Date: 03-09-2010

Case Style: Volkswagen of America, Inc. v. Demerst B. Smit

Case Number: 082305

Judge: Lawrence L. Koontz, Jr.

Court: Supreme Court of Virginia

Plaintiff's Attorney:

Defendant's Attorney:

Description: In a prior appeal, this Court reversed a decision of the Commissioner of the Virginia Department of Motor Vehicles (“DMV”) finding that, during the period of October 1997 through March 1998, Volkswagen of America, Inc. (“Volkswagen”) violated Code § 46.2-1569(7) when it failed to supply certain high-demand models of vehicles imported by Volkswagen for distribution to its franchise dealers in the United States to Miller Auto Sales, Inc. (“Miller Auto”), a Volkswagen franchise dealer in Winchester. Volkswagen of America, Inc. v. Smit, 266 Va. 444, 453-54, 587 S.E.2d 526, 531-32 (2003) (hereinafter, “Volkswagen II”). That appeal arose from a judgment of the Court of Appeals of Virginia, which had affirmed an order of the Circuit Court of the City of Richmond upholding the Commissioner’s decision. Volkswagen of America, Inc. v. Quillian, 39 Va. App. 35, 69, 569 S.E.2d 744, 761 (2002) (hereinafter, “Volkswagen I”).

In reversing the judgment of the Court of Appeals, we held that the Commissioner had erroneously interpreted Code § 46.2-1569(7) and consequently improperly focused on the business judgment of Volkswagen, rather than limiting the inquiry to the relevant factors prescribed by the statute. Volkswagen II, 266 Va. at 453-54, 587 S.E.2d at 531-32. We also vacated that portion of the Court of Appeals’ decision in Volkswagen I that addressed Volkswagen’s challenge to Code § 46.2-1569(7) alleging both that the statute violates principles of the dormant Commerce Clause of the United States Constitution and is unconstitutionally vague in violation of the Due Process Clauses of the United States and Virginia Constitutions. Id. at 454, 587 S.E.2d at 532 (citing 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); see Klarfeld v. Salsbury, 233 Va. 277, 286, 355 S.E.2d 319, 324 (1987).

Following the remand to the DMV and further proceedings before the Commissioner, Volkswagen was again found to have violated Code § 46.2-1569(7). This decision was appealed again through the circuit court and the Court of Appeals, with Volkswagen renewing its constitutional challenges to the statute, as well as contesting the Commissioner’s decision on the merits. Upon appeal from the decision of the circuit court, the Court of Appeals, Volkswagen of America, Inc. v. Smit, 52 Va. App. 751, 799, 667 S.E.2d 817, 841 (2008) (hereinafter, “Volkswagen III”), affirmed the Commissioner’s decision. In doing so, the Court of Appeals affirmed the circuit court’s holding that Code § 46.2-1569(7) was neither void for vagueness nor violative of dormant Commerce Clause principles. Id. at 795, 799, 667 S.E.2d at 839, 841.

Volkswagen appealed the judgment of the Court of Appeals by petition to this Court, challenging both the decision upholding the Commissioner’s finding that its actions violated Code § 46.2-1569(7) and the determination that the statute was not constitutionally infirm. By an order dated April 14, 2009, we awarded Volkswagen this appeal limited to the dormant Commerce Clause and due process issues.

BACKGROUND

Because we have previously given extensive recitation to the factual and procedural background of this case in Volkswagen II, 266 Va. at 447-51, 587 S.E.2d at 528-30, and the issues in this appeal address only the Commerce Clause and due process challenges to the statute at issue, we will limit our recitation of the facts to those necessary to resolve the appeal upon the issues presented.

As relevant to the time at which its dispute with Miller Auto arose, Volkswagen imported vehicles from Volkswagen AG, its German parent corporation, and distributed them to approximately 600 franchise dealers in the United States, including its dealers in Virginia. For vehicle models for which demand exceeded supply, Volkswagen used a national allocation procedure to distribute vehicles to its dealers based on a mathematical algorithm to determine a “Dealer Allocation Percentage” designed to deliver vehicles where they were most likely to be sold and where they were most needed because of low inventory. Volkswagen’s “Area Executives” were given the authority to adjust the algorithm’s results for each dealer within the executive’s geographic region based on various factors, including a dealer’s customer satisfaction survey scores, local market conditions, and minimum stocking requirements of the dealer’s franchise agreement.

