(ca-01-471) Yamaha Motor Corporation, U.s.a. v. JIM’S MOTORCYCLE, INCORPORATED, d/b/a Atlas Honda/Yamaha

Filed: April 12, 2005
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 03-2070
(CA-01-471)
YAMAHA MOTOR CORPORATION, U.S.A.,
Plaintiff - Appellant,
versus
JIM'S MOTORCYCLE, INCORPORATED,
d/b/a Atlas Honda/Yamaha;
DEMERST B. SMIT, in his official
capacity as the Commissioner of
the Department of Motor Vehicles,
Defendants - Appellees,
-------------------------
HARLEY-DAVIDSON MOTOR COMPANY,
Amicus Supporting Appellant.
O R D E R
The Court amends its opinion filed March 18, 2005, as
follows:
On page 15, the sentence beginning at line 16 of the first
full paragraph is amended to read: “That prospective dealer
invested in a site, quit his job, and moved his family to Prince
George County, only to be met with a Second Paragraph protest.”
For the Court
/s/ Patricia S. Connor
____________________________
Clerk

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Filed: March 29, 2005
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 03-2070
(CA-01-471)
YAMAHA MOTOR CORPORATION, U.S.A.,
Plaintiff - Appellant,
versus
JIM'S MOTORCYCLE, INCORPORATED,
d/b/a Atlas Honda/Yamaha;
DEMERST B. SMIT, in his official
capacity as the Commissioner of
the Department of Motor Vehicles,
Defendants - Appellees.
-------------------------
HARLEY-DAVIDSON MOTOR COMPANY,
Amicus Supporting Appellant.
O R D E R
The court amends its opinion filed March 18, 2005, as
follows:
On page 2, under Counsel, line 11 -- delete the semi-colon
behind the word “Virginia” and delete “James J. Briody,
SUTHERLAND, ASBILL & BRENNAN, L.L.P., Washington, D.C.” On
line 13, delete the semi-colon after “Appellee Jim’s Motorcycle,
Inc.”
For the Court
/s/ Patricia S. Connor
____________________________
Clerk

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 YAMAHA MOTOR CORPORATION,
U.S.A.,
Plaintiff-Appellant,
v.
JIM’S MOTORCYCLE, INCORPORATED,
d/b/a Atlas Honda/Yamaha;
DEMERST B. SMIT, in his official No. 03-2070 
capacity as the Commissioner of the
Department of Motor Vehicles,
Defendants-Appellees.
HARLEY-DAVIDSON MOTOR COMPANY,
Amicus Supporting Appellant. 
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert E. Payne, District Judge.
(CA-01-471)
Argued: May 4, 2004
Decided: March 18, 2005
Before LUTTIG and MICHAEL, Circuit Judges, and
Bobby R. BALDOCK, Senior Circuit Judge of the
United States Court of Appeals for the Tenth Circuit,
sitting by designation.
Reversed and remanded by published opinion. Judge Michael wrote
the opinion, in which Judge Luttig and Senior Judge Baldock joined.

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COUNSEL
ARGUED: David Paul Murray, WILLKIE, FARR & GALLAGHER,
Washington, D.C., for Appellant. Maureen Riley Matsen, Deputy
State Solicitor, OFFICE OF THE ATTORNEY GENERAL OF VIR-
GINIA, Richmond, Virginia, for Appellees. ON BRIEF: Robert M.
Tyler, MCGUIREWOODS, L.L.P., Richmond, Virginia, for Appel-
lant. Jerry W. Kilgore, Attorney General of Virginia, William H.
Hurd, State Solicitor, William E. Thro, Deputy State Solicitor,
OFFICE OF THE ATTORNEY GENERAL OF VIRGINIA, Rich-
mond, Virginia, for Appellee Smit; Walter A. Marston, REED
SMITH, L.L.P., Richmond, Virginia; George E. Kostel, REED
SMITH, L.L.P., Falls Church, Virginia, for Appellee Jim's Motorcycle,
Inc. Nicholas T. Christakos, James J. Briody, SUTHERLAND,
ASBILL & BRENNAN, L.L.P., Washington, D.C., for Amicus Curiae.
OPINION
MICHAEL, Circuit Judge:
This case involves a dormant Commerce Clause challenge to a
unique provision in Virginia’s motorcycle dealer franchise law. The
provision allows any existing franchised dealer in Virginia to protest
the establishment of a new dealership for the same brand anywhere
in the Commonwealth. The district court rejected the challenge, con-
cluding that the statute neither discriminates against, nor imposes a
cognizable burden upon, interstate commerce. We conclude, however,
that the statute’s provision for statewide protest rights unduly burdens
interstate commerce in violation of the dormant Commerce Clause.
The judgment is therefore reversed.
I.
A.
