Opinion ID: 201936
Heading Depth: 2
Heading Rank: 3

Heading: The Contracts Clause Claim.

Text: The Alliance also attacks the recoupment bar on a second front. It argues that Maine, in derogation of the Contracts -23- Clause, has trespassed on manufacturers' franchise agreements by eliminating components of the manufacturers' pricing discretion. The Contracts Clause declares that: No State shall . . . pass any . . . Law impairing the Obligation of Contracts . . . . U.S. Const. art. I, § 10, cl. 1. Though seemingly absolute in its prohibition, the Contracts Clause must be accommodated to the inherent police power of the State 'to safeguard the vital interest of its people.' Energy Reserves Group, Inc. v. Kan. Power & Light Co., 459 U.S. 400, 410 (1983) (quoting Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 434 (1934)). To determine whether the Contracts Clause is implicated, a reviewing court first must ask whether the state law has, in fact, operated as a substantial impairment of a contractual relationship. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 (1978). This inquiry elicits an affirmative answer only if a contractual relationship exists, that relationship is impaired by a change in the law, and the resultant impairment is substantial. Houlton Citizens' Coal., 175 F.3d at 190. The first two of these three factors are often easily satisfied, and this case falls into that pattern: automobile manufacturers typically have franchise agreements with dealers that reserve the right to set wholesale motor vehicle prices unilaterally, see supra note 1, and the recoupment bar now restricts their ability to exercise that -24- right. The question of substantial impairment is, therefore, dispositive. The parties' reasonable expectations are central to the issue of substantiality. In that regard, it is especially important whether or not the parties have been operating in a regulated industry. Energy Reserves, 459 U.S. at 413; Houlton Citizens' Coal., 175 F.3d at 190. Maine has heavily regulated the manufacturer-dealer franchise relationship, including warranty reimbursement rates, since 1975. See 1975 Me. Laws 1732-39 (codified as amended at Me. Rev. Stat. Ann. tit. 10, §§ 1171 to 1190-A); see also Alliance I, 304 F. Supp. 2d at 115. The recoupment bar — a necessary means to effectuate the State's warranty reimbursement policy — was a foreseeable addition to that regulatory regime. It was, therefore, permissible under the Contracts Clause. After all, if the Contracts Clause allows a State to dictate the price of warranty repairs in the first instance, it perforce allows the State to require that the manufacturer, rather than the dealer or the consumer, absorb the true cost of those repairs. Cf. Exxon Corp. v. Eagerton, 462 U.S. 176, 194 (1983) (holding that a State that regulates the price of a commodity may require the sellers to absorb a tax increase themselves rather than pass it through to their consumers). It follows inexorably, as night follows day, that the recoupment bar did not substantially impair franchise agreements -25- entered after 1975. Those franchise agreements were executed with the knowledge and expectation of pervasive state regulation. As to franchise agreements entered before 1975 — the record reveals no fewer than six that fit into that taxonomy — our inquiry continues. As to those agreements, we ask whether the impairment, albeit substantial, is reasonable and necessary to fulfill an important public purpose. McGrath v. R.I. Ret. Bd., 88 F.3d 12, 16 (1st Cir. 1996). The public purpose requirement ensures that the State is exercising its police power and not catering to special interests. See Energy Reserves, 459 U.S. at 412. As we have said, Maine's legislature passed the recoupment bar as a consumer- and dealer-protection measure to plug a loophole in, and better effectuate the goals of, the state's retail-rate reimbursement law. See supra Part II(B)(1). That rationale brings the recoupment bar squarely within the category of remedies to generalized social or economic problems that constitute legitimate subjects for legislation, notwithstanding the imperatives of the Contracts Clause. See Energy Reserves, 459 U.S. at 411-12; see also Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 828 (1st Cir. 1992) (describing consumer protection as a subject[] over which the states have traditionally exercised their police powers). -26- The Alliance tries to parry this thrust by characterizing the recoupment bar as a direct adjustment of manufacturers' and dealers' contractual rights. That characterization elevates hope over reason. In each of the cases on which the Alliance relies, the reviewing court found no credible evidence of a legitimate public purpose. See Equip. Mfrs. Inst. v. Janklow, 300 F.3d 842, 860-61 (8th Cir. 2002) (noting that both the State and the [defendant] concede that the Act's purpose is to level the playing field between manufacturers and dealers and that there was no evidence of any significant public purpose); McDonald's Corp. v. Nelson, 822 F. Supp. 597, 608-09 (S.D. Iowa 1993) (pointing out that the articulated overall purpose of the Act is specifically to adjust the balance of power between the contracting parties and that the Act implicated no broad societal interest). As we already have explained, Maine's recoupment bar aspires to protect consumers as well as dealers. Its purpose is much broader than a simple reallocation of existing contractual rights and, thus, that purpose qualifies as significant, legitimate, and public. See Energy Reserves, 459 U.S. at 411-12 & n.13. When, as in this instance, the State is not a party to a contract, courts ordinarily defer, within broad limits, to the legislature's judgment about the reasonableness and necessity of a particular measure. See id. at 412-13. Given the recoupment bar's evident purpose and the legislature's careful tailoring of it to -27- fit that purpose, we are constrained to follow that praxis here. We hold, therefore, that the recoupment bar passes muster under the Contracts Clause as to both pre-1975 and post-1975 franchise agreements.