Right of Refusal Gone Wrong: Ford’s $18 Million Lesson
As an attorney that negotiates dealership buy/sell transactions, the recent $18 million judgment against Ford Motor Company in Arkansas caught my attention. This case underscores the importance of fairness and transparency in manufacturer-dealer relationships, particularly when it comes to the contentious “right of first refusal” clauses known as ROFRs.
Quick Background on Dealership Transactions When a dealer wants to sell his or her business, the company that owns the dealership will negotiate a “buy sell” with a purchaser, either for the purchase and sale of all of the dealership’s assets or the stock/membership interest of the dealership entity. A dealer can’t just sell the dealership to anyone. The dealership must submit the buy sell to the manufacturer for approval. Each manufacturer has its own requirements, but they all require potential buyers to submit applications and go through vetting processes. Only after the manufacturer approves the dealership can it be sold to the buyer.
What is a Right of First Refusal? A right of first refusal (known as a “ROFR”) allows a manufacturer to step into the shoes of the buyer selected by the seller during a proposed sale of a dealership. If a dealer finds a potential buyer for the business, the manufacturer can “refuse” to approve the sale to the buyer and instead purchase the dealership itself or assign its purchase right to a buyer the manufacturer selected. While this clause can help manufacturers maintain control over who represents their brand, it must be exercised fairly and in accordance with contractual and legal standards as well as applicable state laws regulating motor vehicle franchises.
The Case at a Glance Auto Dealership Partners LLC (ADP), led by Larry Crain Jr. and Heath Campbell, sought to purchase a Ford dealership in Benton, Arkansas. However, Ford exercised its ROFR to block the sale. According to the lawsuit, Ford allegedly misled ADP by claiming they were considering the offer in good faith, while simultaneously negotiating with another buyer who eventually purchased the Ford dealership at a $2 million discount on the transaction ADP negotiated with the seller. According to Automotive News, Circuit Judge Timothy Davis Fox said he found “overwhelming evidence” that Ford “engaged in deceit and fraud.” Ford “deliberately withheld information concerning Ford’s exercise of its right of first refusal despite continued reassurances from Ford employees that approval of [the sale] was imminent.” The court awarded ADP $18 million in damages, including $16 million in punitive damages meant to punish Ford for its fraudulent conduct and $2 million after Ford was found to have unfairly altered the transaction.
Why This Matters This ruling warns manufacturers against misusing their right of first refusal. Most state franchise laws prevent potential buyers from suing over ROFR violations, requiring them to sue based on contract or tort law instead. This case outlines a possible recovery path for would-be buyers if a manufacturer unlawfully exercises its ROFR even if they don’t have standing to sue under the state’s dealer franchise laws.