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THE STATE OF NEW HAMPSHIRE

MERRIMACK, SS. SUPERIOR COURT

Deere & Company, CNH America LLC, and AGCO Corporation

v.

The State of New Hampshire

No. 216-2013-CV-554

ORDER

The plaintiffs, Deere & Company ("Deere"), CNH America LLC ("CNH"), and AGCO Corporation ("AGCO"), brought this action against the defendant, the State of New Hampshire, challenging the constitutionality of Senate Bill 126 ("SB 126"), which adds farm, forestry, and industrial equipment, such as tractors, to the RSA 357 -C definition of motor vehicle. Before the court are the parties' cross-motions for summary judgment. The plaintiffs assert that retroactive application of SB 126 will unconstitutionally impair their existing contracts in violation of article

1, section 10 of the United States Constitution and part J, article 23 of the New Hampshire Constitution.

The defendant disagrees. The court heard argument on February 18, 2014. Because the plaintiffs have not sustained their burden of showing that SB 126 unconstitutionally impairs existing contracts and cannot be reconciled with the Federal Arbitration Act, 9 U.S.C. § I, et seq. ("FAA"), the plaintiffs' motion for summary judgment is DENIED and the defendant's motion for summary judgment is GRANTED.

In ruling on cross-motions for summary judgment, the court "consider[ s] the evidence in the light most favorable to each party in its capacity as the nonmoving party and, if no genuine issue of material fact exists, [the court] determiners] whether the moving party is entitled to judgment as a matter of law." NH Ass 'n o{Counties v. State, 158 N.H. 284, 287-88 (2009). A

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fact is material if it affects the outcome of the litigation under the applicable substantive law.

Palmer v. Nan King Rest .. Inc., 147 N.H. 681,683 (2002). In considering a party's motion for summary judgment, the evidence must be considered in the light most favorable to the nonmoving party, together with all reasonable inferences therefrom. Sintros v.Hamon, 148 N.H. 478,480 (2002). Mindful of this standard, the court sets forth the undisputed facts below.

The plaintiffs manufacture industrial, construction, forestry, agricultural, and lawn and garden equipment. The equipment includes commercial mowing products, agricultural tractors, wheel loaders, and backhoes. The plaintiffs sell their products through a number of dealerships in New Hampshire. The relationship between the plaintiffs and the dealerships are governed by dealership agreements (the "agreements"). For example, Deere has three different types of dealership agreements and eight total dealership agreements at issue here. CNH has four different types of dealership agreements and ten total dealership agreements at issue. AGCO has one type of dealership agreement and three total dealership agreements at issue.

Before SB 126, RSA chapter 347-A governed the agreements. The purpose ofRSA 347- A was to protect equipment dealers. Enacted in 1995, the statute established certain ground rules for the relationship between equipment manufacturers and dealers, including regulation in areas where manufacturer and dealer disputes commonly arise, such as warranty reimbursement, termination of franchise agreements, and transfers of dealership interests.

On June 25, 2013, Governor Hassan signed SB 126 into law. The measure inter alia amended the terms "motor vehicle" and "motor vehicle dealer" under RSA 357-C:1, I and VIlI(a) to include "farm and utility tractors, forestry equipment, industrial equipment, farm implements,

farm machinery, yard and garden equipment, attachments, accessories and repair

parts." SB 126 did not "grandfather" existing agreements. Thus, the plaintiffs' current and future

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contracts are now subject to the provisions ofRSA chapter 357-C and are no longer governed by RSA 347-A.

In response, the plaintiffs initiated the instant action in the Hillsborough County Superior Court-Northern District, seeking declaratory relief, a preliminary injunction and permanent injunctive relief. On September 19,2013, the court (Mangones, J.) granted the plaintiffs' request for preliminary injunctive relief to maintain the status quo. The court also granted the defendant's request to transfer venue to this county. In the interim, two parties-the New Hampshire Automobile Dealers Association and Frost Farm Services, Inc.-intervened.