Virginia provides economic protection for its existing motorcycle
dealers by restricting the ability of manufacturers (or distributors) to
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open new dealerships. The dealers have enjoyed this economic pro-
tection for many years under the First Paragraph of Virginia Code
§ 46.2-1993.67(5), or its predecessor, which gives an existing motor-
cycle dealer the right to protest the establishment of a new dealership
for the same line-make (brand) in its "relevant market area," defined
as a seven to ten-, fifteen-, or twenty-mile radius around the existing
dealer, depending on population density. Va. Code Ann. § 46.2-1993.
When a protest is filed under the First Paragraph, the proposed dealer-
ship may open only if there is reasonable evidence that the market can
support all of the dealers in the line-make in the relevant market area.
Id. § 46.2-1993.67(5). The First Paragraph closely tracks the language
of Virginia’s motor vehicle franchise statute that we upheld against
a dormant Commerce Clause challenge in American Motors Sales
Corp. v. Division of Motor Vehicles, 592 F.2d 219 (4th Cir. 1979).
This case, however, involves a challenge to the Second Paragraph
of Virginia Code § 46.2-1993.67(5), which was enacted in 1997. The
Second Paragraph provides that:
No new or additional motorcycle dealer franchise shall be
established in any county, city or town unless the manufac-
turer [or] distributor . . . gives advance notice to any existing
franchised dealers of the same line-make. The notice shall
be in writing and sent . . . at least forty-five days prior to the
establishment of the new or additional franchise. Any exist-
ing franchise dealer may file a protest within thirty days of
the date the notice is received. The burden of proof in estab-
lishing inadequate representation of such line-make motor-
cycles shall be on the manufacturer [or] distributor. . . .
Id. (emphasis added).
The Second Paragraph differs from the First by expanding the
scope of existing dealers’ protest rights beyond a relevant market
area. No statement of purpose accompanies the Second Paragraph,
and the Virginia General Assembly does not keep legislative history.
There is no doubt, however, that the provision aims to expand protec-
tion for motorcycle dealerships. See Yamaha Motor Corp. v. Quillian,
571 S.E.2d 122, 125 (Va. 2002). The Commonwealth suggests that
the added protection was needed because, in contrast to automobile
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dealerships, which make roughly ninety-five percent of their sales
within a twenty-mile radius, motorcycle dealerships, which are fewer
in number, typically sell within a forty-mile radius. Moreover, the
Second Paragraph was enacted at a time of record motorcycle sales
nationwide. Many dealerships were complaining to manufacturers
that they were not sufficiently supplied with the top-selling models,
and there is some evidence that the Second Paragraph also aims to
avert any reduction in product allocation for existing motorcycle
dealerships.
B.
In October 2000 Yamaha, a motorcycle distributor, sought to
authorize a new dealership in Rosedale, Virginia, roughly twenty-six
miles from Jim’s Motorcycle, Inc., d/b/a Atlas Honda/Yamaha
(Atlas), a franchised Yamaha dealer in Bristol, Virginia. Yamaha’s
nationwide sales had increased in each of the preceding three years,
prompting it to seek additional dealers. The proposed dealership in
Rosedale, Mountain Suzuki, was six miles outside Atlas’s relevant
market area as defined by the First Paragraph. Because the First Para-
graph offered it no protection, Atlas filed a Second Paragraph protest
with the Commissioner of the Virginia Department of Motor Vehicles
(DMV), the state official responsible for administering the statute.
The Commissioner used the Atlas protest to issue a decision, dated
August 6, 2001, interpreting the Second Paragraph and establishing
procedures for resolving protests filed under that provision. The Com-
missioner first ruled that when an existing dealer files a protest, a for-
mal evidentiary hearing will be held if the dealer makes a preliminary
showing in an informal fact-finding proceeding that it represents "in
a not insignificant or insubstantial way" the line-make of motorcycle
in the county, city, or town where the new dealer would be located.
J.A. 41-46; Va. Code Ann. § 46.2-1993.67(5). The Commissioner did
not define "in a not insignificant or insubstantial way" in terms of a
fixed number of sales or percentage of market share, but referred to
it as not "de minimus [sic] or incidental or accidental." J.A. 47. In
determining whether the manufacturer has met its ultimate burden of
proving inadequate representation of its line-make, the Commissioner
would focus only on the market in the county, city, or town in which
the proposed new dealership would be located. The Commissioner
also did not define "inadequate representation," but he said that "part
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of the concept" was "market penetration," that is, the extent to which
a product is recognized and bought by customers in a particular mar-
ket. J.A. 49. Finally, the Commissioner took the Second Paragraph lit-
erally and accepted that the statement "[a]ny existing franchise dealer
may file a protest" means that any existing Virginia motorcycle dealer
may protest the establishment of a new dealership in the same line-
make anywhere in the Commonwealth.
