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Cooperating With Another Company’s “Efforts To Comply” With The FCPA Does Not Impose Upon A Company The Contractual Obligation To Comply With The FCPA

Judicial Decision

Foreign Corrupt Practices Act issues pop up, more than people realize I submit, in civil litigation. However, much of this civil litigation flies under the radar and/or may arise in arbitration proceedings meaning there is little transparency of the underlying issues. I have been a expert in several such cases.

These dynamics make this recent Sixth Circuit Court of Appeals decision involving Fiat Chrysler Automobiles International Operations LLC and its former Angolan distributor (Union Commercial Services Limited) all the more interesting.

As highlighted below, in connection with Union’s claim that Chrysler breached an agreement by violating the implied covenant of good faith and fair dealing as well as engaged in tortious interference of business relations, the Court held that a contractual clause requiring Union to cooperate with Chrsyler’s “efforts to comply” with the FCPA did not impose upon Chrylser the contractual obligation to comply with the FCPA.

The opinion sets forth the following relevant background:

“Union Commercial Services Limited agreed to serve as a nonexclusive distributor of Chrysler, Jeep, and Dodge automobiles in the Republic of Angola. Years later, when Fiat Chrysler Automobiles International Operations, LLC terminated the distributor agreement, Union sued claiming that Chrysler breached the agreement by violating the implied covenant of good faith and fair dealing and tortiously interfered with Union’s business relations. The district court dismissed Union’s complaint for failure to state a claim and denied its motion to amend as futile. For those same reasons, we AFFIRM.

In 2006, Union Commercial Services Limited signed a distributor agreement with Chrysler.1 That agreement, governed by Michigan law, made Union a nonexclusive distributor of Chrysler, Jeep, and Dodge automobiles and parts in the Republic of Angola. According to Union, this business relationship soured in 2009 when Chrysler began working with Grupo Auto-Star, S.A., a competitor organized or controlled by high-ranking members of the Angolan government and military. In 2011, without a valid distributorship agreement, Auto-Star began selling Chryslerbrand products in Angola, encroaching on Union’s distributorship.

Around that same time, despite Auto-Star’s entry into the market, Chrysler contacted Union and expressed an intent to have Union continue serving as a distributor in Angola. One week later, Auto-Star—allegedly acting in concert with Chrysler—sought to acquire an ownership interest in Union. Union rebuffed that offer, purportedly because the distributor agreement prohibited Union from being owned, in whole or in part, by a government or its agent.

Two years later, Union notified Chrysler of Auto-Star’s unauthorized purchase and sale of Chrysler products, and Chrysler denied knowledge of Auto-Star’s actions. Not long after, Chrysler sent Union a notice to terminate the distributor agreement, effective August 31, 2014. Though Union inquired, Chrysler provided no reason for the termination. In Union’s view, however, the reason was clear: Union’s distributor agreement, with its prohibition of government deals, obstructed the rich sales market Chrysler was exploiting with the Angolan officials at Auto-Star. And without the agreement, Union lost its authorized-distributor status in Angola.

Union sued in federal district court, alleging that Chrysler breached the distributor agreement by violating the implied covenant of good faith and fair dealing, tortiously interfered with its business relations, violated the Lanham Act and the civil RICO statute, and should be held liable under the doctrine of promissory estoppel. The defendants moved to dismiss all but one count (for breach of contract) under Civil Rule 12(b)(6), and the district court granted the motion and dismissed the suit. 2 Union then sought to amend its complaint post judgment to replead two dismissed counts and add two others, but the court denied the motion on the ground that amendment would be futile. Union appealed.

[…]

Union appeals the district court’s dismissal of its complaint and denial of its motion to amend. Although Union brought a nine-count complaint, it appeals only two of them: Count II, which alleged breach of Article 13.6 of the distributor agreement, and Count IV, which alleged tortious interference with its business relations. With its motion to amend, it sought to add new factual allegations on both these counts and to add two claims against Chrysler for breach of two other articles of the distributor agreement. We start by evaluating the contractual breach claims, considering the allegations contained in the amended complaint, see Bennett v. MIS Corp., 607 F.3d 1076, 1100–01 (6th Cir. 2010), and then analyze the tortious interference claim. On each, we agree with the district court.”

