Franchise Termination. Ormsby Motors, Inc (OMI), was a General Motors Corp (GM) dealership. Their agreement provided for termination if OMI submitted "false . . . claims for any payment." Larry Kain was in charge of OMI's warranty claims. After several

Question

years of excessive claims, GM complained to OMI. When nothing changed, GM conducted a dealer audit. The audit uncovered, among other things, over eighty claims in one ten-day period for paint repair work that was never done. OMI denied knowledge of Kain's activities. GM terminated its dealership agreement with OMI. OMI asked a federal district court to stop the termination, arguing in part that GM did not have good cause. Did GM have good cause? Explain.

Answer 1

Franchise termination
The court explained that "[g]ood cause exists for terminating the franchise where a franchisee fails to substantially comply with the franchise agreement." The court pointed out that "the evidence overwhelmingly shows that OMI breached a material term of the franchise agreement that gave GM the right to terminate the agreement. Such a breach * * * constitutes a failure to substantially comply with the franchise agreement; hence, good cause is shown." The court stated that "[t]his is especially true where, as here, the violations occurred repeatedly and over a substantial period of time." The court reasoned that "an isolated incident by a ‘rogue employee' might in some circumstances not provide good cause for termination of a franchise agreement," but "here the evidence demonstrates that what occurred was more than an isolated incident and that OMI officials took no corrective action even after repeated reports by GM of claims problems. Thus, OMI has failed to demonstrate any likelihood of succeeding on the merits of its argument that the termination of the franchise agreement was without good cause."