The plaintiffs make two substantive arguments. First, the plaintiffs assert that SB 126 unconstitutionally impairs the 21 contracts at issue, contrary to part I, article 23 of the state constitution and article I, section 10 of the federal constitution. Second, the plaintiffs contend that SB 126 violates the Supremacy Clause of the federal constitution by voiding arbitration provisions in Deere's and AGCO's respective contracts.

Not surprisingly, the defendant disagrees. It asserts first that SB 126 does not unconstitutionally impair the plaintiffs' contracts. The defendant also argues that even if certain portions of RSA 357 -C violate the Supremacy Clause, such violations do not void the entire statutory scheme. The court will address the parties' arguments in turn.

The analytical framework for assessing a constitutional challenge to legislative action is well established. "Whether or not a statute is constitutional is a question of law …. “ Akins v. Sec’y of State, 154 N.H. 67, 70 (2006). "The party challenging a statute's constitutionality bears the burden of proof." Stale v. Pierce, 152 N.H. 790, 791 (2005). Accordingly, "the constitutionality of an act passed by the coordinate branch of the government is to be presumed." Opinion 0/ the Justices, 118 N.H. 582, 584 (1978) (quotation omitted). "A statute will not be construed to be

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unconstitutional where it is susceptible to a construction rendering it constitutional." City of Claremont v. Truell, 126 N.H. 30, 39 (1985).

In this case, the court need not engage in the exercise of statutory interpretation. "The effects of the legislation are obvious and acknowledged. If those effects infringe on constitutionally protected rights, [the courtJ cannot avoid [its] obligation to say so." Tuttle v. NH Med. Malpractice

Joint Underwriting Assoc., 159 N.H. 627, 640 (2010), citing Alliance of American Insurers v. Chu, 571 N.E.2d 672, 678 (N.Y. 1991).

Under part I, article 23 of the New Hampshire Constitution, "retrospective laws are highly injurious, oppressive, and unjust. No such laws, therefore, should be made, either for the decision of civil causes, or the punishment of offenses." While this section does not reference existing contracts, its "proscription duplicates the protections found in the contract clause of the United States Constitution." State v. Fournier, 158 N.H. 214,221 (2009). Thus, "article I, section 10 [of the federal constitution] and part I, article 23 [of the state constitution] … offer equivalent protections where a law impairs a contract, or where a law abrogates an earlier statute that is itself a contract. … " Tuttle, 159 N.H. at 641.

The threshold inquiry in a Contract Clause analysis is whether the law has a retroactive effect on an existing contract. The party asserting a Contract Clause violation has the burden of demonstrating retroactive application of the law. Petition of Concord Teachers,158 N.H. 529, 537 (2009). Here, the parties do not dispute that SB 126 has a retroactive effect. Thus, the court will direct its analysis at the remaining elements of the plaintiffs' claim of a Contract Clause violation.

"Contract Clause analysis in New Hampshire requires a threshold inquiry as to whether the legislation operates as a substantial impairment of a contractual relationship." Tuttle, 159

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N.H. at 641 (quotation and citation omitted). "This inquiry has three components: whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial!." Id. If the legislation substantially impairs the contract, "a balancing of the police power and the rights protected by the contract clauses must be performed, and … [the] law … may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose." Opinion of the Justices (Furlough), 135 N.H. 625, 634 (1992). 

While the parties do not dispute the existence of the plaintiffs' contracts, they do dispute whether the contracts are impaired by the enactment of SB 126 and whether that impairment is substantial. See General Motors Corp. v. Romein, 503 u.s. 182, 186 (1992). "Although the United States Supreme Court has provided little specific guidance as to what constitutes a 'substantial' contract impairment, total destruction of contractual expectations is not necessary for a finding of substantial impairment." Tuttle, 159 N.H. at 649 (citation omitted).

The severity of an impairment of contractual obligations can be measured by the factors that reflect the high value the Framers placed on the protection of private contracts. Contracts enable individuals to order their personal and business affairs according to their particular needs and interests. Once arranged, those rights and obligations are binding under the law, and the parties are entitled to rely on them. 