Miller Auto was the lowest volume dealer among Volkswagen’s dealers in its dealer sales district, which included seven Volkswagen dealers in northern Virginia as well as four dealers in Maryland and one in Washington, D.C. During 1997, for example, Miller Auto sold 47 new Volkswagens of all models, while during the same period the two largest Volkswagen dealers in Virginia each sold over 1000 new Volkswagens of all models. Miller Auto, which had franchise agreements for several other automobile lines, concedes that sales of all models supplied by Volkswagen accounted for only approximately ten percent of its sales volume.

In the period immediately preceding the dispute between Volkswagen and Miller Auto, the supply of all the models in Volkswagen’s line of vehicles available for distribution to dealers generally exceeded demand and, thus, it was not necessary for Volkswagen to use the dealer allocation percentage to determine how many vehicles a particular dealer was entitled to receive. However, in the fall of 1997, Volkswagen introduced a new 1998 model of the Passat and in early 1998 introduced the New Beetle model. Because demand for these vehicles initially far exceeded supply, Volkswagen used the national allocation procedure to determine how many of these vehicles its dealers were entitled to receive.

It is not disputed that during the period of October 1997 to March 1998 Volkswagen imported 18,454 Passats, and during the period of February to March 1998 Volkswagen imported 5,637 New Beetles. Miller Auto requested delivery from Volkswagen of one or more 1998 Passats and New Beetles during those respective timeframes, but received no shipments of either vehicle until after March 1998.1 While it is also not disputed by Miller Auto that the demand for Passats and New Beetles during the relevant timeframes exceeded the available supply, there is no conclusive evidence in the record as to actual level of national dealership demand, either as to the number of dealers requesting delivery of the two vehicle models or of the total number of vehicles requested by all dealers.

On February 9, 1998, John C. Miller, Vice President of Miller Auto, advised Volkswagen by letter that Miller Auto was dissatisfied with the manner in which new vehicles were being allocated to it. Miller expressly stated his belief that Volkswagen’s allocation procedure violated Code § 46.2-1569(7). Miller sent a copy of this letter to the DMV.

As relevant to Miller’s compliant, Code § 46.2-1569(7) provides that: Notwithstanding the terms of any franchise agreement, it shall be unlawful for any [motor vehicle] 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. (Emphasis added.)2

After mediation of the dispute between Miller Auto and Volkswagen pursuant to Code § 46.2-1572.2 proved fruitless, the Commissioner instituted formal proceedings against Volkswagen. As indicated above, those proceedings resulted in a determination by the Commissioner that Volkswagen had violated Code § 46.2-1569(7), but that this Court overturned that determination in Volkswagen II.

Upon remand, the record was not substantially enlarged as to any relevant factor. The Commissioner again determined, based upon his interpretation of what level of distribution of the two vehicle models at issue would be “equitably related to the total new vehicle production or importation currently being achieved nationally,” that Volkswagen had violated Code § 46.2-1569(7) with respect to its dealings with Miller Auto. Specifically, the Commissioner found that regardless of the methodology used to allocate vehicles among dealers, the “allocation[] of zero vehicles [to a dealer] of a certain make, series, or model for one or more months would not be equitable.” The Commissioner expressly limited his finding to the facts of this case where the requested vehicle was a new model and “where no meaningful history of dealer or national sales exist for the new vehicle.” However, the Commissioner concluded that there was no specific statutory sanction provided for such violation and, that in any case, given the length of time since the violation, and because Volkswagen was no longer using the relevant allocation procedures and “there was no evidence presented at the hearing to indicate that Volkswagen was currently in violation of any of the provisions contained within Title 46.2,” the Commissioner determined that no sanction against Volkswagen was warranted.

Both the circuit court and subsequently the Court of Appeals in Volkswagen III gave a thorough analysis of the Commerce Clause and due process challenges to the application of Code § 46.2-1569(7) raised by Volkswagen in appealing the Commissioner’s determination. Because this Court will review these questions of law de novo, it is not necessary to recount here the analysis that each court used to determine that the statute was not unconstitutional. See Appalachian Voices v. State Corp. Comm’n, 277 Va. 509, 516, 675 S.E.2d 458, 461 (2009)(constitutional arguments are questions of law that this Court reviews de novo).

