Title: Volkswagen of America v. Smit
Citation: N/A
Docket Number: 022402
State: Virginia
Issuer: Virginia Supreme Court
Date: October 31, 2003

PRESENT: Hassell, C.J., Keenan, Koontz, Kinser, Lemons, and 
Agee, JJ., and Russell, R.J. 
 
VOLKSWAGEN OF AMERICA, INC. 
 
v.  Record No. 022402 
OPINION BY JUSTICE BARBARA MILANO KEENAN 
 
 
 
October 31, 2003 
 
DEMERST B. SMIT, COMMISSIONER 
OF THE VIRGINIA DEPARTMENT OF  
MOTOR VEHICLES, ET AL. 
 
 
FROM THE COURT OF APPEALS OF VIRGINIA 
 
 
In this appeal, we consider whether the Court of Appeals 
erred in affirming a circuit court judgment approving a decision 
of the Commissioner of the Department of Motor Vehicles (the 
Commissioner) that an automobile distributor violated Code 
§ 46.2-1569(7).  We primarily consider whether Code § 46.2-
1569(7) requires the Commissioner to find, before holding that a 
distributor has violated the statute, that the distributor 
failed to ship to a Virginia dealer a quantity of new vehicles 
that meets the statute's requirements. 
 
We will state the facts relevant to this appeal.  
Volkswagen of America, Inc. (Volkswagen), a New Jersey 
corporation, is the distributor of Volkswagen motor vehicles in 
the United States and Canada and is a subsidiary of the German 
automobile manufacturer, Volkswagen AG.  Volkswagen imports a 
fixed supply of vehicles from its corporate parent and 
distributes these vehicles to about 600 dealers nationwide, 
including 17 dealers in the Commonwealth. 
 
Miller Auto Sales, Inc., d/b/a Miller Volkswagen (Miller), 
is a retail dealer of Volkswagen motor vehicles in Winchester, 
Virginia.  Miller is the smallest dealer by volume of Volkswagen 
sales in its assigned sales district. 
 
In late 1997, Volkswagen adopted a national program for 
allocating and distributing to its dealers vehicle models often 
in short supply, such as the Beetle, the Passat, and the Jetta.  
This allocation program was designed to take shipments of 
vehicles that Volkswagen imported from its corporate parent and 
to divide those vehicles among Volkswagen's six national sales 
regions in proportion to each region's share of Volkswagen's 
national "planning volume," which reflected anticipated annual 
unit sales. 
 
Each region's allotment of vehicles was subdivided further 
among the region's sales districts, with each district receiving 
a number of vehicles in proportion to its share of the region's 
annual planning volume.  At the district level, an "area 
executive" was responsible for allocating vehicles to individual 
dealers based on Volkswagen's national allocation methodology. 
 
Although Volkswagen's vehicle allocation methodology 
underwent several changes through October 1998, the core of that 
methodology consistently had been a "mathematical algorithm" 
 
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contained in a computer-generated spreadsheet that Volkswagen 
distributed electronically to its area executives.  Volkswagen's 
allocation formula was based on several factors, including the 
reported inventories of all dealers within a district, 
anticipated unit sales, and actual unit sales for that year.  
Each area executive had discretion to adjust the results of the 
formula in response to local market conditions. 
 
The results computed from the mathematical algorithm were 
further modified by Volkswagen's "Create an Apostle Program" 
(CAAP).  Under CAAP, Volkswagen used an independent organization 
to conduct telephone surveys of recent purchasers of Volkswagen 
vehicles to evaluate customer satisfaction.  From these surveys, 
a customer satisfaction index was created that measured each 
individual dealer's performance in sales, service, and customer 
relations. 
 
Volkswagen then used each dealer's CAAP score to adjust the 
allocation formula's results for that particular dealer.  
Volkswagen also imposed a "minimum stocking requirement," which 
functioned as a "safety valve" authorizing the area executive to 
override the allocation formula to ensure that each dealer would 
have in its inventory at least one vehicle of every Volkswagen 
model. 
 