As to Article 13.6, Union argued that Chrysler breached this article by violating the implied covenant of good faith and fair dealing when it worked with Auto-Star to bribe Angolan officials to acquire an ownership interest in Union.

As stated by the court:

“But the text of the Articles’ subparts obligates Union, not Chrysler.

Article 13.6(1) reads in pertinent part:

[Union] represents and warrants that [Union] will comply with all applicable laws and abide by the requirements of the U.S. Foreign Corrupt Practices Act, U.S. Export Controls, and U.S. Anti-Boycott laws with regard to all activities that are the subject of this Agreement . . . . [Union] and its Authorized Resellers must fully cooperate with CHRYSLER[’s] efforts to comply with [those laws and regulations].

And the next subpart, Article 13.6(2), requires Union to warrant that no government official or entity has a substantial financial interest in its distributor agreement. The district court held that the implied good faith covenant claim failed as a matter of law because the plain language of Article 13.6 “does not impose obligations or discretion of performance on” Chrysler. R. 29, PageID 604–05. For that same reason, it held that repleading this count would be futile.

[…]

Union argues that Article 13.6(1)’s “efforts to comply” language makes Chrysler’s compliance with the Foreign Corrupt Practices Act discretionary and therefore subject to the implied covenant. But as the district court held, Article 13.6(1) imposes no performance obligation on Chrysler. This “efforts to comply” language suggests that Chrysler may act to comply with the FCPA and other federal laws—and that Union must cooperate in Chrysler’s compliance—but does not obligate Chrysler to take any action. In the absence of a performance obligation, or a provision suggesting some discretionary one, Union cannot invoke the covenant to function as it sought with its suit here.

[…]

Of course, Chrysler must comply with the FCPA and other federal laws. But that’s not a contractual obligation owed to Union—it is a statutory obligation that springs from the FCPA itself. Union claims that the obligation’s source makes no difference and “does not undermine [the] argument that [Chrysler’s] performance under Article 13.6(1) was discretionary.” Yet it cites no cases in which a court implied the covenant where a contract references just one party’s compliance with federal law.

[…]

Article 13.6(1)’s language unambiguously fails to impose performance obligations on Chrysler, so Union’s implied covenant claim fails as a matter of law. The district court thus correctly concluded that amendment would be futile. See Crawford, 53 F.3d at 753.

Union’s argument on Article 13.6(2) suffers the same flaw and thus the same fate. That provision requires Union to warrant that no government official or entity serves as an owner or investor in Union or has a substantial financial interest in the distributor agreement, and that Union will not pay or loan any government official or entity any funds received for goods sold under the agreement. In Union’s view, “by encouraging Auto-Star to acquire an ownership stake in Union[] and then terminating the Agreement when Union refused to violate Article 13.6(2),” Chrysler violated the implied covenant of good faith and fair dealing. Appellant Br. at 38. In effect, Union argues that Chrysler put it in a lose-lose situation. On one hand, it could play along with Chrysler’s “scheme . . . for corrupt Angolan interests to acquire an ownership interest in Union,” but doing so would render it in violation of Article 13.6(2) (and subject to termination). On the other, Union says, it could comply with Article 13.6(2) and refuse Auto-Star’s offer, but risk termination for doing so.

Again though, Union’s argument fails to acknowledge the absence of a performance obligation imposed on Chrysler by Article 13.6(2). The text instead speaks to Union’s obligations, as Union admits in its own briefing in arguing that Chrysler’s actions “prevented or hindered Union from meeting its obligations under Article 13.6(2).” Appellant Br. at 37. Because Article 13.6(2) does not make Chrysler’s “performance a matter of its own discretion,” Stephenson, 328 F.3d at 826, or speak to any obligation Chrysler owes under the contract, Union cannot successfully invoke the implied covenant to create a claim. And as with Article 13.6(1), amendment would be futile.”

Regarding the tortious interference claim, the court observed (among other things) that Union did not plausibly plead an FCPA violation by linking Chrysler’s actions to the elements of such a violation.

Interestingly, in a dissenting opinion, a judge observed that “Union provided sufficient factual allegations which, if taken as true, suggested that (1) Auto-Star was organized and run by government officials with significant police power; (2) Auto-Star had been involved previously in a similar bribery scheme in the past; and (3) Chrysler worked with Auto-Star even after Union informed them about these issues.”

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