DISCUSSION

Our review of Volkswagen’s challenge to the application of Code § 46.2-1569(7) in this case begins with the well established principle that duly enacted laws are presumed to be constitutional. Tanner v. City of Virginia Beach, 277 Va. 432, 438, 674 S.E.2d 848, 852 (2009). “We are required to resolve any reasonable doubt concerning the constitutionality of a law in favor of its validity. Thus, if a statute or ordinance can be construed reasonably in a manner that will render its terms definite and sufficient, such an interpretation is required.” Id. at 438-39, 674 S.E.2d at 852 (citations omitted). “Nevertheless, construing statutes to cure constitutional deficiencies is allowed only when such construction is reasonable. A statute cannot be rewritten to bring it within constitutional requirements.” Jaynes v. Commonwealth, 276 Va. 443, 464, 666 S.E.2d 303, 314 (2008) (citation omitted). Because our jurisprudence favors upholding the constitutionality of properly enacted laws, we have recognized that it is possible for a statute or ordinance to be facially valid, and yet unconstitutional as applied in a particular case.

See, e.g., Cochran v. Fairfax County Bd. of Zoning Appeals, 267 Va. 756, 764, 594 S.E.2d 571, 576 (2004); see also Boddie v. Connecticut, 401 U.S. 371, 379 (1971)(“a statute . . . may be held constitutionally invalid as applied . . . although its general validity as a measure enacted in the legitimate exercise of state power is beyond question”). “The 'usual judicial practice' is to address an as-applied challenge before a facial challenge because it generally will be more ‘efficien[t],’ because this sequencing decreases the odds that facial attacks will be addressed ‘unnecessarily’ and because this approach avoids encouraging ‘gratuitous wholesale attacks upon state and federal laws.’ ” Connection Distrib. Co. v. Holder, 557 F.3d 321, 327-28 (6th Cir. 2009) (quoting Board of Trustees of the State Univ. of N.Y. v. Fox, 492 U.S. 469, 484-85 (1989); see also Mahan v. National Conservative Political Action Committee, 227 Va. 330, 340, 315 S.E.2d 829, 835 (1984) (upholding declaratory judgment that facially valid statute was nonetheless unconstitutional as applied).

“ ‘[V]agueness challenges to statutes not threatening First Amendment interests are examined in light of the facts of the case at hand; the statute is judged on an as-applied basis.’ ” Motley v. Virginia State Bar, 260 Va. 243, 247, 536 S.E.2d 97, 99 (2000) (quoting Maynard v. Cartwright, 486 U.S. 356, 361 (1988)). As we observed in Volkswagen II, a court should not declare a statute to be wholly unconstitutional “unless such a determination is absolutely necessary to decide the merits of the case.” 266 Va. at 454, 587 S.E.2d at 532. Thus, Volkswagen’s due process challenge does not require us to determine whether Code § 46.2-1569(7) is facially invalid if we determine that the statute is constitutionally infirm as applied on the facts of this case. Accordingly, we will first consider Volkswagen’s assertion that Code § 46.2-1569(7) as applied by the Commissioner in this case violated due process because the statute is impermissibly vague in that the statute failed to provide adequate notice to Volkswagen as to what conduct it prohibits.

In Tanner, we explained that “[t]he constitutional prohibition against vagueness derives from the requirement of fair notice embodied in the Due Process Clause[s]” of the United States and Virginia Constitutions. 277 Va. at 439, 674 S.E.2d at 852. Due process requires that a statute be sufficiently precise and definite to give fair warning to those who are subject to it what the statute prohibits and what is expected of them by the state. Id. “The constitutional prohibition against vagueness also protects citizens from the arbitrary and discriminatory enforcement of laws.” Id. Thus, there are two, independent ways in which a statute can be impermissibly vague. “First, if it fails to provide people of ordinary intelligence a reasonable opportunity to understand what conduct it prohibits. Second, if it authorizes or even encourages arbitrary and discriminatory enforcement.” Hill v. Colorado, 530 U.S. 703, 732 (2000); see Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 498 (1982); Greenville Women's Clinic v. S.C. Dep't of Health, 317 F.3d 357, 366 (4th Cir. 2002). A vague statute violates the “important values” of fair notice to citizens and the prevention of arbitrary enforcement. Hoffman, 455 U.S. at 498.

“[A]n ordinance that lacks meticulous specificity nevertheless may survive a vagueness challenge if the ordinance as a whole makes clear what is prohibited.” Tanner, 277 Va. at 439, 674 S.E.2d at 852. “Because legislative bodies are ‘[c]ondemned to the use of words,’ courts cannot require ‘mathematical certainty’ in the drafting of legislation.” Id. (quoting Grayned v. City of Rockford, 408 U.S. 104, 110 (1972)). Accordingly, a statute may survive a vagueness challenge if the language used by the legislature makes clear what the statute prohibits and what is required in order to comply with the law. Id.