In February 1998, Miller sent a letter to Volkswagen, with 
a copy to the Commissioner, alleging, among other things, that 
 
3
Volkswagen's use of a customer satisfaction index in its 
allocation of vehicles violated Code § 46.2-1569(7).  That 
statute provides in relevant part: 
 
Notwithstanding the terms of any franchise 
agreement, it shall be unlawful for any manufacturer, 
factory branch, distributor, or distributor branch, or 
any field representative, officer, agent, or their 
representatives: 
. . . . 
 
7.  To fail to ship monthly to any dealer, if ordered 
by the dealer, the number of new vehicles of each 
make, series, and model needed by the dealer to 
receive a percentage of total new vehicle sales of 
each make, series, and model equitably related to the 
total new vehicle production or importation currently 
being achieved nationally by each make, series, and 
model covered under the franchise.  Upon the written 
request of any dealer holding its sales or sales and 
service franchise, the manufacturer or distributor 
shall disclose to the dealer in writing the basis upon 
which new motor vehicles are allocated, scheduled, and 
delivered to the dealers of the same line-make.  In 
the event that allocation is at issue in a request for 
a hearing, the dealer may demand the Commissioner to 
direct that the manufacturer or distributor provide to 
the dealer, within thirty days of such demand, all 
records of sales and all records of distribution of 
all motor vehicles to the same line-make dealers who 
compete with the dealer requesting the hearing. 
 
Id.
 
In the letter, Miller requested that Volkswagen disclose 
"in writing the basis upon which new motor vehicles are 
allocated, scheduled, and delivered to the dealers of the same 
line-make."  In April 1998, Miller's counsel sent the 
Commissioner another letter requesting a hearing under the 
statute.  The Commissioner referred the case to a hearing 
 
4
officer to conduct the hearing and to make recommended findings 
and rulings. 
 
Before the hearing, Volkswagen moved to dismiss the 
proceedings on the grounds that Code § 46.2-1569(7) was 
unconstitutionally vague and violated the Commerce Clause of the 
United States Constitution.  The hearing officer denied 
Volkswagen's motion.  At the hearing, much of the factual 
evidence and expert testimony received by the hearing officer 
focused on Volkswagen's vehicle allocation methodology rather 
than on the actual number of vehicles that Volkswagen had 
shipped to Miller. 
 
After the hearing, the hearing officer issued a proposed 
decision in which he found that Volkswagen's allocation 
methodology was "flawed in its design and deficient in its 
operation."  The hearing officer recommended that the 
Commissioner declare that Volkswagen's vehicle allocation 
methodology was unlawful and in violation of Code § 46.2-
1569(7). 
 
The hearing officer found that there were two mathematical 
calculations in Volkswagen's allocation formula that worked to 
Miller's detriment.  First, the hearing officer observed that 
the "algorithm truncated fractional allocations in certain 
circumstances due to peculiarities of the computerized 
spreadsheet program."  Second, he noted that "the algorithm did 
 
5
not accumulate 'fractional vehicles' so that a small volume 
dealer, like Miller . . . was effectively frozen out on a 
repeated basis from acquiring vehicles in short supply." 
 
The hearing officer further found that the results of 
Volkswagen's allocation program were monitored solely on an "ad 
hoc" basis and that "[o]nly when a dealer, such as Miller, 
complained, was there any apparent effort to verify whether or 
not allocations were fair."  The hearing officer stated that 
statistical measurements were not used in such circumstances and 
that "the notion of fairness would seem to rest strictly on 
achieving quietude from the dealerships." 
 
The hearing officer also found that the flaws in 
Volkswagen's allocation formula were exacerbated by Volkswagen's 
use of the CAAP program to modify the algorithm results, thus 
making the allocation of new vehicles "hostage to CAAP 
performance."  In explaining this conclusion, the hearing 
officer stated: 
 
[O]ne could reasonably conclude from some of the 
statistical evidence presented, both by fact witnesses 
and by expert witnesses, that the restriction of 
allocations itself created a vicious cycle of lower 
CAAP scores, as customers who were delayed in 
receiving ordered vehicles, or who could not get 
vehicles precisely as specified, might well be less 
satisfied with Miller. 
 
