Sales finance companies that buy paper from motor vehicle dealers often place conditions, which are outlined in sales and service agreements, on what kind of paper they will buy. One common condition is a limitation on the type of ancillary products the dealer sells and finances in connection with the retail installment sale. What products a dealer sells, and how the dealer discloses the product on the retail installment sale contract, can have serious implications for a finance company that buys the paper and, therefore, becomes the obligor or the holder.
Finance companies that buy paper can be liable for certain violations that dealers make in connection with the sale of the product, both under federal and some state laws. For that reason, finance companies establish criteria a dealer must satisfy with respect to a specific product before the finance company will buy that paper.
Finance companies have to be careful about what conditions they place concerning buying paper, though, especially in cases where an entity related to the finance company sells a product that competes with other products that dealers sell. Depending on the circumstances, a finance company can inadvertently subject itself to claims of unfair competition, tying, or reciprocal/exclusive dealing from the dealer or other finance companies.
Take, for instance, the case of Midwest Agency Services, Inc. v. JPMorgan Chase Bank, 2010 U.S. Dist. LEXIS 22457 (E.D. Ky. March 11, 2010). Chase Auto Finance Corporation (CAF), a subsidiary of JPMorgan Chase Bank, N.A. CAF was a sales finance company that purchased retail installment sale contracts from motor vehicle dealers. Chase Insurance Agency (CIA), a subsidiary of another Chase Bank entity, sold a GAP insurance product that dealers could sell in connection with retail installment sales of motor vehicles. One of CIA’s product competitors was Midwest Agency Services, which sold a similar GAP insurance product. Dealers could choose which product they wanted to sell (CIA, Midwest, or another product) or could choose not to sell a GAP insurance product at all.
CAF sent dealers a letter notifying them that its policies had changed and that it would no longer buy contracts that included GAP insurance products unless the product was on its Approved Products List. Midwest’s product was not on the list. CIA’s product was on the list, along with other vendors’ products.
Midwest sued CAF and other related Chase entities, claiming that they violated the Sherman Act and the Bank Holding Company Act (BCHA). They argued that CAF violated the Sherman Act by engaging in: (1) unlawful tying; (2) unlawful reciprocal dealing; and (3) unlawful exclusive dealing. They argued that Chase Bank violated the BHCA by engaging in unlawful tying. CAF moved to dismiss Midwest’s claims. The U.S. District Court for the Eastern District of Kentucky granted the motion.
The court held that to have standing to sue under the Sherman Act, a plaintiff must allege an antitrust injury. Midwest alleged it incurred damages as a result of CAF’s unwillingness to buy contracts that included Midwest’s product. The court rejected Midwest’s argument, explaining that injury to a competitor like Midwest, rather than injury to the market as a whole, does not create an antitrust violation. The purpose of the antitrust law is to protect competition, not competitors. The court also held that CAF had not engaged in an unlawful tying arrangement. Tying occurs where a party will only sell a product on the condition that the buyer also purchases another product from that party. The court noted that CAF, as a purchaser of retail installment contracts, was not selling a product. Accordingly, CAF did not have the “selling power” required to satisfy the concept of tying.
The court also rejected Midwest’s reciprocal dealing and exclusive dealing claims. A reciprocal dealing arrangement occurs when one party agrees to buy a second party’s goods, provided that the second party purchases a particular product from the first party. Reciprocal dealing arrangements are only unlawful when one party uses its market power to “coerce” the second party to buy the first party’s product. CAF did not engage in reciprocal dealing because it did not condition its purchase of the contracts on the sale of the CIA product. CAF agreed to purchase contracts that either did not have any product attached to it or had a product from the Approved Products List, which included CIA’s products as well as other vendors’ products.
An exclusive dealing arrangement occurs when one buyer agrees to purchase a product only from one supplier for a specific amount of time. CAF did not engage in an exclusive dealing arrangement because it was willing to buy contracts that included products from any of the vendors on the Approved Products List. The court also rejected Midwest’s argument that Chase Bank violated the BHCA by engaging in tying. The relevant tying provisions of the BHCA, the court explained, apply to banks extending credit. Neither Chase Bank nor CAF was, however, extending any credit. The dealer was extending the credit, and then CAF was purchasing the contracts post-consummation. Accordingly, the tying provisions of the BHCA did not apply to Chase Bank or CAF under these circumstances.
In this case, the court undertook a careful analysis of what these laws actually involve and properly held that neither Chase Bank nor CAF had violated the law when it refused to buy paper that contained charges for unapproved products. The laws that Midwest tried to sue under did not apply to Chase Bank or CAF. But there’s a bigger lesson here.
A sales finance company is always free to set its own criteria for buying paper. In fact, every sales finance company should have a program in place to conduct a periodic due diligence of what it is buying and whether the ancillary products attached to the paper satisfy state and federal law standards. Finance companies should be aware that they cannot set arbitrary standards and that they are not immune from claims of unfair competition, tying, or reciprocal and exclusive dealing. Instead, the finance companies must ensure that their approval and purchase standards do not violate these types of laws.
Maya P. Hill is an associate in the Maryland office of Hudson Cook. LLP. Basis Points readers can reach Maya at 410-782-2356 or by email at mhill@hudco.com.