Volkswagen contends that the language of Code § 46.2-1569(7) as applied by the Commissioner in this case is impermissibly vague because neither the statute nor any formal or informal administrative action provided Volkswagen with fair notice that it was prohibited from failing to deliver at least one vehicle of any model requested by a franchise dealer in any given month based solely on a mathematical determination that the number of vehicles it imported during that month equaled or exceeded the total number of its dealers eligible to make such a request. In the absence of any clear guidance within the statute or through regulation or guidance provided by the Commissioner, Volkswagen contends that the determination of compliance with the statute in any given case would depend solely on an arbitrary determination by the Commissioner of what is “equitable” after the fact.

Volkswagen notes that Code § 46.2-203 empowers the Commissioner to adopt “reasonable administrative regulations necessary to carry out the laws administered by the [DMV],” but that no regulations have been promulgated by the Commissioner to provide guidance to manufacturers and distributors as to the proper determination of the equitable relationship between total production and importation and the right of an individual dealer to request delivery of a specific make and model of a vehicle. Nor has the Commissioner provided any “guidance documents” on the application of the statute as permitted under Code § 2.2-4001 et seq. On the specific facts of this case, Volkswagen contends that nothing in Code § 46.2-1569(7), as interpreted by the Commissioner, provides a manufacturer or distributor with notice that it was prohibited from failing to supply every dealer who requested delivery of a particular newly introduced model of a vehicle with at least one vehicle in any month that the national production or importation of that model equaled or exceeded the total number of dealers requesting delivery of one or more vehicles, without regard to any other factor. Noting that the Commissioner expressly limited this finding to newly introduced models, declining to express any opinion on how the statute would apply “where there is reliable data regarding sales histories for particular vehicles,” Volkswagen contends that the Commissioner created an arbitrary standard for the “equitable” delivery of new vehicle models that could not have been gleaned from the language of the statute and, thus, Volkswagen was without notice that its failure to supply Miller Auto with a least one of each of the requested vehicles in any given month would render it in violation of Code § 46.2-1569(7). There is nothing inherently vague in a statutory requirement that an act be performed “equitably.” Indeed, such a standard has been enacted by the General Assembly to address a variety of circumstances in order to effectively accomplish the purpose of a particular statute.3

Board to equitably distribute forfeited property to eligible participating agencies); Code § 20-49.8(A) (permitting a court to equitably apportion unpaid expenses of a paternity proceeding); Code § 23-30.42(j) (authorizing the Virginia College Building Authority to equitably apportion expenses for its operation among participating institutions); Code § 32.1-299(A)(2) (requiring distribution of cadavers donated for scientific study equitably among health education institutions).

And, as the Commissioner correctly asserts on brief in this appeal, we have recognized that “a statute is not fatally indefinite because questions may arise as to its applicability, or opinions may differ with respect to what falls within its terms, or because it is difficult to enforce.” Fallon Florist, Inc. v. City of Roanoke, 190 Va. 564, 590, 58 S.E.2d 316, 329 (1950). Nonetheless, we agree with Volkswagen that, as applied by the Commissioner in this case, the requirement of Code § 46.2-1569(7) that Miller Auto was to receive delivery of 1998 Passats and New Beetles in a volume “equitably related to the total new vehicle production or importation currently being achieved nationally” is impermissibly vague. Neither the statute nor any administrative regulation or guidance promulgated by the Commissioner provided Volkswagen with notice that if the number of vehicles available in a given month was equal to or greater than the number of dealers making requests, it was prohibited from failing to deliver to Miller Auto at least one of each model of vehicle requested without regard to any other factors that might impact the determination of the number of vehicles the dealer would otherwise be entitled to receive.

A statute, ordinance, or regulation which delegates discretionary authority to an administrative officer to determine its application does not satisfy due process if it lacks standards which are sufficiently clear to guide the officer, and inform those subject to his jurisdiction, of how that discretion is to be exercised. See, e.g., Chapel v. Commonwealth, 197 Va. 406, 415, 89 S.E.2d 337, 343 (1955); cf. City of Waynesboro v. Keiser, 213 Va. 229, 233-34, 191 S.E.2d 196, 199 (1972) (holding that a statute permitting a court to adjust property tax assessments “in its discretion” was “vague and overbroad [because it] provides no guidelines or standards for decision”). In Chapel, we held that the Dry Cleaners Act impermissibly delegated discretionary authority to the State Dry Cleaners Board “without fixing any standard or test to guide and control the exercise of such discretion.” 197 Va. at 415, 89 S.E.2d at 343. As we said in Chapel:

“It is a fundamental principle of our system of government that the rights of men are to be determined by the law itself, and not by the let or leave of administrative officers or bureaus. This principle ought not to be surrendered for convenience or in effect nullified for the sake of expediency. It is the prerogative and function of the legislative branch of the government, whether State or municipal, to determine and declare what the law shall be, and the legislative branch of the government may not divest itself of this function or delegate it to executive or administrative officers.” 197 Va. at 410, 89 S.E.2d at 340 (quoting Thompson v. Smith, 155 Va. 367, 379, 154 S.E. 579, 584 (1930)).