 
The hearing officer further found that while Volkswagen 
presented some testimony that its minimum stocking requirement 
 
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was a "hallowed and longstanding 'unwritten rule' for 
allocation," it appeared that this requirement was not applied 
in allocating vehicles to Miller until after Miller had 
requested a hearing.  The hearing officer concluded that the 
evidence failed to show that the minimum stocking requirement 
functioned as an adequate "safety valve" to remedy the 
deficiencies of Volkswagen's allocation formula. 
 
The Commissioner issued a "Hearing Decision" in which he 
adopted the findings of the hearing officer.  The Commissioner 
determined, in relevant part, that Volkswagen's vehicle 
allocation methodology was unlawful and in violation of Code 
§ 46.2-1569(7). 
 
Volkswagen appealed from the Commissioner's ruling to the 
Circuit Court of the City of Richmond.  Volkswagen argued that 
Code § 46.2-1569(7) violated the Commerce Clause of the United 
States Constitution and was unconstitutionally vague.  
Volkswagen also asserted that the Commissioner misinterpreted 
Code § 46.2-1569(7) because that statute merely "regulates the 
number of vehicles that a motor vehicle manufacturer or 
distributor must ship to each of its Virginia dealers, not the 
mechanisms that a manufacturer or distributor must use to 
calculate or determine that number." 
 
The circuit court affirmed the Commissioner's determination 
that Volkswagen's vehicle allocation methodology violated Code 
 
7
§ 46.2-1569(7), and held that the Commissioner did not exceed 
his authority in reaching this conclusion.  The court stated 
that the purpose of the statute is to "ensure that Virginia 
dealers get a fair percentage of vehicles" in comparison to 
national distributions.  The court concluded that, therefore, 
"the administrative body charged with the statute's enforcement 
would necessarily have to examine the allocation methodology to 
determine whether a Virginia dealer is getting its fair share."  
In addition, the circuit court rejected Volkswagen's 
constitutional arguments. 
 
Volkswagen appealed to the Court of Appeals, which affirmed 
the circuit court's judgment.  Volkswagen of Amer., Inc. v. 
Quillian, 39 Va. App. 35, 42, 69, 569 S.E.2d 744, 748, 761 
(2002).  After rejecting Volkswagen's constitutional arguments, 
the Court of Appeals concluded, in relevant part, that the plain 
meaning of Code § 46.2-1569(7) "reflects the intention of the 
legislature to give the [C]ommissioner the flexibility necessary 
to accurately determine whether a dealer has received its fair 
share of vehicles from a distributor."  Id. at 63, 569 S.E.2d at 
758.  The Court further held that "in determining whether a 
distributor is in compliance with Code § 46.2-1569(7), the 
[C]ommissioner may consider and base his determination on that 
distributor's vehicle allocation methodology" and that "the 
[C]ommissioner is not confined to examining only the actual 
 
8
number of vehicles allocated."  Id. at 64, 569 S.E.2d at 759.  
We awarded Volkswagen an appeal pursuant to Code § 17.1-410(B). 
 
Volkswagen argues that the Commissioner exceeded his 
authority under the plain language of Code § 46.2-1569(7).  
Volkswagen contends that the Commissioner improperly determined 
that Volkswagen violated the statute without considering whether 
Volkswagen failed to comply with the statute's requirement that 
Miller receive from its distributor new vehicles in a number 
"equitably related" to national importation figures. 
 
