Continental Imports, Inc., D/B/A Mercedes-Benz of Austin v. Mercedes-Benz USA, LLC Board of the Texas Department of Motor Vehicles, Whitney Brewster, in Her Official Capacity as Executive Director of the Texas Department of Motor Vehicles And Swickard Austin, LLC D/B/aMercedes-Benz of South Austin

• Court: Court of Appeals of Texas
• Decided: January 6, 2023
• Docket: 03-21-00377-CV
• Status: Published

Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-21-00377-CV

Continental Imports, Inc., d/b/a Mercedes-Benz of Austin, Appellant

v.

Mercedes-Benz USA, LLC; Board of the Texas Department of Motor Vehicles, Whitney Brewster, in her official capacity as Executive Director of the Texas Department of Motor Vehicles; and Swickard Austin, LLC d/b/a Mercedes-Benz of South Austin, Appellees

FROM THE 261ST DISTRICT COURT OF TRAVIS COUNTY NO. D-1-GN-21-003294, THE HONORABLE LORA LIVINGSTON, JUDGE PRESIDING

MEMORANDUM OPINION

Continental Imports, Inc. d/b/a Mercedes-Benz of Austin (Continental Imports)

appeals from a final order issued by the Board of the Texas Department of Motor Vehicles

denying Continental Imports’s protest of Swickard Austin, LLC d/b/a Mercedes-Benz of South

Austin’s application to establish a new Mercedes-Benz dealership in Austin, Texas. On appeal,

Continental Imports complains that (1) the final order was not supported by substantial evidence,

(2) in making its decision the Board departed from agency precedent without explanation, and

(3) the Board failed to state the reasons for its determination to deny the protest. Because we

conclude that the Board’s order is supported by substantial evidence and that the Board did not

act in an arbitrary or capricious manner or abuse its discretion, we will affirm the final order. BACKGROUND

Swickard Austin filed an application with the Motor Vehicle Division of the

Texas Department of Motor Vehicles to establish a new Mercedes-Benz dealership in Austin.

Continental Imports, which owns an existing Mercedes-Benz dealership in Austin initiated this

proceeding to protest Swickard Austin’s application.1 Mercedes-Benz USA, LLC (MB USA),

the Mercedes-Benz national distributor, intervened in the proceeding on Swickard’s behalf. The

Division referred the case to the State Office of Administrative Hearings (SOAH) for a contested

case hearing before an Administrative Law Judge (ALJ) to determine whether there was good

cause to establish a new Mercedes-Benz dealership in Austin. See Tex. Occ. Code § 2301.652(a)

(“The board may deny an application for a license to establish a dealership if, following a

protest, the applicant fails to establish good cause for establishing the dealership.”). SOAH

conducted an eight-day hearing before two ALJs who heard evidence from all parties. After the

close of the hearing, the ALJs issued a proposal for decision (PFD) finding that Swickard Austin

had demonstrated good cause for the addition of a new Mercedes-Benz dealership in Austin and

recommending that the Board approve Swickard Austin’s application. Continental Imports

excepted to most of the ALJs’ determinations in the PFD. MB USA filed a reply to the

exceptions, which Swickard Austin joined. MB USA filed no exceptions to the PFD but

recommended four revisions. After reviewing the exceptions and requested revisions, the

ALJs recommended making minor changes to two Findings of Fact and two additional minor

1 A car dealer may protest an application to establish a dealership if the person filing the protest is a franchised dealer of the same line-make whose dealership is located in the county in which the proposed dealership is to be located or within a 15-mile radius of the proposed dealership. See Tex. Occ. Code § 2301.652(b). There is no dispute that Continental Imports satisfied this statutory requirement and, therefore, had standing to protest Swickard Austin’s application.

2 changes to the PFD to correct misstatements. Because the ALJs determined that the remaining

exceptions filed by Continental Imports constituted disagreements with the PFD’s evaluation of

the evidentiary record, they recommended no further changes to the PFD or its Findings of Fact

and Conclusions of Law. After considering the administrative record, the Board issued an order

adopting the Findings of Fact and Conclusions of Law, including the minor changes to the

Findings of Fact recommended by the ALJs. The Board adopted the ALJs’ determination that

Swickard Austin met its burden of demonstrating good cause to establish a new Mercedes-Benz

dealership in Austin. Continental Imports then sought judicial review of the Board’s final order

in district court, and Swickard Austin removed the suit to this Court pursuant to section

2301.751(b) of the Texas Occupations Code. See id. § 2301.751(b)

DISCUSSION

The single relevant issue in a protest proceeding is “good cause.” Id.

§ 2301.652(a); Gene Hamon Ford, Inc. v. David McDavid Nissan, Inc., 997 S.W.2d 298, 306

(Tex. App.—Austin 1999, pet. denied). The burden of proving good cause to establish a new

dealership is on the applicant—in this case Swickard Austin. See Tex. Occ. Code § 2301.652(a).

In determining whether good cause exists, the statute requires the Board to consider seven

factors: (1) whether the manufacturer or distributor of the same line-make of a new motor

vehicle is being adequately represented as to sales and service; (2) whether the protesting

franchise dealer representing the same line-make of the new motor vehicle is in substantial

compliance with the dealer’s franchise, to the extent that the franchise is not in conflict with the

statute; (3) the desirability of a competitive marketplace; (4) any harm to the protesting

franchised dealer; (5) the public interest; (6) any harm to the applicant; and (7) current and

3 reasonably foreseeable projections of economic conditions, financial expectations, and the

market for new motor vehicles in the relevant market area. Id. Although the Board must

consider all the factors, the statute does not place any emphasis on one factor over another.

