claims is affirmed.
BYE, Circuit Judge, dissenting.
Although South Dakota's new law impairs contracts, as the majority holds, I
believe the impairment was foreseeable to equipment manufacturers. For that reason,
I respectfully dissent.
An impairment is not substantial in a field where prior regulation existed and
new legislation "was foreseeable as the type of law that would alter contract
obligations." Energy Reserves Group, Inc. v. Kan. Power & Light Co., 459 U.S. 400,
416 (1983). "The idea . . . is that if the party to the contract who is complaining could
have seen it coming, it cannot claim that its expectations were disappointed."
Holiday Inns Franchising, Inc. v. Branstad, 29 F.3d 383, 385 (8th Cir. 1994).
Since 1951, South Dakota has prohibited manufacturers from terminating
dealerships "unfairly, without due regard to the equities of the dealer and without just
provocation." S.D. Codified Laws § 37-5-3. All provisions in dealership contracts
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which purport to waive compliance with § 37-5-3 are void. S.D. Codified Laws §
37-5-12. Thus, manufacturers have long been on notice that their dealership contract
terms, at least those terms relating to termination, were subject to state regulation.
See Groseth Int'l, Inc. v. Tenneco, Inc., 410 N.W.2d 159, 168 (S.D. 1987)
(interpreting § 37-5-3 and holding that the "just provocation" standard "requires some
sort of misconduct or shortcoming on the part of the dealer," and rejecting the
manufacturer's argument it could meet the standard where a termination was in good
faith). The restrictions on dealership termination now found at § 37-5-14 merely fine-
tune those existing regulations, providing specific circumstances under which a
termination will be considered unfair and without just cause. I am therefore unable
to conclude that the provisions of § 37-5-14 pertaining to termination violate the
Contract Clause.
In reaching this conclusion, I find persuasive the reasoning of the Seventh
Circuit in Chrysler Corp. v. Kolosso Auto Sales, Inc., 148 F.3d 892 (7th Cir. 1998).
Wisconsin had a longstanding statute prohibiting auto manufacturers from
terminating auto dealerships "unfairly, without due regard to the equities of said
dealer and without just provocation." Wis. Stat. § 218.01(3)(a)(17) (enacted in 1937,
renumbered at § 218.0116(1)(i) by 1999 Act 31, §§ 14 to 283, eff. April 19, 2000).
In 1993, Wisconsin amended the law to (1) allow a dealer to challenge a
manufacturer's refusal to allow the dealer to relocate, and (2) create a specific
procedure for resolving relocation disputes. See Wis. Stat. § 218.01(3x) (renumbered
at § 218.0134(3)(a) by 1999 Act 31, §§ 14 to 283, eff. April 19, 2000). In 1995, when
Kolosso Auto Sales informed Chrysler it wanted to move its dealership, Chrysler sued
to enforce a provision in the dealership contract that forbid Kolosso from relocating
without Chrysler's permission, and to declare the new law invalid under the Contract
Clause. Kolosso, 148 F.3d at 893.
The Seventh Circuit held the 1993 amendment did not violate the Contract
Clause. The court noted Wisconsin had interpreted the pre-existing law's "just
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provocation" clause "to forbid termination without good cause." Id. at 896. The
court reasoned the pre-existing law would have prevented Chrysler from terminating
Kolosso for moving the dealership without permission, absent good cause, and the
new law merely specified that a manufacturer could not terminate a dealer for an
unauthorized relocation unless it followed the new procedures for resolving
relocation disputes.
Chrysler should have known . . . that it did not have a solid right to
prevent a dealer from changing the location of the dealership, that it was
operating in a grey area of the dealership law, that the law might some
day be amended to regulate disputes over relocation specifically, and
that if this happened it might not be able to get the amendment struck
down under the contracts clause.
Id. at 897.
Here, the district court correctly concluded § 37-5-14's specific provisions on
termination "are simply particular applications of the general standard in § 37-5-3
[and] the substantive changes effected by the Dealership Act at issue in this case are
not so different from the changes in Kolosso as to impose a substantial impairment
under the Contract Clause." Equip. Mfrs. Inst. v. Janklow, 136 F. Supp. 2d 991,
1000 (D.S.D. 2001). Because § 37-5-14's impairment on existing contracts was
foreseeable, it is unecessary to address whether the legislation serves a significant and
legitimate public purpose.
I would affirm the district court in all respects.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT
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