As for the Atlas protest itself, the Commissioner ruled that Atlas
was entitled to a formal evidentiary hearing. Atlas had sold fourteen
Yamaha motorcycles in the four years from 1997 through 2000. Ten
of the fourteen sales occurred in a single year; Atlas sold either one
or two Yamaha motorcycles in each of the remaining three years.
Though the irregularity of these sales might suggest they were inci-
dental, the fourteen sales over four years represented fifty-eight per-
cent of all Yamaha brand sales in Russell County, Virginia.
Accordingly, the Commissioner concluded that Atlas represented a
"not insubstantial" number of Yamaha bike sales in the Russell
County market. J.A. 46-47.
In May 2002 Harley-Davidson Motor Company, Inc., amicus
curiae in this case, notified Virginia dealers of its intent to authorize
a new dealership in Prince George County, Virginia. H.D. Motorcy-
cles Sales & Service, Inc. (HDM), a Richmond Harley-Davidson
dealer, filed a protest under both the First and Second Paragraphs.
The new dealership was outside HDM’s relevant market area, a cir-
cumstance that disposed of the First Paragraph protest. In informal
fact-finding proceedings before the Commissioner, evidence was
offered that HDM’s share of the motorcycle market in Prince George
County was 14.9 to 16.7 percent for the years 1999 through 2001.
This led the Commissioner to determine that HDM represented the
Harley-Davidson line-make in the county in a not insubstantial way.
The Commissioner thus concluded that HDM was entitled to a formal
evidentiary hearing on the issue of inadequate representation.
C.
In the meantime, on July 25, 2001, Yamaha sued the Commis-
sioner and Atlas in federal court seeking a declaration that the Second
Paragraph violates the dormant Commerce Clause of the Constitution
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and an injunction prohibiting the paragraph’s enforcement. The par-
ties stipulated to certain facts, and the district court conducted a one-
day bench trial in April 2002. In considering the case, the district
court recognized that no Virginia court had interpreted the Second
Paragraph. Accordingly, before issuing a decision, the district court
certified four questions to the Supreme Court of Virginia that dealt
with the scope of an existing dealer’s protest rights.
The Supreme Court of Virginia confirmed in large part the Com-
missioner’s interpretation of the Second Paragraph. Quillian, 571
S.E.2d 122. The court made clear that the Second Paragraph grants
"any existing franchised dealer" in Virginia the right to protest when-
ever a manufacturer seeks to authorize a new dealership anywhere in
the Commonwealth that would sell the same line-make as the existing
dealer. Id. at 127. The Virginia court further explained that once a
protest moves to a formal evidentiary hearing, the manufacturer must
prove "inadequate representation . . . in the market area likely to be
served by the new dealer." Id. at 126-28 (emphasis omitted). Thus, the
state court rejected the Commissioner’s interpretation that proof of
inadequate representation should be limited to the same county, city,
or town in which the proposed dealer would be located. Id. The Com-
missioner adjusted his standards accordingly.
After the Supreme Court of Virginia issued its decision, Yamaha’s
dormant Commerce Clause challenge resumed in the district court.
The parties conducted further discovery, and thereafter the court held
two additional days of trial. On July 31, 2003, the court issued a com-
mendably thorough decision that included extensive findings of fact
and conclusions of law. The court first determined that the Second
Paragraph did not discriminate against interstate commerce. The dis-
trict court then found that the Second Paragraph imposed severe bur-
dens on interstate commerce, although it ultimately concluded that
these burdens were not cognizable under the dormant Commerce
Clause. We will recount a few of the findings here, reserving others
for later.
The district court found that "even a frivolous protest to which the
Commissioner responds with uncharacteristic dispatch could take
years to resolve" because a protesting dealer who is denied a hearing
may appeal to a Virginia circuit court and then to the Virginia Court
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of Appeals. Yamaha Motor Corp. v. Smit, 276 F. Supp. 2d 490, 501
(E.D. Va. 2003) (emphasis added). And because the Commissioner
himself has frequently failed to abide by the statutory timetable for
resolving First Paragraph protests, his "promise to resolve Second
Paragraph protests in a timely manner rings rather hollow." Id. The
district court also found that in addition to being lengthy, the protest
process is unpredictable: the standards for granting a protest are
"highly subjective" and "remarkably vague" because the Commis-
sioner has resisted defining what "not insubstantial representation"
means. Id. (internal quotation marks omitted). Instead, the Commis-
sioner has opted to grant a hearing whenever an existing dealer pro-
duces some evidence of nonincidental representation. Id. As a result,
the district court found that
a manufacturer cannot predict with any certainty whether
any of the potential protests . . . will actually advance to the
formal evidentiary hearing phase, and must assume that,
given the lack of a clearly defined standard and the Com-
missioner’s bias in favor of granting the hearing, that it will
be subjected to the full administrative process, the result of
which can be contested in subsequent judicial proceedings.
