Essay: Harley-Davidson and PowerSports case

FACTS
On November 8, 1999, Harley-Davidson (Harley) received a request from Scott Smith of the Harley-Davidson of Seminole County, Florida, to approve the sale of that dealership to PowerSports of Seminole County. On November 24 and December 13, 1999, Harley-Davidson sent letters inquiring of PowerSports’ interest and ability to run the dealership by Harley-Davidson’s standards. The November 24 letter explicitly stated that PowerSports could not go public and maintain the dealership simultaneously. At a December 16, 1999, meeting, PowerSports proposed an operating plan for the dealership that aligned with Harley-Davidson’s values and standards for customer service. Also at that meeting, the PowerSports representatives stated that it had no intention of going public. On December 31, 1999, Harley-Davidson sent PowerSports a letter requesting more documents and information, specifically concerning PowerSports’ upcoming private placement. PowerSports failed to send its documents on January 3, 2000, as it had said. The memorandum was received by Harley-Davidson on January 6, 2000, after Harley-Davidson had sent its letter of approval on January 5, 2000. The memorandum stated that the Harley-Davidson and PowerSports deal was the last financing deal before an IPO in the second quarter of the fiscal year 2000. However, the memorandum did include that PowerSports would operate the dealership in alignment with the franchise agreement. On January 18, 2000, Harley-Davidson filed suit and alleged that PowerSports intentionally made a material misrepresentation to sway Harley-Davidson in its decision to approve the transfer of the dealership.
ISSUE OF THE CASE
The issue is whether the PowerSports made a material misrepresentation in its presentation to Harley-Davidson.
RELEVANT RULES OF LAW
Material misrepresentation is the act of intentional hiding or falsification of a material fact, which if known to the other party, could have terminated or significantly altered the basis of a contract, deal, or transaction. The economic loss doctrine prohibits recovery of damages in tort wherein the loss is only economic and has not caused a personal injury or damage to any other person or property. The doctrine bars intentional misrepresentation claims alleging fraudulent inducement under Wisconsin law.
Douglas-Hanson Co. v. B.F. Goodrich Co. set a precedent for the economic loss doctrine in cases of fraud and misrepresentation in the state of Wisconsin was a landmark case of fraud and misrepresentation in the state of Wisconsin. The defendant, Goodrich Co., was in the process of developing an adhesive film for automobile carpets and contacted the plaintiff, Douglas-Hanson Co., to assist in the electronic beaming necessary to cure the film. The defendant led the plaintiff to believe that it had a commercially viable product and they subsequently entered into a contract. Douglas-Hanson purchased a processor whose cost, including delivery and installation charges, exceeded $1,000,000. Over a year after the contract was signed, Goodrich decided to conduct a market study to determine whether there was a market for the product after failing to send more than eight films for curing. The project was a failure, and Goodrich closed down the adhesive division of the company. Douglas-Hanson filed suit for breach of contract and intentional misrepresentation. This misrepresentation was material, as Douglas-Hanson would not have entered into the contract had it been aware of the underdeveloped product, and could have avoided a significant economic loss. The jury hence ruled that the plaintiff is awarded compensatory and punitive damages, as the defendant’s false overstatement of the development stage of the product had led the plaintiff to consider the project a good investment.  The Wisconsin Court of Appeals also held that “the economic loss doctrine does not preclude a plaintiff’s claim for intentional misrepresentation when the misrepresentation fraudulently induces a plaintiff to enter into a contract.” Like most other states, Wisconsin state law bars misrepresentation claims.
Home Valu, Inc. v. Pep Boys Manny, Moe and Jack of Delaware, Inc. is another example of a case that dealt with material misrepresentation and the economic loss doctrine in the State of Wisconsin. After a real estate deal fell through, Home Valu, Inc. sued Pep Boys Manny, Moe and Jack of Delaware, Inc. for the torts of negligent and intentional misrepresentation. Home Valu operated a retail store under the name Drexel in Milwaukee, Wisconsin. Drexel sold home improvement goods and although profitable, Home Valu decided to sell the property to Pep Boys to accommodate Pep Boys’ expansion into Wisconsin. Home Valu and Pep Boys signed a selling agreement on May 15, 1997. However, Pep Boys began to experience a downturn in revenue which led the leadership to slow down the expansion rate. Pep Boys notified Home Valu in February of 1998 that it would not purchase the Drexel property and Pep Boys offered to pay Home Valu $50,000 for the breach of contract. Home Valu denied the offer because it had already begun the expensive process of closing down the Drexel location, spending more than $800,000. Home Valu claimed that Pep Boys made statements that induced it to enter into the selling agreement. The district court dismissed all of Home Valu’s misrepresentation claims as barred by Wisconsin’s economic loss doctrine.
ANALYSIS OF THE CASE
The adjunctive facts in Harley Davidson Motor Co vs. PowerSports, Inc. are undisputed. PowerSports had misrepresented its intent to operate according to the Harley Davidson franchise model and was set to violate the terms of the contract by publicly trading the company. The plaintiff, Harley Davidson, had been clear about the tailored guidelines its franchises were supposed to adhere to and had spelled the guidelines out in the contract. Had the plaintiff been aware of the defendant’s strategy to operate the franchise as a separate business, it would not have entered into a contract with the defendants, thus making this misrepresentation material. The plaintiff was also set to suffer significant economic losses once the franchise went public.        PowerSports would not be entitled to summary judgment on this record, and there is no indication that the Supreme Court of Wisconsin would allow the economic loss doctrine to apply to such a rescission action. Harley Davidson was thus clearly entitled to a recession and should be able to recover its costs in court.
The plaintiff’s request for damages made the case complicated. Wisconsin law states that if one of the parties consent to a contract that is induced by material or fraudulent misrepresentations, that party can either get rescission or damages but cannot receive both. As established in Head & Seemann, Inc. v. Gregg however, this law is subject to change based on the elaborated nature of the damages. If the misrepresentation is material and the damages are restitutionary measures, the plaintiff might be entitled to both in a material misrepresentation case. Harley-Davidson hence restyled their original claim and prayed for restitution damages. “Rescission is always coupled with restitution because rescission and restorative damages [are] entirely consistent with each other and therefore not subject to election.” (cite). Thus, a party electing rescission can recover restitution to restore it to the place it would have been; as if no contract had ever existed. Harley-Davidson should, therefore, be allowed to recover a monetary reward to “restore it to the position it would have occupied if no contract would have been made” (cite Schnuth v. Harrison).
The economic loss doctrine did not prohibit Harley-Davidson from getting rescission by misrepresentation. If Harley-Davidson were restricted, this would violate contract law from protecting their duty of good faith, fair dealing, and the requirement of mutual assent.
CONCLUSION OF THE CASE
Both the jury and the District Court ruled that this was a clear case of material representation, as Harley-Davidson would not have entered into the contract had it been aware of PowerSports’ actual plans of operating the franchise. To restore Harley-Davidson to its position before it had come into the contract with Power Sports, the court awarded both recessions of the contract and restitution damages to Harley-Davidson.