CAN TOYOTA’S ENTRY INTO NASCAR BE DODGED THROUGH LITIGATION WITH BILL DAVIS RACING?

Meri J. Van Blarcom-Gupko, Esq.*

I.     Introduction

In 1948, Bill France Sr. founded the National Association for Stock Car Auto Racing - better known as NASCAR.[1]  Due to a shortage of new cars in the post-war era, “modified” cars were used at the start of NASCAR.[2]  In 1949, Bill France Sr. reconsidered the concept of his stock car association and decided to race late model family sedans that people drove everyday.[3]

In recent years, NASCAR has been experiencing staggering growth.[4]  At present NASCAR boasts about 75 million fans and counting.[5]  While the Winston Cup Series is the premier and most commonly associated series with the NASCAR name, it is not NASCAR’s only racing series.  NASCAR also includes the Busch Series,[6] the Craftsman Truck Series,[7] the NASCAR Dodge Weekly Series,[8] the NASCAR Elite Division,[9] the NASCAR Grand National Division,[10] and NASCAR Touring.[11]

With NASCAR rapidly expanding in popularity,[12] there is a move for foreign auto manufacturers to join the competition.  Amidst debate, Japanese manufacturer Toyota will debut in the NASCAR Craftsman Truck Series in February 2004.[13]  Toyota Racing Development (“TRD”) submitted the official Tundra race truck for the Craftsman Series to NASCAR officials in July 2003.[14]

The announcement of Toyota’s entry into the Craftsman Truck Series has lead to speculation that Toyota has its eye on the Winston Cup series.[15]  While Toyota asserts that a move into stock cars would take at least two to three years of planning, there is a possibility that contractual arrangements with certain teams could permit a move sooner.[16]  Toyota, which is already influential in open-wheel racing, has relationships with NASCAR team owners Roger Penske and Chip Ganassi through open-wheel racing.[17]

Part of the debate over the entry of foreign manufacturers into NASCAR is the fan factor.  Many longtime fans want NASCAR to enforce the rule that only American-made cars are permitted to compete in the races.[18]  Toyota can get around this rule, at least for the truck series, because most of its trucks are made at plants in the United States.[19]

The entry of Toyota into the 2004 NASCAR Craftsman Truck Series is at the center of a dispute between DaimlerChrysler (“Dodge”)[20] and Bill Davis Racing (“BDR”).[21]  In May 2003, Daimler Chrysler filed suit, in Michigan’s Oakland County Circuit Court, against BDR alleging that BDR helped Toyota prepare for its NASCAR debut, through a partnership that could have resulted in confidential information being made available to its rival Toyota.[22]  Among Dodge’s contentions in the suit is that BDR breached the contract between them.[23]  Also, due to concerns over disclosure of confidential information, Dodge is seeking injunctive relief to prevent BDR from providing any information to Toyota.[24]

BDR filed an answer and counterclaim in the United States District Court contending Dodge materially breached the contract when Dodge sent a letter dated May 22, 2003 terminating their agreement “effective immediately.”[25]

Toyota denies any deal with BDR to find out information about Dodge but has stated that BDR is under retainer to assist in chassis and body development on the Tundra.[26]  Toyota has indicated that it operated under the impression BDR had clearance from Dodge to become involved in the development with Toyota.[27]

This article develops the legal aspects of the recent events between Dodge and BDR.  Section II examines the issues raised in the lawsuit, starting with the relevant facts of the litigation.  Section III explores the potential impact of this lawsuit on the team owners, manufacturers, and other involved parties.

II. Issues in the Lawsuit

Breach of Contract

At the center of the lawsuit is a contract between Dodge and BDR, which was entered into on February 14, 2000 for a six-year term starting on January 1, 2000.[28]  Under the agreement, Dodge was to pay BDR three million dollars for the 2003 NASCAR Winston Cup season, which Dodge asserts to have paid in full.[29]  As part of the relief requested, Dodge seeks to recover any amount not yet expended for legitimate purposes.[30]

Under the contract, Dodge was also to give BDR cars, engineering data, access to information, wind tunnel time, and use of factory supplied parts.[31]  In turn, BDR was to prepare and test race vehicles for the Winston Cup Series, exclusively deal with Dodge, and not represent any competitors.[32]  BDR contends that Toyota is not a “competitor” as defined in the agreement between the parties.[33]  Neither party includes the contract definition of “competitor” in their papers filed with the court, which precludes a detailed analysis of the issue.  However, without reading the language, it seems conceivable that under the circumstances the contract definition of a competitor could be construed to include Toyota.[34]