Furlough, 135 N.H. at 633, quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978).

The severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation. 

Allied Structural Steel, 438 U.S. at 245.

To evaluate whether a law substantially impairs a contract, the court examines "(1) the nature of the contract and the affected contractual terms; (2) the degree to which the parties reasonably relied upon those terms at the time they formed the contract; and (3) the practical effect

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the challenged law would have upon parties." Tuttle, 159 N.H. at 668 (Dalianis and Duggan, J1., dissenting), citing Lower Village Hydroelectric Assocs. v. City of Claremont,147 N.H. 73, 77 (200 I). "In determining whether contract impairment is substantial, some courts look to whether the subject matter of the contract has been the focus of heavy state regulation." Id. at 650. "If so, further regulation might be foreseeable and, thus, any change to the contract caused by such regulation would not necessarily constitute a substantial impairment." Id. "However, standing alone, 'a history of regulation is never a sufficient condition for rejecting a challenge based on the contracts clause.'" Id., citing and quoting Chrysler Corp. v. Kolosso Sales, Inc., 148 F.3d 892, 895 (7th Cir. 1998), cert. denied, 525 U.S. 1177 (1999).

Applying the foregoing standards, the court concludes that SB 126 does not substantially impair the plaintiffs' existing contracts. In their brief, the plaintiffs identify ten substantial SB 126 impairments:

I. The plaintiffs were originally permitted to define each dealer's relevant market area without advance notice. Under RSA 357-C:3, it is an unfair and deceptive practice to change the relevant market area set forth in the franchise agreement without good cause.

2. Although the plaintiffs could compete or authorize others to compete with a dealer in the dealer's dealership area, the statute now removes the plaintiff s discretion to add or relocate a dealership into an existing area without good cause and without a finding by the New Hampshire Motor Vehicle Board C'MVIB") that good cause exists.

3. RSA 357-C:3, III(h) removes the plaintiffs' discretion to set dealer minimum equity level or capital standards.

4. RSA 357-C limits the plaintiffs' discretion to decline to deliver or fill orders to situations where the plaintiffs have no control.

5. While the plaintiffs previously could terminate, cancel, or non-renew a dealership agreement upon notice for any failure to abide by the terms of the dealership agreement consistent with RSA 347-A:2, I, the plaintiffs now can only do so if good cause exists. Further, the plaintiffs must satisfy certain requirements, including:

(l) notice; 

(2) good faith;

(3) good cause; and

(4) a MVIB finding that there is good cause to cancel, terminate, fail to renew, or refuse to continue any franchise relationship. RSA 357-C:7, III (a-e).

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6. RSA 357-C will prohibit the plaintiffs from enforcing the arbitration agreements contained in their existing contracts.

7. The plaintiffs will lose control over the compensation they provide for warranty services by forcing them to compensate at the dealer's retail labor rates and product prices.

8. The plaintiffs will no longer be able to limit the types of equipment a particular dealer may sell.

9. At least one of the plaintiffs' contracts places express restrictions on whether a dealer may carry a competitive line of equipment. Under RSA 357-C:3, lI(c), it will be an unfair and deceptive act to "coerce or attempt to coerce, any motor vehicle dealer to … [r]efrain from participation in the management of: investment in, or acquisition of any other line of new motor vehicle or related products."

10. SB 126 will impair one contracting party's commercial worksite products contract. 

The defendant disputes the plaintiffs' claim of substantial impairment.

Not all of the impairments identified by the plaintiffs apply to each of the contracts in question. According to the plaintiffs, "SB 126 impairs [their] existing contracts in at least 10 respects.” Pl.'s Mem. of Law at 12. The court disagrees. Upon review of each individual contract, it is clear that all ten factors do not affect all of the agreements. The court must therefore analyze the plaintiffs' substantial impairment argument as it pertains to each individual contract-not all the contracts listed as a whole.

A review of each individual contract does not support a conclusion of substantial impairment.