Id. (internal citation omitted). The court also found that protests were
"virtually certain" to occur in response to any proposal for a new
dealership. Id. at 502. Expert economists testified that, given the tight
supply of top-selling motorcycles, "an existing dealer has the eco-
nomic incentive to file a protest of questionable merit in order to gain
bargaining leverage" with manufacturers. Id. In addition, the district
court described a ripple effect from the Second Paragraph that will
thwart the establishment of new dealerships in Virginia. It is likely,
the court found, that prospective dealers will not be able to secure the
financing to acquire new franchise locations because manufacturers
will be reluctant to provide the necessary commitment letters when
protests are virtually certain. Id. Finally, the court recognized that the
economic realities produced by the Second Paragraph had led
Yamaha and Harley-Davidson "to forego establishing new dealers in
Virginia." Id. This has caused "a relative reduction in intrabrand and
interbrand competition." Id. at 503. As the court noted, this should
"[a]s a matter of economic theory . . . lead to higher prices for con-
sumers," but there is no evidence yet of such an effect. Id.
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Despite its finding that the "Second Paragraph, and the procedures
that the Commissioner has adopted to enforce it, create a significant
hurdle for manufacturers and their prospective new dealers," id. at
500, the district court determined that the burdens imposed by the
Second Paragraph do not violate the dormant Commerce Clause
because the statute does not "regulate[ ] in an area where there is a
‘compelling need’ for national uniformity," id. at 514. The court
therefore granted judgment for the defendants, and Yamaha appeals.
We review the district court’s factual findings for clear error and its
legal interpretation of the Commerce Clause de novo. Williams v.
Sandman, 187 F.3d 379, 381 (4th Cir. 1999).
II.
The Commerce Clause grants Congress the power "[t]o regulate
Commerce . . . among the several States." U.S. Const. art. I, § 8, cl.
3. Although the Clause speaks only of congressional power, the
Supreme Court since 1852 "has construed the Commerce Clause as
incorporating an implicit restraint on state power even in the absence
of congressional action — hence the notion of a ‘dormant’ Commerce
Clause." 1 Laurence H. Tribe, American Constitutional Law § 6-2, at
1030 (3d ed. 2000) (citing Cooley v. Board of Wardens, 53 U.S. (12
How.) 299, 318 (1852)). The dormant Commerce Clause thus "limits
the power of the States to erect barriers against interstate trade." Den-
nis v. Higgins, 498 U.S. 439, 446 (1991) (internal quotation marks
omitted).
Analysis of a dormant Commerce Clause challenge to a state stat-
ute proceeds on two tiers, a discrimination tier and an undue burden
tier. See Envtl. Tech. Council v. Sierra Club, 98 F.3d 774, 785 (4th
Cir. 1996). Under the discrimination tier, "[w]hen a state statute
clearly discriminates against interstate commerce, it will be struck
down unless the discrimination is demonstrably justified by a valid
factor unrelated to economic protectionism. Indeed, when the state
statute amounts to simple economic protectionism, a virtually per se
rule of invalidity has applied." Wyoming v. Oklahoma, 502 U.S. 437,
454-55 (1992) (internal quotation marks and citations omitted). Under
the undue burden (or Pike balancing) tier, "[w]here the statute regu-
lates evenhandedly to effectuate a legitimate local public interest, and
its effects on interstate commerce are only incidental, it will be upheld
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unless the burden imposed on such commerce is clearly excessive in
relation to the putative local benefits." Pike v. Bruce Church, Inc.,
397 U.S. 137, 142 (1970). A "less strict scrutiny" applies under the
undue burden tier. Wyoming, 502 U.S. at 455 n.12. As the Supreme
Court has recognized, "there is no clear line separating close cases on
which scrutiny [or tier of analysis] should apply." Id. (internal quota-
tion marks omitted). Here, the district court rejected Yamaha’s dor-
mant Commerce Clause challenge after applying both tiers of
analysis. The Court held that the Second Paragraph of Virginia Code
§ 46.2-1993.67(5) neither discriminates against nor imposes any cog-
nizable burdens on interstate commerce. Yamaha argues that the court
erred in each of these determinations.
A.
A "state law [that] discriminates [against interstate commerce]
facially, in its practical effect, or in its purpose," Envtl. Tech. Council,
98 F.3d at 785, will be struck down unless the state demonstrates
"both that the statute serves a legitimate local purpose, and that this
purpose could not be served as well by available nondiscriminatory
means," Maine v. Taylor, 477 U.S. 131, 138 (1986) (internal quota-
tion marks omitted). The district court found that the Second Para-
graph does not discriminate against interstate commerce, and thus
took the discrimination-tier analysis no further.
The district court concluded, and Yamaha does not dispute, that the
language of the Second Paragraph is neutral on its face. The provision
regulates motorcycle manufacturers, and it makes no distinction
between in-state and out-of-state manufacturers. There are no motor-
cycle manufacturers in Virginia, but if there were, the statute would
"visit[ ] its effects equally upon both interstate and local business."
Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 36 (1980). Further, as
we discuss in greater detail in our Pike analysis, see infra part II.B,
the Second Paragraph has a legitimate general purpose: to protect
existing motorcycle dealers in Virginia from unfair practices by man-
ufacturers (regardless of their location) in the establishment of new
dealerships. We therefore turn to the district court’s determination
that the Second Paragraph does not discriminate in its practical effect.
In addressing the issue of discriminatory effect, the district court
properly focused on the "probable effect[ ]," Lewis, 447 U.S. at 37,
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or the "discernable practical effect that [the] challenged statutory pro-
vision has or would have upon interstate commerce," Waste Mgmt.
Holdings, Inc. v. Gilmore, 252 F.3d 316, 335 (4th Cir. 2001). Yamaha
argues that the Second Paragraph discriminates in effect by conferring
a benefit on existing motorcycle dealers in Virginia at the expense of
existing dealers in other states. Yamaha and other motorcycle manu-
facturers distribute their bikes to dealers based on a national alloca-
tion system, under which dealers receive bike allotments based on
their prior sales and on national availability. As the district court
found, the demand for motorcycles has long exceeded supply, and
dealers are constantly in need of top-selling models. Virginia dealers
therefore have an incentive to file Second Paragraph protests as a
means of gaining leverage to negotiate with manufacturers for more
favorable product allocations. Any product allocation concessions
would come at the expense of other dealers, Yamaha argues. And
because Virginia has an equitable allocation law, see Va. Code Ann.
§ 46.2-1993.67(9), any concessions would come at the expense of
dealers in other states. Thus, the Second Paragraph has a discrimina-
tory effect, Yamaha claims, by giving added bargaining power to Vir-
ginia dealers, which they might leverage to extract more favorable
product allocations to the detriment of out-of-state dealers. The dis-
trict court held that Yamaha’s theory was too speculative to provide
a basis for finding the Second Paragraph discriminatory in its effect.
Yamaha, 276 F. Supp. 2d at 508.
As the district court’s discussion reveals, Yamaha did not produce
any evidence indicating that the Second Paragraph’s probable effect
would be that a manufacturer would yield to a protesting dealer’s
effort to extract additional motorcycles or some other advantage in
exchange for dropping a protest. The court pointed to the one (failed)
attempt by a Virginia dealer to use a protest to gain additional prod-
uct. HDM filed a Second Paragraph protest to Harley-Davidson’s pro-
posed establishment of a new dealership; thereafter HDM offered to
drop its protest in exchange for a sixty percent increase in bike alloca-
tion and the conversion of a secondary retail location into a full
dealership. In rebuffing HDM, Harley-Davidson indicated that it
would never give in to such demands. Thus, the district court found
that "the manufacturers have not acceded to extortionate allocation
demands and have no intent to do so." Id. This finding is supported
by the record, and the district court was correct in concluding that
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Yamaha did not produce any evidence that the Second Paragraph
would have any probable or discernible discriminatory effects on
interstate commerce. Accordingly, we will not disturb the district
court’s conclusion that the Second Paragraph does not discriminate
against interstate commerce.
B.
Yamaha next argues that the district court erred when it determined
that the Second Paragraph "survives the Pike inquiry" because it
"creates no cognizable burdens on interstate commerce." Id. at 514.
A statute that does not discriminate against interstate commerce may
still be struck down under Pike balancing if "the burden imposed on
such commerce is clearly excessive in relation to the putative local
benefits. If a legitimate local purpose is found, then the question
becomes one of degree." Pike, 397 U.S. at 142 (internal citation omit-
ted); see also General Motors Corp. v. Tracy, 519 U.S. 278, 287
(1997) (stating that the dormant Commerce Clause also prohibits reg-
ulation that "unduly burdens interstate commerce"). A statute need
not be perfectly tailored to survive Pike balancing, but it must be rea-
sonably tailored: "the extent of the burden that will be tolerated . . .
depend[s] on the nature of the local interest involved, and on whether
it could be promoted as well with a lesser impact on interstate activi-
ties." Pike, 397 U.S. at 142.
In determining whether a statute has "a legitimate local purpose"
and "putative local benefits," a court must proceed with deference to
the state legislature. See CTS Corp. v. Dynamics Corp. of Am., 481
U.S. 69, 92 (1987). Courts "are not inclined to second-guess the
empirical judgments of lawmakers concerning the utility of legisla-
tion." Id. (internal quotation marks omitted). Thus, we consider
whether the legislature had a rational basis for believing there was a
legitimate purpose that would be advanced by the statute. See id. at
92-93. We likewise apply a deferential standard in identifying a stat-
ute’s putative benefits. See id.