In the suit, Dodge alleges that BDR helped Toyota prepare for its NASCAR debut, through a partnership that inevitably would result in Dodge’s trade secrets being made available to its rival Toyota.[35]  Dodge contends that in December 2002, BDR not only applied for, but also received, a license to conduct its business at a specific location in High Point, North Carolina marked with a sign “Tundra Race Truck Center.” [36]

Additionally, in late April 2003, NASCAR officials conducted a wind tunnel test at the Lockheed facility in Georgia, which was to test four different manufacturer’s front ends on a Toyota.[37]  Dodge alleges that at least one employee of BDR went to the wind tunnel test and claimed to represent Toyota or TRD and that at least one employee of BDR has publicly stated they were helping Toyota and/or TRD.[38]  Moreover, Dodge asserts the truck taken to the wind tunnel test had a Dodge engine and bore BDR decals on the rims and the actuator control box inside the truck.[39]

Expressing that BDR materially breached the agreement, Dodge ended its association with BDR in late May, prior to the Coca-Cola 600 at Lowe’s Motorspeedway in Concord, North Carolina.[40]  Dodge withdrew factory support, access to sensitive information, technology advances and competitive plans from BDR.[41]

The breach of contract count in the Dodge Complaint arises out of the allegation that BDR assisted Toyota in preparing for its entry into the Craftsman Truck Series in 2004.  It is asserted that conduct engaged in by BDR and a relationship between Toyota and BDR breached the confidentiality and non-competition provisions of the contract.  The other counts of the Complaint seek specific forms of relief as they relate to the relationship between BDR and Dodge.

BDR’s counterclaim alleges that Dodge, not BDR, breached the contract.  While not setting forth the specifics of the May termination letter from Dodge, BDR alleges that Dodge did not have the right to terminate the agreement for the reasons stated therein.[42]  Moreover, BDR alleges that Dodge was required to supply BDR with engines, body parts and accessories at no charge, and that Dodge has failed to provide such items since May 2003.  Under the terms of the agreement, Dodge was to provide BDR with 10 vehicles at no charge for the 2003 season and each subsequent season under the contract; however, Dodge has demanded that these vehicles be returned.[43]  In addition to demanding the return of certain vehicles, Dodge has also demanded that BDR return certain computer software BDR uses to prepare and test vehicles to run in the Winston Cup Series.[44]

1.   Non-Competition With DaimlerChrysler/Dodge

As part of its suit, Dodge seeks a declaration[45] from the court that Dodge did not breach the contract and that Dodge validly terminated the agreement with BDR because of the alleged BDR breach.[46]  It is established under Michigan law that a material breach of a contract entitles the non-breaching party to rescind a contract.[47]  In order to be considered justified in rescinding the contract, which Dodge did in late May 2003, it must first demonstrate that the alleged material breach by BDR affected a substantial or essential part of the contract.[48]

The term substantial breach is closely scrutinized by the courts and is found:

[w]here the breach has effected such a change in essential operative elements of the contract that further performance by the other party is thereby rendered ineffective or impossible, such as the causing of a complete failure of consideration or the prevention of further performance by the other party.[49]

When deciding if the alleged breach is material, the court will consider how the breach impacts the ability of Dodge and BDR to carry out the other provisions of the contract.[50]  If the Court determines that BDR materially breached the contract through its alleged dealings with Toyota - whether through the confidentiality or non-compete provisions, or both - Dodge will likely obtain a declaratory judgment that it justifiably rescinded the agreement.

Dodge bears the burden of demonstrating the existence of a contract and that a breach of the contract occurred.[51]

As set forth in the Complaint, there are three contract provisions, which are key to the breach of contract claim.  Two of the contract provisions cited relate to BDR’s agreement not to drive or promote vehicles of Dodge’s competitors and state as follows:[52]

10.1 During the term of this Agreement, RACE TEAM[53] will cause Driver to refrain from driving any non-DaimlerChrysler vehicles in any race show, exhibition or similar event without obtaining DaimlerChrysler’s prior written consent. [54]

10.2 During the term of this Agreement, neither RACE TEAM nor its Employees will represent, endorse, or otherwise promote the vehicles, parts or service of a DaimlerChrysler competitor, unless RACE TEAM obtains DaimlerChrysler’s prior written consent.[55]

Parties can enter into “exclusive dealing” contracts to protect valuable proprietary information under Michigan law.[56]  In a traditional exclusive dealing relationship, parties can contract not to buy or sell a product from anyone but the other.[57]  The dealings between BDR and Dodge are not the traditional exclusive dealing arrangement but nonetheless the law would appear to protect them because the contract has formed in significant part to protect proprietary information.

