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From Antitrust Law Daily, March 11, 2015

Rent-A-Wreck exclusive franchise agreement not void as non-competitive

By Greg Hammond, J.D.

An exclusive right to sell or operate Rent-A-Wreck car rental franchises in West Los Angeles was not unenforceable under California law as non-competitive, the U.S. Court of Appeals in Richmond held. In upholding a lower court decision, the appellate court determined that the franchisor had the burden of demonstrating the exclusive-territory agreement foreclosed competition, and the lower court did not err by preventing the franchisor from presenting its preferred relevant market definition to the jury (Schwartz v. Rent A Wreck of America, Inc., March 10, 2015, Duncan, A.).

Background. The creator of the “Rent-A-Wreck” car rental brand, David S. Schwartz, assigned most of his interest in that name to Rent-A-Wreck of America, Inc. (RAWA). Schwartz, however, reserved the exclusive right to sell or operate Rent-A-Wreck franchises in West Los Angeles, where he continued to operate a car rental business under the name “Bundy Rent-A-Wreck.” In 2007, Schwartz sought declaratory judgment that he has the exclusive right to operate a Rent-A-Wreck franchise in the Los Angeles territory. Conversely, RAWA sought a declaration that Schwartz’s supposed franchise rights were unenforceable under California law because they precluded RAWA from competing in that territory. A jury found that Schwartz’s contract afforded him an exclusive franchise in West Los Angeles.

On RAWA’s first appeal, the appellate court remanded the case to the district court to ask the jury two questions: (1) whether RAWA maintains sufficient control over Schwartz to protect its trademark, trade name, and goodwill; and (2) whether the exclusive-territory provision forecloses competition for rental cars. RAWA had the burden of proof on both issues, and the court limited RAWA to a market in which the consumers are those who rent cars from establishments like Rent-A-Wreck, instead of consumers who seek to operate Rent-A-Wreck franchises. The jury once again sided with Schwartz, finding that RAWA had the right to exercise some control over Schwartz, and that the exclusive-territory agreement did not foreclose competition in a substantial share of the market for rental cars. RAWA appealed for a second time.

The appellate court identified two issues on appeal: (1) whether the district court erred by assigning RAWA the burden of proving that the agreement foreclosed competition; and (2) whether the district court erred by preventing RAWA from presenting its preferred definition of the relevant market to the jury.

Burden of proof. The court first determined that RAWA correctly bore the burden of proof because it was the party claiming that the exclusive-territory agreement violated California competition law. Although neither the California State Legislature nor the California Supreme Court has addressed the question of which party bears the burden of establishing whether an exclusive-territory provision forecloses competition, the court predicted that the Supreme Court would hold that the party claiming an exclusive-territory provision is void under Section 16600 of the California Business and Professions Code bore the burden of showing that Section 16600 prohibited that provision. The court reasoned that there was a general rule under California law that the burden of proof falls on the party seeking relief from the court, and the Supreme Court previously recognized that a party bringing a claim under Section 16600 must allege facts sufficient to constitute a cause of action for unfair competition under Section 16600. In addition, there were no facts that would suggest the burden of proof should shift to Schwartz. The court therefore affirmed the lower court’s allocation of the burden of proof on RAWA.

Market definition. RAWA also argued that the lower court erred by preventing RAWA from presenting its preferred market definition to the jury. Originally, RAWA defined the market as the sale of Rent-A-Wreck brand franchises, for renting and leasing used motor vehicles that are less than eight years old. The appellate court affirmed the lower court’s decision for two reasons: (1) the district court did not prevent RAWA from defining the relevant market as one for older rental cars when it rejected RAWA’s initial definition, but RAWA thereafter chose not to define any rental car market; and (2) the district court did not err when it rejected RAWA’s attempts to define the market as one for Rent-A-Wreck franchises, as the appellate court’s previous opinion instructed the lower court to submit to the jury a question of whether the exclusive territory provision forecloses competition in a substantial share of the market for rental cars, not Rent-A-Wreck franchises.

The case number is 13-2189.

Attorneys: Daniel Janssen (Quarles & Brady LLP) for Appellants. Roger Charles Simmons (Gordon & Simmons, LLC) for Appellees.

Companies: Rent-A-Wreck Inc.; Rent-A-Wreck of America, Inc.

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