The Pike test requires closer examination, however, when a court
assesses a statute’s burdens, especially when the burdens fall predom-
inantly on out-of-state interests. See id. at 93; Minnesota v. Clover
Leaf Creamery Co., 449 U.S. 456, 473 n.17 (1981); Telvest, Inc. v.
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Bradshaw, 697 F.2d 576, 580 (4th Cir. 1983). Nevertheless, when
local economic interests are affected, "[n]ondiscriminatory measures
. . . are generally upheld, in spite of [some burden] on interstate com-
merce, in part because the existence of major in-state interests
adversely affected is a powerful safeguard against legislative abuse."
W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 200 (1994) (internal
quotation marks and alterations in original omitted). In other words,
burdened in-state interests can be relied upon to prevent or rectify leg-
islative abuse, but the same cannot be said of burdened out-of-state
interests. Thus, when there are few or no adversely affected in-state
interests, Pike balancing serves as a check against legislative abuse.
See Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429, 444 n.18
(1978) (upholding state highway regulations because they adversely
affect "local economic interests as well as other States’ economic
interests, thus insuring that a State’s own political processes will
serve as a check against unduly burdensome regulations").
In this case, the first part of the Pike analysis —determining
whether the Second Paragraph serves a legitimate local purpose — is
controlled by New Motor Vehicle Board v. Orrin W. Fox Co., 439
U.S. 96 (1978), and American Motors, 592 F.2d 219. In Orrin Fox the
Supreme Court upheld an automobile dealer franchise regulation chal-
lenged under the Due Process Clause and the Sherman Act, finding
that it served the legitimate purpose of addressing the "disparity in
bargaining power between automobile manufacturers and their deal-
ers" by providing protections for existing dealers (often small busi-
nesses) when new dealer franchises were proposed. 439 U.S. at 100,
107. Shortly thereafter, in American Motors we upheld a predecessor
to the First Paragraph that made it unlawful for a motor vehicle manu-
facturer "[t]o grant an additional franchise for a particular line-make
. . . in a trade area already served by [its] dealer or dealers . . . unless
the franchisor" gave written notice to its other dealers "in the trade
area;" a notified dealer could then request a determination by the
Commissioner as to whether the trade area would support another
dealer. Va. Code Ann. § 46.1-547(d) (1978); Am. Motors, 592 F.2d
at 221. In evaluating the statute’s purpose, we followed Orrin Fox
and determined that the Virginia General Assembly was legitimately
"‘empowered to subordinate the franchise rights of . . . manufacturers
to the conflicting rights of their franchisees where necessary to pre-
vent unfair or oppressive trade practices.’" Id. at 222 (quoting Orrin
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Fox, 439 U.S. at 107). The purpose of the Second Paragraph is basi-
cally the same as that of the predecessor to the First Paragraph we
upheld in American Motors. The Second Paragraph seeks to achieve
that purpose by more aggressive means, but this difference affects the
balancing of interests, not the legitimacy of the statute’s purpose.
Thus, we proceed to an assessment of the Second Paragraph’s bene-
fits and burdens under Pike balancing.
The district court struggled to articulate a benefit of the Second
Paragraph, stating that
the closest approximation of the benefit achieved by the
statute is that some number of existing dealers, who,
although located beyond the relevant market area defined by
the First Paragraph, serve the geographic market area of a
hypothetical prospective dealer in a not insignificant way,
will be protected against the diminution in return on their
investment in capacity and advertising that would occur
should the hypothetical dealer actually open.
Yamaha, 276 F. Supp. 2d at 512. The Commonwealth maintains that
such "objective precision in identifying benefits, beyond those pre-
sumed by the purpose of the statute . . . is not necessary." Br. for
Appellees at 38-39. Accordingly, the Commonwealth offers no new
argument for the benefits of the Second Paragraph. Instead, it falls
back on Orrin Fox and American Motors:
There is nothing in the record of this case sufficient to
raise any doubt that the second paragraph serves precisely
the same legitimate state interests served by the dealer pro-
tection statutes at issue in [Orrin] Fox and American
Motors. Those explanations of the legitimate interest
advanced by the second paragraph also describe the putative
local benefits that flow from the second paragraph.
Id. at 37-38.
Only rarely have we doubted a statute’s putative benefits, but we
did, for example, when we concluded that the purported "‘ruinous’
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effects of competition" that a statute aimed to combat were "entirely
speculative." Medigen, Inc. v. Pub. Serv. Comm’n, 985 F.2d 164, 167
(4th Cir. 1993). We do not discount the benefit of preventing oversa-
turation of the retail motorcycle market because it is not entirely spec-
ulative that existing dealers will suffer harm from excessive
competition. The First Paragraph, however, provides this same bene-
fit, and there is a serious question whether any additional benefit from
the Second Paragraph is clearly exceeded by the added burdens.