Another well-established principle of Michigan law is that the party “who commits the first substantial breach of a contract cannot maintain an action against the other contracting party for failure to perform.”[58]  Thus, it is critical that Dodge demonstrate that BDR breached the contract first.  BDR is attempting to demonstrate that it was in fact Dodge that first breached the agreement, but such appears to be an uphill battle in the face of the facts, as set forth in the pleadings filed by both parties, and in the published accounts of the events.

BDR might succeed in its alleged breach of contract claim, if it can demonstrate that all other team owners, including other Dodge sponsored teams, were required to test different noses on a Tundra at the wind tunnel test in Marietta.  The difficulty lies in the fact that BDR “avers that it has assisted in developing and obtaining NASCAR approval of the Tundra truck body and frame, that BDR sold rims to TRD that were used on certain versions of the truck, an actuator control box with a BDR decal was used during the April 30 wind tunnel test and a Dodge engine was placed in a Tundra truck as a mockup engine, not a working engine, for wind tunnel testing.”[59]  Such admissions alone will likely harm any chances of BDR demonstrating that Dodge breached the agreement first or that Dodge was not justified in terminating the agreement.

2.   Confidential Information

The third provision, of the contract at issue in the lawsuit, required that BDR not disclose “any design, development, improvement, discovery, invention or any information made, acquired or originated by RACE TEAM or DaimlerChrysler in connection with this Agreement unless release of such information to a third party is first approved by DaimlerChrysler in writing.”[60]  BDR agreed to keep “Confidential Information in confidence for a period of three (3) years from the date of receipt thereof.”[61]

Under Michigan law, covenants not to use or disclose confidential information are recognized and enforced.[62]  When a dispute occurs, the confidential nature of the information can be determined from the manner in which the defendant treated the information before the litigation.[63]  Additionally, the plaintiff must demonstrate that sufficient measures were taken to guard the secrecy of the information and preserve its confidentiality.[64]  Evidence of measures taken to guard secrecy and preserve confidentiality can include the following: an express agreement, disclosures in confidence in circumstances that demonstrate a common understanding that the information is confidential, or security precautions to ensure only a limited number of authorized people gain access to the information.[65]  Information that is sufficiently widespread so that it is available to a substantial segment of the relevant industry cannot be said to be confidential or secret.[66]

For Dodge to show that BDR misappropriated its confidential trade secret information, it must show the following, by a preponderance of the evidence: (1) that a trade secret exists; (2) that BDR acquired the information in confidence; and (3) that BDR used the information without authorization.[67]

In determining if confidential information is considered a trade secret, the courts have looked to the Restatement for guidance.[68]  Under Michigan law, the following factors are evaluated in determining the existence of a trade secret:

(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficultly with which the information could be properly acquired or duplicated by others. [69]

The Agreement between Dodge and BDR contained an express agreement regarding the confidentiality of Dodge’s information.  The dealings between the parties show that the information was guarded by both parties, as demonstrated by the fact the information at the center of the suit is still not widely available.  The significant sums of money expended and exclusive arrangements involved regarding the information further attest to the value of the information.  The fact that not much is known about the agreements between manufacturers and team owners leans in favor of trade secret status for the information involved in the contract at issue.

3.   Injunctive Relief

Dodge’s request for injunctive relief is based on the concern that confidential information extended to BDR, as part of the agreement between the parties, will be used by or disclosed to either Toyota or TRD by BDR.[70]  The injunction is requested to keep BDR from disclosing confidential information.[71]

The breach of contract claims are generally incorporated by reference into the injunctive relief provision and accordingly form a basis for the injunctive relief sought.  It is presumed that the matter will begin with a preliminary injunction and proceed to a subsequent determination for permanent injunctive relief.  As an initial matter, Dodge will need to demonstrate the following to obtain a preliminary injunction against BDR: (1) it is likely to succeed on the merits; (2) it would suffer an irreparable injury if the preliminary injunction is not granted; (3) a preliminary injunction would not cause substantial harm to others; and (4) a preliminary injunction would be in the public interest.[72]

When assessing an application for injunctive relief the court is to consider and balance all of the factors.[73]  In evaluating the facts alleged and any relevant contract provisions, the court will make specific findings about each of the four factors (or less if the issue can be dispositively resolved).[74]  The first element - the likelihood of success on the merits - is often the most critical determination.[75]  Dodge will be required to demonstrate the likelihood of success on the merits of a breach of contract claim in order to receive a preliminary injunction.  If it seems likely that Dodge will succeed on the merits of its breach of contract claim as it relates to the trade secret information, the court will likely grant a preliminary injunction restraining BDR from using any of the information obtained under its agreement with Dodge pending the final result of the litigation.