The provisions of RSA 347-A previously governed the plaintiffs' agreements. Thus, as the defendant correctly notes, "SB 126's assignment of tractors and other equipment to RSA 357-C is not equivalent to an entirely unregulated industry suddenly being faced with extensive regulation." Def.'s Mem. of Law at 6. The plaintiffs' agreements were subject to a statutory scheme that regulated the behavior of the manufacturers and dealers. While including the plaintiffs within the purview ofRSA 357-C has created added requirements by which the plaintiffs must act, such additions represent refinements in the law. For example, subjecting the plaintiffs

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to the "good cause" requirement, while not in RSA 347-A, is consistent with the RSA 347- A general prohibition of bad faith. See Ford Motor Co. v. Meredith Motor Co., No. 99-456-B, 2000 U.S. Dist. LEXIS 13099, at *24-25 (D.N.H., Aug. 24, 2000), vacated on abstention grounds, 257 F.3d 67 (1 st Cir. 200 I); see also Veix v. Sixth Ward Bldg. &Loan Assoc., 310 U.S. 32, 38 (1940).

The plaintiffs' reliance on Tuttle does not avail them, as that case is factually distinct. 

Tuttle involved legislation requiring the New Hampshire Medical Malpractice Joint Underwriting Association ("JUA") to transfer surplus funds directly to the general fund, despite the fact that the JUA's plans entitled participating physicians to surplus funds. The court held that the measure impaired existing contract rights. Tuttle, 159 N.H. at 633.It is true that the insurance industry is heavily regulated; however, the Tuttle legislation was not regulatory legislation meant to protect insurers, insureds or the public. [d. at 650. In contrast, the issues raised by SB 126 are more analogous to those addressed in Ford,which examined the expansion of existing regulation pertaining to previously regulated agreements. SB 126 does not change the fundamental nature of the contracts in question. Unlike the legislation in Tuttle, which effectively eliminated the "participating" character of the policies and thus changed the nature of the contracts, SB 126's requirement that manufacturer decisions be made with good cause does not change the very nature or "heart" of these agreements to buy and sell equipment parts. See id. at 651.

Given these considerations, the court concludes that SB 126 does not substantially impair the plaintiffs' existing contracts. Importantly, a contrary conclusion would not be helpful to the plaintiffs because the plaintiffs have also not sustained their burden of showing that SB 126 is not reasonable and necessary to serve an important public purpose.

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"[I]t is to be accepted as commonplace that the Contract Clause does not operate to obliterate the [State's] police power. … " Furlough, 135 N.H. at 634, quoting Allied Structural Steel, 438 U.S. at 241.

It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may. thereby be affected. This power, which in its various ramifications is known as the police power, is an exercise of the sovereign right of the Government to protect the lives, health, morals, comfort and general welfare of the people, and is paramount to any rights under contracts between individuals. 

Allied Structural Steel, 438 U.S. at 241. "If the Contract Clause is to retain any meaning at all, however, it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power." ld. at 242. "Thus, a balancing of the police power and the rights protected by the contract clauses must be performed, and a bill or law which substantially impairs a contractual obligation may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose.” Furlough, 135 N.H. at 635. Given the nature of this case, it is appropriate for the court to engage in the exercise of examining whether SB 126 is reasonable and necessary to accomplish the stated public purpose, assuming a substantial impairment of contract rights.

The police power side of the equation requires the court to examine whether the law serves an important public purpose. The defendant asserts that "SB 126 serves a proper public purpose because it broadens the reach of RSA 357 -C, a statute created to regulate vehicle manufacturers, distributors … and dealers doing business in this state, … premised on the 1981 general court's finding that 'the distribution and sale of vehicles within this state vitally affects the general economy of the state and the public interest.'" Def.'s Mem. of Law at 14. In addition to the stated purpose of RSA 357-C, the legislative history of SB 126 establishes the measure's

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public purpose. Three equipment dealers discussed issues with manufacturers at an April 16, 2013 house committee public hearing. See Def.'s Exh. C. One dealer testified about how unfair manufacturer practices hurt customers and small family owned businesses. Id. A farmer testified that fewer local dealerships hurt farmers because these farmers have to travel great distances to larger dealers they do not know. Id.