In response, Miller contends that Volkswagen has waived 
this argument by failing to object to the hearing officer's 
statement in a pre-hearing telephone conference that "the issue 
is this case appear[s] to be whether or not the allocation 
methodology adopted by [Volkswagen] was equitable in accord with 
the Statute."  In addressing the merits of Volkswagen's 
argument, Miller argues that the statute contemplates regulation 
of a distributor's vehicle allocation methodology because the 
only way to determine whether an equitable number of vehicles 
has been allocated to a dealer is to evaluate the method by 
which that number was determined.  Miller also asserts that the 
Commissioner's task was compounded by Volkswagen's failure to 
maintain adequate records concerning the number of vehicles it 
allocated to Miller before Miller's complaint.  We disagree with 
Miller's arguments. 
 
9
 
Initially, we find no merit in Miller's contention that 
Volkswagen's failure to object to the hearing officer's pre-
hearing characterization of the controversy results in a waiver 
of the argument that Volkswagen advances in this appeal.  The 
hearing officer's statement indicated that he would consider 
whether Volkswagen's allocation methodology complied with the 
terms of the statute.  In view of the statute's requirements, 
such a determination could not be made without considering 
national importation figures and their relationship to the 
number of new vehicles being shipped to Miller.  Thus, 
Volkswagen has not waived the argument that it advances here. 
 
We resolve the substance of Volkswagen's argument by 
examining the language of Code § 46.2-1569(7).  Under basic 
rules of statutory construction, we determine the General 
Assembly's intent from the words contained in the statute.  
Woods v. Mendez, 265 Va. 68, 74, 574 S.E.2d 263, 266 (2003); 
Vaughn, Inc. v. Beck, 262 Va. 673, 677, 554 S.E.2d 88, 90 
(2001); Cummings v. Fulghum, 261 Va. 73, 77, 540 S.E.2d 494, 496 
(2001).  When the language of a statute is plain and 
unambiguous, courts are bound by the plain meaning of that 
language.  Woods, 265 Va. at 74-75, 574 S.E.2d at 266; 
Industrial Dev. Auth. v. Board of Supervisors, 263 Va. 349, 353, 
559 S.E.2d 621, 623 (2002); Cummings, 261 Va. at 77, 540 S.E.2d 
at 496.  Thus, when a statute's language is unambiguous, courts 
 
10
cannot give that language a construction that amounts to holding 
that the General Assembly did not mean what it actually has 
stated.  Mozley v. Prestwould Bd. of Dirs., 264 Va. 549, 554, 
570 S.E.2d 817, 820 (2002); Lee County v. Town of St. Charles, 
264 Va. 344, 348, 568 S.E.2d 680, 682 (2002); Vaughn, Inc., 262 
Va. at 677, 554 S.E.2d at 90. 
 
We conclude that the language of Code § 46.2-1569(7) is 
plain and unambiguous.  This language required the Commissioner 
to consider the actual monthly shipments that Volkswagen made to 
Miller in relation to the number of new vehicles imported by 
Volkswagen on a national level in the particular vehicle 
categories covered under Miller's franchise agreement.  The 
statute further required that the Commissioner, in conducting 
this examination, determine whether Miller obtained the number 
of such vehicles needed to receive a percentage of new vehicle 
sales "equitably related" to the number of these types of 
vehicles imported by Volkswagen nationally. 
 
The Commissioner did not undertake this required analysis.  
Instead of addressing the actual number of vehicles Miller 
received from Volkswagen in relation to national importation 
numbers, the Commissioner merely examined the component parts of 
Volkswagen's vehicle allocation methodology, and adjustments 
made to that process, to determine whether they were "fair" in 
their application to small dealers such as Miller.  Thus, in 
 
11
basing his determination on Volkswagen's vehicle allocation 
methodology, the Commissioner wholly failed to consider the 
national importation numbers for the types of vehicles covered 
under Miller's franchise agreement.  This omission was followed 
by the Commissioner's failure to address whether Miller received 
the number of vehicles needed to receive a percentage of new 
vehicle sales "equitably related" to the quantity of these types 
of vehicles imported on a national level.1
 
"An erroneous interpretation of a statute by those charged 
with its enforcement cannot be permitted to override [the 
statute's] clear meaning.  Amendments of statutes can only be 
made by the legislature and not by the courts or administrative 
officers charged with their enforcement."  Hampton Roads 
Sanitation Dist. Comm'n v. City of Chesapeake, 218 Va. 696, 702, 
240 S.E.2d 819, 823 (1978); see also Hurt v. Caldwell, 222 Va. 
91, 97, 279 S.E.2d 138, 142 (1981); City of Richmond v. County 
of Henrico, 185 Va. 176, 189, 37 S.E.2d 873, 879-80 (1946). 
                     