In order to obtain permanent injunctive relief under Michigan law, Dodge must show a “substantial threat of impending injury,” and “must prove by a preponderance of the evidence actual or threatened invasion” of the party’s rights as alleged. [76]  “Proof of mere apprehension of injury is insufficient to justify granting relief.”[77]  This is a difficult standard as the courts try only to grant permanent injunctive relief in limited circumstances.

In the event that Dodge is successful in obtaining a permanent injunction against BDR preventing BDR from disclosing confidential information, the injunction would remain in effect until BDR can show that Dodge’s trade secrets or confidential information have become common knowledge, are known to competitors, or otherwise have become legally available.[78]  Based on the highly confidential nature of information and arrangements between racing teams and manufacturers, it seems unlikely that BDR could make such a showing.

III.  Conclusion

Without question the litigation between BDR and Dodge will clearly impact team affiliations with Toyota in the Craftsman Truck Series.[79] Until such time as Toyota is competing in the Winston Cup and Busch Series and team owners can run Toyota vehicles in all three major NASCAR series, there will continue to be issues for team owners from other series attempting to be affiliated with Toyota in the Truck Series.  The non-compete and confidentiality provisions of contracts between team owners and manufacturers will become increasingly significant as Toyota enters the Truck Series.  A team owner racing Toyota trucks will not have a Toyota affiliation across the various series, as some team owners do with Ford, Chevrolet, and Dodge at this time.  All team owners that look to become involved with Toyota for 2004 will need to be extremely cautious.

While manufacturer support of NASCAR teams is standard, such support is not generally the focus of public attention.  It has been projected that Winston Cup team owners receive an average two to three million dollars per year, per team, from manufacturers.[80]  Team owners use the manufacturer’s funding for a variety of things, including wind tunnel time, research and development work, engine blocks, parts, sheet metal, technical support and company vehicles for team employees.[81]  There is no doubt that sponsorships are critically important in auto racing, but it is manufacturer support that has been called the “constant base” of any racing program.[82]  Certainly the loss of manufacturer support can seriously impact a team and the damage to an already struggling team can be crippling.  In fact, Ward Burton has made public his intention to get out of his contract with BDR early and find another team for the 2004 season; though not expressly stated it is likely that the situation with BDR and Dodge was an influence in Ward Burton’s decision to be released from his contract.[83]

The value of a manufacturer’s support is too significant to a team, in either the Winston Cup or Busch Series, to lose it in favor of an affiliation with Toyota in the Truck Series.  As a result of the situation with BDR and Dodge, team owners in other NASCAR series who are affiliated with Dodge, and presumably the other manufacturers as well, will be highly cautious before agreeing to a team affiliation with Toyota in the Truck Series.  Contracts with competing car manufacturers will need to be carefully scrutinized to ensure that a team owner can begin an affiliation with Toyota without breaching its existing contract with another car manufacturer and without running the risk of creating a situation where Toyota could gain access to the other manufacturer’s trade secrets (even in theory).

In addition, as drivers seek an opportunity to race in more than one NASCAR series in a season, even part time, team owners will likely be very cautious to be certain that their drivers do not seek to race in a competing manufacturer’s car or truck.  Team owners and drivers will need to be sure that the driver’s spot appearances in another series do not conflict with any existing agreements and team owners will place limitations on drivers to avoid jeopardizing manufacturer support.  This will likely be most significant with Cup drivers pulling double duty running the Truck or Busch and Cup Series races (and on rare occasions triple duty running all three).  However, it could be a concern with any driver running in more than one NASCAR series or where a driver is under contract with a certain manufacturer and a team owner seeks to bring that driver to the Cup from another series.[84]

Regardless of the eventual outcome of the BDR and Dodge dispute, whether through a trial or a settlement, contracts between team owners and manufacturers will be more carefully scrutinized going forward.  Both manufacturers and team owners will be watching to be sure that contracts are not breached through affiliations, driver action, or other means where breach of contract, non-compete or confidentiality issues could become a concern jeopardizing the manufacturer’s support of a team.