This testimony was thoroughly considered by the legislature. In a May 22, 2013 hearing on SB 126, Representative Jones stated:

In the past farm equipment was sold and serviced by many smaller dealers in towns all across the state. This practice was beneficial because local dealers can be called at home, after hours, or on Sundays or holidays to provide service or parts in emergencies. Local dealers will open their stores when a farmer needs a baler part on Sunday morning and rain is forecast for Sunday afternoon. This is a true emergency for a farmer whose hay crop is at risk.

According to the Northeast æÃæü¤ÇéÎåÔÂÌì Dealers Association in 1999 they had 41 member dealers in New Hampshire and today they only have nine. The move by equipment manufacturers to fewer mega dealers is detrimental to agriculture and the economy of rural New Hampshire because a mega dealer 100 miles away will not provide the level of support of a local dealer and, even if they would, the distance is too great to be of use.

H.R. Session Hearing on SB 126 at 1:09:15 (May 22, 2013). Representative Sad responded by stating: "Last month R.N. Johnson, a family owned John Deere dealership in my town, closed its doors after 84 years of service to our large agricultural community. Do you think that this bill would have had any impact at all on that decision to close?" Id.Representative Jones answered that it would.

The legislative history and the stated purpose of the bill establish the legislative findings as to the public purpose of the bill. There is sufficient record support to accord an appropriate level of deference. While the plaintiffs correctly assert that leveling the playing field between manufacturers and dealers is not a significant and legitimate public interest, see Allied Structural Steel, 438 U.S. at 247, the purpose ofSB 126 goes beyond that purpose to "ensure consumer in-

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terests are safeguarded …. " See SB 126. As a result, the court must assign significant weight to the public purpose. See Allied Structural Steel, 438 U.S. at 247; see also Alliance o/Auto Mjrs. v. Gwadosky, 430 F.3d 30 (1st Cir. 2005). Accordingly, the court is persuaded that the bill serves a legitimate and significant public purpose.

The police power analysis also requires the court to examine whether the law is reasonable and necessary. "In assessing the reasonableness and necessity of the Act, the threshold question is the degree of deference [the court] must afford the legislature's decision as to the means chosen to accomplish its purpose." Tuttle, 159 N.H. at 653. "Unless the State itself is a contracting party, 'as is customary in reviewing economic and social regulation, courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure. '" Furlough,

135 N.H. at 634-35 (quotation, brackets and ellipses omitted). "This deference serves to ensure that the constitutional prohibition against the impairment of contracts does not prevent the State from legitimate exercises of police power 'to protect the vital interests of its people. ", Tuttle, 159 N.H. at 653, citing W.E. Worthen Co. v. Thomas, 292 U.S. 426, 432-33 (1934).

"The exercise of that reserved power has repeatedly been sustained by this Court as against a literalism in the construction of the contract clause which would make it destructive of the public interest by depriving the State of its prerogative of self-protection." Thomas, 292 U.S. at 432-33. "In cases where the State is itself a party to the contract, heightened review is warranted and courts generally accord minimal deference to legislative acts affecting such contracts." 

Tuttle, 159 N.H. at 654, citing Lower Village Hydroelectric Assocs., 147 N.H. at 78. If, on the other hand, the state is not a party to the contracts, more deference is warranted, "but complete deference is unsupportable." Tuttle, 159 N.H. at 655.

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In analyzing the reasonableness of legislation, courts consider whether: "(I) the law meets an emergency need; (2) the law was enacted to protected a basic societal interest, rather than a favored group; (3) the law is appropriately tailored to the targeted emergency; (4) whether the imposed conditions are reasonable; and (5) whether the law is limited to the duration of the emergency." Tuttle, 159 N.H. at 675 (Dalianis and Duggan, JJ., dissenting), citing Home Bldg. & L. Ass 'n v. Blaisdell, 290 U.S. 398, 444-47 (1934). "An emergency need not exist, however, before a state may enact a law that impairs a private contract." Id., citing Energy Reserves Group, Inc. v. Kansas Power &Light Co., 459 U.S. 400, 412 (1983).