As the district court recognized, the burdens of the Second Para-
graph are severe. To begin with, the Second Paragraph is uniquely
anti-competitive even as dealer protection laws go. Although the First
Paragraph is a typical dealer protection statute, the Second Paragraph
"has no parallel in the law of any other state," Yamaha, 276 F. Supp.
2d at 495, and it creates a significant barrier to market entry, see id.
at 500. Unlike the Second Paragraph, the dealer protection statutes in
other states set geographic limitations on the protest rights of existing
dealers; of the eleven other state statutes submitted in the record, ten
limit protest rights to a market area radius of twenty miles or less.
(One state allows the market area to be defined in the dealership
agreement.)
The Second Paragraph creates a barrier to market entry because of
the "virtual certainty" of a protest whenever a manufacturer attempts
to authorize a new dealership. Id. at 502. "[E]ven a frivolous protest
. . . could take years to resolve," the district court found. Id. at 501.
In any event, the Commissioner has set quite a low threshold for what
an existing dealer must show to trigger a formal evidentiary hearing;
the dealer must only show that it represents the relevant line-make in
a "not insignificant or insubstantial" way in the county, city, or town
of the prospective dealer. J.A. 43. Thus, the district court found that
with "the Commissioner’s bias in favor of granting [a] hearing," a
manufacturer "must assume that . . . it will be subjected to the full
administrative process, the result of which can be contested in subse-
quent judicial proceedings." Yamaha, 276 F. Supp. 2d at 501. Even
if a formal hearing is denied, the existing dealer may pursue the mat-
ter in Virginia courts, "a process that could [go on for] years." Id.
In other states with dealer protection statutes, a manufacturer can
reasonably anticipate the regions where it might be susceptible to a
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protest and can plan its expansion accordingly. In Virginia, however,
a manufacturer has no way of avoiding the Second Paragraph’s reach;
targeting an underserved area of the Commonwealth will not spare it
a protest. For example, an existing dealer in Virginia Beach could
protest the establishment of a new dealership in Big Stone Gap, nearly
500 miles away. Thus, manufacturers cannot plan franchise expansion
in Virginia as they can in other states; instead, they are forced to play
a waiting game that could take years. The only business plan a manu-
facturer could implement would be to provide the statutorily required
notice of a proposed dealership and then hunker down for a long
fight.
The chilling effect of protests and potential protests on new dealer-
ship openings in Virginia has been established. Manufacturers incur
significant costs, measured in both money and effort, in defending
against protests, and this makes an attempt to open a new dealership
in Virginia more burdensome than anywhere else. Even though "de-
mand for motorcycles continues to increase," id. at 503, the "eco-
nomic realities" of the Second Paragraph have caused both Yamaha
and Harley-Davidson "to forego [all efforts to] establish[ ] new deal-
ers in Virginia." Id. at 502. Instead, the two manufacturers will "de-
vote their capital and business expansion efforts in other states." Id.
"One consequence of the decisions by Yamaha and Harley-
Davidson," the district court found, "is a relative reduction in intrab-
rand and interbrand competition." Id. at 503. The Second Paragraph
will also deter would-be franchisees, who will not want to experience
what happened to Harley-Davidson’s prospective dealer in Prince
George County, Virginia. That prospective dealer invested in a site,
quit his job, and moved his family to Prince George County, only
to be met with a Second Paragraph protest. The district court
found that "the uncertainty surrounding the protest process makes
it difficult for prospective dealers" to secure a dealership location,
and a definite location is a prerequisite to the Second Paragraph’s
notice procedure. Id. at 502. As the district court said, because
"protest is a virtual certainty," manufacturers will be reluctant to
provide commitment letters, and without commitment letters,
"prospective dealers are unlikely to be able to [obtain] the
financing necessary to secure a location." Id. All of these circum-
stances led the district court to its central finding that the Second
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Paragraph "create[s] significant economic burdens chilling the open-
ing of new dealerships." Id. at 514.
The district court held, however, that these "are not the type[s] of
burdens the Pike test is meant to address." Id. The court, relying on
dicta from a footnote in Tracy, said that Pike balancing applies only
when a "‘generally nondiscriminatory’" state law "‘undermine[s] a
compelling need for national uniformity in regulation.’" Id. (quoting
Tracy, 519 U.S. at 299 n.12). According to the district court, because
the Second Paragraph does not regulate in an area where there is a
compelling need for national uniformity, the provision "creates no
cognizable burdens on interstate commerce, and thus necessarily sur-
vives the Pike inquiry." Id.
We respectfully disagree with this analysis. Pike balancing is not
limited to cases where state statutes interfere with a "compelling need
for national uniformity in regulation." Cases decided under the dor-
mant Commerce Clause sometimes invoke this principle, for example,
where statutes "adversely affect interstate commerce by subjecting
activities to inconsistent regulations." CTS Corp., 481 U.S. at 88.