We have recognized that the legislature may delegate discretion to an administrative officer to determine the specifics of how a statute is to be enforced, but “ ‘[t]he legislature must declare the policy of the law and fix the legal principles which are to control in given cases.’ ” Thompson, 155 Va. at 381, 154 S.E. at 584 (quoting Mutual Film Corp. v. Ohio Industrial Commission, 236 U.S. 230, 239 (1915)). Of course, the legislature is not required to delve into the minutiae of the standards to be applied in every case, but may delegate to the administrative body rulemaking authority to set specific procedures for applying the general standards established by the laws the body is charged with enforcing “so long as the rules it adopts are not inconsistent with the authority of the statutes that govern it or with principles of due process.” Judicial Inquiry & Review Commission v. Elliott, 272 Va. 97, 115, 630 S.E.2d 485, 494 (2006); see also Sargent Elec. Co. v. Woodall, 228 Va. 419, 424, 323 S.E.2d 102, 105 (1984). In short, the requirement of fair notice contained in due process is not satisfied if the public cannot determine what the law prohibits or the standard to which they must conform from either the language of the statute or a properly promulgated regulation or other official guidance provided prior to the statute being enforced, but rather only after the fact from the result of an arbitrary exercise of discretion by the administrative official charged with enforcing the statute.

In this case, the Commissioner stated that he used “basic mathematics to analyze whether an allocation of zero vehicles would satisfy the statutory requirement” to “equitably” allocate newly introduced models of vehicles to determine whether a manufacturer or distributor is in compliance with the provisions of Code § 46.2-1569(7). As an example, the Commissioner noted “that in December of 1997, for instance, sufficient numbers of Passats were imported into the U.S. to allow each U.S. dealer to receive allocations or shipments of approximately 8 Passats.” The Commissioner concluded that the this “[s]imple division” supported his conclusion that Code § 46.2-1569(7) prohibited Volkswagen from failing to ship at least one Passat to Miller Auto from that month’s importations.

However, the issue before this Court is not whether “simple mathematics” demonstrates that Volkswagen could have shipped at least one of each model to Miller Auto, but rather whether Code § 46.2-1569(7) provided Volkswagen with adequate notice that the statute prohibited Volkswagen from failing to ship at least one of each model to Miller Auto if it were otherwise capable of doing so. When viewed in this light, the Commissioner’s use of “basic mathematics” is clearly not a standard that is prescribed by the language of the statute. Nor is it a standard clearly enunciated in a regulation or other form of guidance promulgated by the Commissioner. Accordingly, under the facts of this case, we conclude that during the period of October 1997 through March 1998 Volkswagen could not reasonably have understood from the language of the statute that its failure to ship any newly introduced Passats and New Beetles to Miller Auto would violate Code § 46.2-1569(7), but learned this only after the fact from the result of an arbitrary exercise of discretion by the administrative official charged with enforcing the statute.

In the absence of fair notice from the language of the statute or that the Commissioner would interpret the statute as prohibiting it from not shipping at least one of each requested vehicle model to Miller Auto in any month that it was capable of doing so, Volkswagen was denied its right to due process. Thus, we hold that Code § 46.2-1569(7) is impermissibly vague as applied in this case, and the Commissioner’s finding that Volkswagen was in violation of that statute must be set aside.

As in Volkswagen II, we conclude that because the merits of Volkswagen’s appeal can be decided on the narrower basis of an “as applied” challenge to the statute under due process, it is not necessary to consider Volkswagen’s facial challenge to the statute based on either vagueness or dormant Commerce Clause principles. 266 Va. at 454, 587 S.E.2d at 532. Therefore, we again 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. See id.

* * *

See: http://www.courts.state.va.us/opinions/opnscvwp/1082305.pdf

Outcome: For these reasons, we will vacate that portion of the Court of Appeals’ judgment addressing the Commerce Clause issue, reverse the judgment of the Court of Appeals affirming the Commissioner’s finding that Volkswagen violated Code § 46.2-1569(7), and enter final judgment here for Volkswagen.

Reversed in part, vacated in part, and final judgment.

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