 
1 We find no merit in Miller's contention that the 
Commissioner was limited to examining Volkswagen's vehicle 
allocation methodology because Volkswagen's records were 
inadequate to undertake an actual shipment analysis and Miller 
received an artificially high number of vehicles after filing 
its complaint.  If the information available to the Commissioner 
was inadequate to make the required statutory determination, he 
was required to obtain the necessary information, rather than 
undertake an analysis that did not comport with the terms of the 
statute. 
 
12
 
The Commissioner's erroneous statutory interpretation 
resulted in Volkswagen improperly being found in violation of 
the statute absent any analysis of the actual shipments received 
by Miller in relation to the relevant national importation 
numbers achieved by Volkswagen.  Thus, because the 
administrative agency charged with enforcement of the statute 
failed to undertake the analysis and make the predicate finding 
required by the statute, the agency's resulting determination 
must be set aside.  See Browning-Ferris Indus. of S. Atl., Inc. 
v. Residents Involved in Saving the Env't, Inc., 254 Va. 278, 
284-85, 492 S.E.2d 431, 435 (1997). 
 
We also observe that the Court of Appeals, in its analysis 
of the Commissioner's decision, incorrectly held that the 
Commissioner may base his determination whether a distributor 
violated Code § 46.2-1569(7) on the distributor's vehicle 
allocation methodology.  This holding was incorrect because it 
improperly focused on the business judgment of Volkswagen, 
rather than on the actual shipments to Miller, the relevant 
national importation figures, and whether there was an 
"equitable" relationship between those numbers as mandated by 
the statute.  Accordingly, we hold that the Court of Appeals 
erred in affirming that portion of the circuit court judgment 
 
13
upholding the Commissioner's determination that Volkswagen 
violated Code § 46.2-1569(7).2
 
Because our conclusion regarding the Commissioner's 
erroneous application of the statute decides the merits of this 
appeal, we do not reach the constitutional issues raised by 
Volkswagen.  Our decision in this regard reflects the 
established principle of constitutional law that a court will 
not rule upon the constitutionality of a statute unless such a 
determination is absolutely necessary to decide the merits of 
the case.  Klarfeld v. Salsbury, 233 Va. 277, 286, 355 S.E.2d 
319, 324 (1987); Keller v. Denny, 232 Va. 512, 516, 352 S.E.2d 
327, 329 (1987); see also Tran v. Gwinn, 262 Va. 572, 583, 554 
S.E.2d 63, 69 (2001).  The fact that the present case will be 
remanded and that the constitutional issues may arise again does 
not affect our obligation to adhere strictly to this principle.  
Klarfeld, 233 Va. at 286, 355 S.E.2d at 324.  Therefore, we will 
vacate that portion of the Court of Appeals' judgment holding 
that Code § 46.2-1569(7) does not violate the Commerce Clause of 
the United States Constitution and is not unconstitutionally 
vague. 
 
For these reasons, we will reverse in part, and vacate in 
part, the judgment of the Court of Appeals and remand the case 
                     
 
2 Based on our resolution of the merits of this appeal, we 
need not consider the various procedural issues raised by 
 
14
to the Court of Appeals for ultimate remand to the Commissioner 
for further proceedings consistent with the principles expressed 
in this opinion. 
Reversed in part, 
 
 
 
 
       vacated in part, 
 
 
 
 
 
   and remanded. 
                                                                  
Volkswagen. 
 
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