Mall Chevrolet, Inc. v. Gen. Motors LLC

99 F.4th 622

MALL CHEVROLET, INC., Appellant v. GENERAL MOTORS LLC

No. 21-2283

United States Court of Appeals, Third Circuit

Argued: May 24, 2022

Filed: April 26, 2024

On Appeal from the United States District Court for the District of New Jersey (D.C. Civ. No. 1-18-cv-15077), District Judge: Honorable John R. Padova

William M. Tambussi [ARGUED], Jonathan L. Triantos, Brown & Connery, LLP, 360 N Haddon Avenue, P.O. Box 539, Westmont, New Jersey 08108, Laura D. Ruccolo, Capehart Scatchard, P.A., 8000 Midlantic Drive, Laurel Corporate Center, Suite 300S, P.O. Box 5016, Mount Laurel, New Jersey 08054, Counsel for Mall Chevrolet, Inc.

James C. McGrath [ARGUED], Michael A. Kippins, Seyfarth Shaw LLP, Two Seaport Lane, Suite 1200, Seaport East, Boston, Massachusetts 02210, Jeremy A. Cohen, Seyfarth Shaw LLP, 620 Eighth Avenue, 32nd Floor, New York, New York 10018, Counsel for General Motors LLC

Before: BIBAS, MATEY, and PHIPPS, Circuit Judges.

OPINION OF THE COURT

PHIPPS, Circuit Judge.

A motor vehicle manufacturer sought to terminate its franchise agreement with one of the most successful car dealerships in New Jersey after discovering evidence that the dealership had submitted false warranty claims for vehicle repairs. The manufacturer also announced its intention to recoup the amounts it paid in disputed warranty claims through a chargeback process. The dealership then preemptively sued the manufacturer under the New Jersey Franchise Practices Act to prevent the termination of the franchise agreement and the chargebacks. Neither of those claims nor any of the others brought by the dealership survived summary judgment.

Now on appeal, the dealership challenges the District Court's summary-judgment rulings. For the reasons below, there was no genuine dispute of material fact - the dealership did submit false claims for warranty repairs - and the manufacturer was entitled to judgment as a matter of law on each of the appealed claims. Accordingly, on de novo review, we will affirm the judgment of the District Court.

I. FACTUAL BACKGROUND

A. GM's Reliance on Dealerships and Its Contract with Mall Chevy

General Motors LLC, commonly abbreviated as 'GM,' manufactures and sells new motor vehicles. As part of its business model, GM relies on independently owned and operated authorized dealers to sell its brands of new motor vehicles directly to customers for personal or business use.

In 1986, GM entered into a franchise agreement for the sale and service of its motor vehicles with Mall Chevrolet, Inc., or 'Mall Chevy' for short. Under the 2015 version of the contract, Mall Chevy, whose dealership was physically located in Cherry Hill, New Jersey, was the 'dealer,' and its area of primary responsibility was the Camden region. That contract also included an assurance by Mall Chevy that one of its partial owners, Charles W. Foulke III - whom the contract designated as a 'dealer operator' - would "provide personal services by exercising full managerial authority" over the operations of the dealership. Dealer Sales and Service Agreement 2015, Standard Provisions, Art. 2 (JA147). For years, Mall Chevy was one of GM's top-performing Chevy dealers regionally and nationally.

B. Mall Chevy's Performance of Warranty Repairs for GM

The franchise agreement obligated Mall Chevy to service vehicles, and that included warranty repairs on qualified vehicles. After performing warranty work, Mall Chevy could submit a reimbursement claim to GM for parts and a reasonable amount of labor. In the contract, Mall Chevy promised that its claims for payment would be "true and accurate." Dealer Sales and Service Agreement 2015, Standard Provisions, Art. 11.2 (JA159). As a matter of practice, GM allowed Mall Chevy to submit reimbursement claims for warranty work without supporting documentation.

Despite that flexibility, the contract established several internal controls. Mall Chevy had to maintain a uniform accounting system, and it had to retain for at least two years and make available upon GM's request the supporting documentation for a warranty repair. In addition, Mall Chevy agreed to allow GM "to access, examine, audit, and take copies of any of the [required] accounts and records." Id., Art. 11.3 (JA159). And if, after an audit, GM could not verify a warranty repair, then it could recover the amounts paid for parts and labor through a chargeback. Most consequentially, if Mall Chevy submitted a false claim to generate a payment that would not otherwise be due, then GM could terminate the franchise agreement without affording Mall Chevy an opportunity to cure that breach.