However, Pike balancing is conducted in situations where a need for
national uniformity is not implicated. See, e.g., Clover Leaf, 449 U.S.
at 472-74 (upholding statute prohibiting retailers from selling milk in
plastic containers because the "minor" burden on interstate commerce
was outweighed by "substantial" local benefits); Hunt v. Wash. State
Apple Adver. Comm’n, 432 U.S. 333, 352-54 (1977) (striking down
statute requiring that all apple containers include in-state grading
information in part because state could not justify it "in terms of the
local benefits"); Pike, 397 U.S. at 142-46 (striking down statute
requiring in-state packaging of cantaloupes prior to interstate ship-
ment because legitimate state interests were outweighed by incidental
burden on allocation of company’s resources). As noted, Tracy’s foot-
note twelve is dicta: the Supreme Court acknowledged in the footnote
that General Motors had brought only a first-tier (discrimination)
challenge under the dormant Commerce Clause, 519 U.S. at 298 n.12;
the Court thus had no occasion to rule on the proper contours of a
second-tier (Pike balancing) challenge. Pike balancing is therefore
appropriate in cases like this one, where interstate commerce is bur-
dened by a state law that imposes barriers to market entry.
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In proceeding with the Pike analysis, we note that the Second Para-
graph not only imposes cognizable burdens on commerce, it imposes
these heavy burdens predominantly on out-of-state interests. There
are no motorcycle manufacturers located in Virginia. And existing
motorcycle dealers, the major in-state interests affected by the provi-
sion, stand to benefit from the law’s enforcement. The existing deal-
ers cannot "be relied upon to prevent legislative abuse" because they
"ha[ve] been mollified by" the economic protection they currently
enjoy. W. Lynn Creamery, 512 U.S. at 200. Indeed, the in-state inter-
ests actively seek to protect the burdensome law. In 2001 the Virginia
Motorcycle Dealers Association asked each franchised dealer in the
Commonwealth "to contribute at least $1000 to cover the legal fees
for defending our ‘best in the nation’ franchise laws" and to cover the
costs of lobbying the General Assembly. J.A. 827. Although those
brave enough to try to open new dealerships are likely to be Virginia
residents, these few individuals are sure to be outnumbered and out-
gunned by the existing dealers. As a result, there is little political
check against the possibility of legislative abuse in the form of motor-
cycle franchise laws that unduly burden commerce. See Raymond
Motor, 434 U.S. at 444 n.18.
The unnecessary and excessive breadth of the Second Paragraph
persuades us that the statute’s burdens clearly exceed its benefits. As
for benefits, the district court could only approximate that "some
number of existing dealers," who are outside the relevant market area
protected by the First Paragraph but "serve the geographic market
area of a hypothetical prospective dealer in a not insignificant way,"
might receive some protection on their investment and advertising
"should the hypothetical dealer actually open." Yamaha, 276 F. Supp.
2d at 512. Weighed against this weak benefit is a substantial burden,
a barrier to market entry, that is unparalleled in scope. The Common-
wealth has erected this barrier in the absence of evidence that protec-
tion in the form of statewide protest rights for every motorcycle
dealer was needed. See Medigen, 985 F.2d at 167 (finding "no basis"
for "concluding that competition in this market has had or will have
any destructive effects"). The Commonwealth’s only explanation for
expanding the protection afforded by the First Paragraph is that
motorcycle dealerships tend to sell within a forty-mile radius, which
is beyond the First Paragraph’s "relevant market" protection of a
radius up to twenty miles. The Second Paragraph, of course, did not
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limit protest rights to dealers within a forty-mile radius of a proposed
dealership; it imposed no limit at all. The Pike inquiry requires us to
consider whether the Second Paragraph’s benefits could have been
achieved with a less restrictive alternative. We conclude that it could
have. The Second Paragraph could have imposed some rational geo-
graphic limit on protest rights, but it did not. Under the Second Para-
graph as it stands, an existing dealer at one end of Virginia can protest
a proposed dealership some 500 miles away at the other end of the
state. That is overreaching in the extreme. If we were to uphold the
blanket statewide protection of the Second Paragraph, we would be
giving Virginia the green light to extend similar protection to automo-
bile dealers and franchisees of other product lines, thereby turning
Virginia into an island of economic protectionism. If other states were
to follow suit, it would jeopardize what the dormant Commerce
Clause aims to preserve: "a national [free] market for competition
undisturbed by preferential advantages conferred by [individual]
State[s] upon [their] residents or resident competitors." Tracy, 519
U.S. at 299. The dormant Commerce Clause places certain limits on
protective regulation, and these limits have been exceeded in the Sec-
ond Paragraph.
III.
The Second Paragraph of Virginia Code § 46.2-1993.67(5) violates
the dormant Commerce Clause by imposing an undue burden on
interstate commerce. The judgment of the district court is therefore
reversed, and the case is remanded for entry of judgment in favor of
Yamaha.
REVERSED AND REMANDED
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