Here, SB 126 survives the aforementioned scrutiny under this deferential standard. The state is not a party to the existing contracts. Moreover, nothing before the court suggests that the state has some type of indirect financial interest at stake. This is in stark contrast to the Tuttle situation. The legislation in question is a reasonable decision by the legislature to protect the general welfare of the public through valid economic legislation. As a result, the court is satisfied that SB 126 constitutes broad-based economic legislation that is directed to meet a societal need.

See Nieves v. Hess Oil Virgin Islands Corp., 819 F.2d 1237, 1249 (3d Cir. 1987) ("Courts are required to defer to the legislature's judgment concerning the necessity and reasonableness of economic and social legislation.").

The other side of the balancing equation involves the rights protected by the contract clause. In this context, the court's analysis as to whether SB 126 substantially impairs the plaintiffs' contract rights is dispositive. The court acknowledges that SB 126 may have some economic impact on the plaintiffs; however, as addressed above, their pre-SB 126 relationship with dealers was not unfettered. RSA 347-A previously governed the plaintiffs' agreements. Any SB 126

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burden caused by extending the plaintiffs' dealer relationships to the regulatory requirements of RSA 357-C does not outweigh the state's police power.

In addition to their contract clause claim, the plaintiffs assert that SB 126 violates the Supremacy Clause. Under 11 of the contracts at issue in this case, the parties agreed that any disputes would be resolved by binding arbitration. The plaintiffs contend that RSA chapter 357-C prohibits predetermined agreements to arbitrate. In so doing, the plaintiffs argue that these provisions violate the FAA and are therefore void under the Supremacy Clause of the United States Constitution.

The FAA provides, in pertinent part: 

A written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract … or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract … or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C § 2. The Supremacy Clause provides:

The Constitution, and the Law of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding.

U.S. CON ST. ART. IV, CL. 2. Where state law invalidates an arbitration provision that falls under the FAA, the state law is preempted. See Doctor's Assocs. v. Casarotto, 517 U.S. 681,688 (1996).

The plaintiffs have persuaded the court that the foregoing authority that SB 126 and RSA chapter 357-C are void under the Supremacy Clause to the extent that they attempt to render void and unenforceable arbitration agreements in existing contracts. This is not dispositive, however.

As the defendant asserts, "the conflicting provision is 'displaced' by the federal law in that sin-

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gular instance." DeC s Mem. of Law at 21. As a result, only those provisions that conflict with the FAA are considered invalid, leaving the rest of the statutory scheme intact. SeeRSA 357-

C: 16 ("If any provision of this chapter or application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the chapter. … ").

The plaintiffs argue that RSA 357-C MVIB regulation is pervasive to the point where the statute cannot stand if the arbitration provisions of the contracts are enforced. The court disagrees. The arbitration provisions relate to the procedural mechanism that will be employed to resolve disputes between the plaintiffs and the dealers-those provisions do not establish the substantive law that will govern the resolution of the disputes. An arbitration panel can apply RSA 357-C substantive law as it applies any other substantive law that would govern the resolution of a dispute. Thus, pursuant to RSA 357 -C: 16, the procedural dispute resolution mechanisms can be severed from the other provisions of the chapter.

Based on the foregoing, the court concludes that SB 126 does not impair the plaintiffs' existing contracts in violation of part I, article 23 of the New Hampshire Constitution. Additionally, the court concludes that article I, section 10 of the United States Constitution provides no additional Contract Clause protection. Finally, in view of the RSA 357-C:16 severability provision, SB 126 does not run afoul of article IV, clause 2 of the United States Constitution-the Supremacy Clause. Accordingly, the plaintiffs' motion for summary judgment is DENIED and the defendant's motion for summary judgment is GRANTED.

So ORDERED.

Date: April 15, 2014

LARRY M. SMUKLER

PRESIDING JUSTICE