Article I, Section 10, Clause 1 of the United States Constitution provides that “[n]o state shall . . . pass any . . . Law Impairing the Obligation of Contracts . . . .” On August 2, 2019, a panel of the US Court of Appeals for the Eighth Circuit in Association of Equipment Manufacturers v. Burgum, 932 F.3d 727 (8th Cir. Aug. 2, 2019), affirmed entry of a preliminary injunction barring North Dakota from enforcing amendments to a state law governing contracts between farm equipment manufacturers and dealers. A 2-1 majority of that panel determined that a group of manufacturers and their trade association were likely to succeed on the merits of their claim that the amendments violate the Contract Clause. If ultimately successful, this case could affect Contract Clause challenges to similar state laws by motor vehicle manufacturers and manufacturers in other industries.

Contract Clause Challenge to Amendments to North Dakota Statute

In March 2017, North Dakota enacted amendments to its farm equipment dealer statute making significant changes to the law effective August 1, 2017, including provisions that prohibited manufacturers from (1) conducting warranty or incentive audits or seeking a chargeback on a warranty or incentive payment more than one year after the date of the payment; and (2) requiring a dealer to enter into an arbitration clause. The amendments also imposed obligations on manufacturers to reimburse dealers for warranty repairs at “the average rate charged by the dealer for similar service or sales to nonwarranty customers,” and expressly made the provisions of these amendments applicable retroactively, “[n]otwithstanding the terms of any contract.”

In July 2017, four farm equipment manufacturers and their trade association filed an action in federal district court in North Dakota seeking a preliminary and permanent injunction barring enforcement of these amendments. Among other things, the manufacturers and trade association argued that the amendments violated the Contract Clause because they applied retroactively and substantially impaired existing contracts between the manufacturers and their dealers. On December 14, 2017, the district court entered a preliminary injunction enjoining enforcement of the amendments, finding that the amendments were “special-interest legislation unsupported by a significant and legitimate public purpose” and that the manufacturers and their trade association were likely to succeed on their Contract Clause argument.

In affirming the district court’s preliminary injunction, the Eighth Circuit considered whether the amendments constituted a “substantial impairment” of pre-existing manufacturer-dealer contracts, and if so, whether the amendments reasonably advanced a “significant and legitimate public purpose.” The state argued that the retroactive application of the amendments did not “substantially impair” these pre-existing contracts because the amendments were “reasonably foreseeable.” A majority of the Eighth Circuit panel concluded that the changes were not foreseeable because they went “a significant step beyond regulation of coercive and discriminatory practices by rendering unenforceable obligations that dealers previously accepted as part of freely negotiated contracts.” Moreover, the majority found that the amendments “primarily benefit[] a particular economic actor in the farm economy—farm equipment dealers,” and that any “incidental public benefits” were inadequate to meet the requirement of the Contract Clause.

On September 19, 2019, the Eighth Circuit denied a request for rehearing or rehearing en banc. The North Dakota Implement Dealers Association intervened in the case to defend the amendments to the farm equipment dealer statute. The parties have filed cross motions for partial summary judgment on the Contract Clause issue with the district court, with briefing completed in October 2019, and those motions are now pending.

Relevance to Other Manufacturer-Dealer Laws

The now-enjoined North Dakota amendments are similar to provisions of state dealers laws governing other types of manufacturer-dealer relationships in the United States, including the motor vehicle, recreational vehicle, heavy duty equipment, and motorcycle industries. Motor vehicle manufacturers generally have not succeeded in Contract Clause attacks on statutes governing their relationships with the dealers. See e.g., Alliance of Auto Mfrs., Inc. v. Currey, 601 Fed. Appx. 10, 13-14 (2d Cir. 2015); Alliance of Auto Mfrs., Inc. v. Gwadosky, 430 F.3d 30, 43-44 (1st Cir. 2005). The US Supreme Court’s recent decision in Sveen v. Melin, --- US ---, 138 S. Ct. 1815 (2018), suggests that a majority of the members of that court may not be inclined to revisit the balancing approach to Contract Clause jurisprudence. In a spirited dissent, however, Justice Gorsuch noted that “[m]any critics have raised serious objections” to this balancing approach, and argued that these critics “deserve a thoughtful reply, if not in this case then in another.” Sveen, 138 S. Ct. at 1828 (Gorsuch, J., dissenting). Perhaps the challenge to the North Dakota farm equipment dealer statute will give the Court an opportunity to provide that thoughtful reply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.