One of the key supporting documents for service work, including warranty repairs, is a job card. A job card is supposed to have several pieces of information related to the service work requested and performed. That information includes the date of service, the vehicle identification number, the vehicle's odometer reading, the customer's name and contact information, the details of a customer's concerns or complaints, and the customer's signature authorizing repairs (or a signature by a service manager along with an explanation for the absence of a customer's signature).

Some of that job-card information is available from other sources. For instance, when advertising used vehicles, some vendors, such as CarMax and Carvana, make available on their websites vehicle identification numbers and the corresponding mileage for vehicles in their inventory. With the names and contact information for those vendors available online, the other information on a job card - the detailed description of a customer's concerns and an authorized signature - is critical to a job card's integrity.

To perform service work, including warranty repairs, Mall Chevy employed service advisors, a dispatcher, and technicians. The service advisors had significant responsibility for preparing the job cards, including entering the information about the vehicle and the customer. The dispatcher was responsible for assigning the repair order to a technician, who would repair the vehicle and record the work done on the job card before returning the job card to the service advisor.

As part of their compensation from Mall Chevy, service advisors and the dispatcher received commissions on the amount of service work performed. The commission for service advisors was tied to the repair work performed on their job cards. The commission for the dispatcher was based on the overall volume of service work performed, excluding revenues attributed to the body shop. The calculation of those commissions included warranty repair work.

C. Mall Chevy's Problematic Claims for Warranty Repairs

In May 2017, as part of a regional review, GM examined warranty reimbursement claims submitted by Mall Chevy. Through two letters - one dated May 16, the other May 19 - GM informed Mall Chevy of the results of its review of the dealership's warranty-claim practices.

The May 16 letter was ominous. It articulated GM's suspicion that Mall Chevy was falsely claiming to have performed warranty work on what may be called 'ghost vehicles' - vehicles that were not actually repaired by Mall Chevy. Based on its finding that "a high number of Mall Chevrolet's warranty cases [were] being processed for used vehicle locations, resulting in legitimate questions as to the circumstances of these repairs," GM informed Mall Chevy that it would not pay warranty claims for cars owned by three used-car dealers - CarMax, Carvana, and DriveTime - without GM's prior approval. Letter from GM to Mall Chevy, May 16, 2017 (JA6569).

That message prompted an immediate response from one of Mall Chevy's service advisors, Ray Moffatt, whose compensation included a commission on warranty work. He resigned that day. In a text message to several of his Mall Chevy colleagues, Moffatt let them know that he quit and that Mall Chevy's general manager "knows everything, the truth." Screenshot of Moffatt Text Message (JA6616). Moffatt closed his text message with, "Sorry guys good while it lasted." Id.

The next letter, dated May 19, detailed GM's findings, and it carried additional consequences. GM identified warranty claims for over $98,000 that were invalid because the corresponding job cards lacked required information or an authorized signature. GM also found other problematic warranty claims totaling more than $16,000 related to out-of-warranty work, the use and retention of GM parts, improper repeat repairs, and work not performed. As a result of those findings, GM announced that it was charging back $114,178.60 in warranty payments. Mall Chevy did not challenge that chargeback.

In the three weeks following that letter, three employees in Mall Chevy's service department in addition to Moffatt ceased working there. One was the dispatcher, who, like Moffatt, received a commission based in part on the performance of warranty work. Also, the dispatcher along with one of the other employees were recipients of Moffatt's text message.

Even then, GM's diligence was not complete: on July 5, 2017, it announced that it would audit Mall Chevy. The audit examined an eleven-and-a-half-month period, from August 2, 2016, to July 14, 2017, and it involved on-site auditors as well as a review of the electronic claims that Mall Chevy had submitted.

As a result of the audit, GM prepared a 94-page Debit Deviation Report. That report, dated April 30, 2018, identified 517 deviations on job cards related to 346 vehicles (the job cards for some vehicles had multiple deviations associated with them). In total, GM had paid Mall Chevy $672,176.59 for that warranty work. That amount included claimed warranty work on ghost vehicles - 186 of the deviations involved 130 vehicles whose presence at the dealership was "not substantiated." Debit Deviation Report (JA4838-4932).

D. GM's Notice of Termination of the Franchise and Its Intent to Chargeback Amounts Claimed for Warranty Repairs

Within days of completing the...