Id.; see Grubbs Nissan Mid-Cities, Ltd. v. Nissan N. Am., Inc., No. 03-06-00357-CV, 2007 WL

1518115, at *4 (Tex. App.—Austin May 23, 2007, pet. denied) (mem. op.). Because the

legislature has given the Board exclusive jurisdiction to determine the issue of good cause,

the question of how best to resolve the issue, including the weight to be given each statutory

factor, is a matter committed to the Board’s discretion. Austin Chevrolet, Inc. v. Motor Vehicle

Bd., 212 S.W.3d 425, 432 (Tex. App.—Austin 2006, pet. denied). This Court has previously

recognized that we may not substitute our judgment for that of the Board on the weight to

be given each of the required statutory factors. See Meier Infinity Co. v. Motor Vehicle Bd.,

918 S.W.2d 95, 100 (Tex. App.—Austin 1996, writ denied).

We review the Board’s final order and its good cause determination under the

substantial evidence rule. See Tex. Occ. Code § 2301.751(a); Tex. Gov’t Code § 2001.174(a)(2)

(“A party to a proceeding affected by a final order, rule, or decision or other final action of the

board with respect to a matter arising under this chapter . . . may seek judicial review of the

action under the substantial evidence rule . . . in the court of appeals for the Third Court of

Appeals District.”); Buddy Gregg Motor Homes, Inc. v. Motor Vehicle Bd., 156 S.W.3d 91, 98

(Tex. App.—Austin 2004, pet. denied) (applying substantial evidence review in cases removed

from district court). This standard requires that we reverse or remand a case for further

proceedings in the following circumstances:

[I]f substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions, or decisions are:

4 (A) in violation of a constitutional or statutory provision;

(B) in excess of the agency’s statutory authority;

(C) made through unlawful procedure;

(D) affected by other error of law;

(E) not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole; or

(F) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

Tex. Gov’t Code § 2001.174(2). The standards for a substantial evidence review are well

established:

Under the substantial evidence rule we review the evidence as a whole to determine if it is such that reasonable minds could have reached the same conclusion as the agency in the disputed action. We may not substitute our judgment for that of the agency and may only consider the record on which the agency based its decision. The issue before us is not whether the agency reached the correct conclusion but whether there is some basis in the record for its action. Although substantial evidence is more than a mere scintilla, the evidence in the record may actually preponderate against the agency’s decision and nonetheless amount to substantial evidence. We presume that the agency’s findings, inferences, conclusions, and decisions are supported by substantial evidence, and the burden to prove otherwise is on the appellant. Finally, the agency’s decision should be reversed only if the party challenging the decision demonstrates that the absence of substantial evidence has prejudiced the party’s substantial rights.

Citizens Against Landfill Location v. Texas Comm’n on Envtl. Quality, 169 S.W.3d 258, 264

(Tex. App.—Austin 2005, pet. denied) (citations omitted); see also North E. Indep. Sch. Dist. v.

Riou, 598 S.W.3d 243, 251 (Tex. 2020) (“Review under the substantial-evidence rule is highly

deferential—the issue is not whether the agency’s decision is correct, but whether the record

demonstrates a reasonable basis for it.”). “The question whether an agency’s determination

meets [the substantial-evidence standard] is one of law.” Texas Comm’n on Envtl. Quality v.

5 Maverick Cnty., 642 S.W.3d 537, 547 (Tex. 2022) (quoting Montgomery Indep. Sch. Dist. v.

Davis, 34 S.W.3d 559, 566 (Tex. 2000)).

There are also narrow circumstances in which an agency decision can be reversed

as “arbitrary and capricious” even though it is supported by substantial evidence. See Tex.

Gov’t Code § 2001.174(2)(F); Texas Health Facilities Comm’n v. Charter Med.-Dall., Inc.,

665 S.W.2d 446, 454 (Tex. 1984) (“In enacting the APTRA, it is clear that the legislature

intended to distinguish between agency action that is not supported by substantial evidence and

agency action that is arbitrary and capricious.”). This Court has held, however, that “the finding

of an act, which is supported by substantial evidence, to be arbitrary and capricious must be

based on a violation of due process or some other unfair or unreasonable conduct that shocks the

conscience.” Santulli v. Texas Bd. of Law Exam’rs, No. 03-06-00392-CV, 2009 WL 961568,

at *4 n.5 (Tex. App.—Austin Apr. 10, 2009, pet. denied) (mem. op.) (quoting Texas State Bd. of

Dental Exam’rs v. Silagi, 766 S.W.2d 280, 285 (Tex. App.—El Paso 1989, writ denied)).

The Board’s order granting Swickard Austin’s application determined in

Conclusion of Law 15 that Swickard Austin met its burden of demonstrating good cause for the

establishment of a Mercedes-Benz dealership in South Austin. In Conclusions of Law 8 through

14, the Board addressed each of the seven “good cause” factors in Texas Occupations Code

section 2301.652(a) and determined that:

8. The [Mercedes-Benz] product lines are not being adequately represented as to sales and service in the Austin [area of responsibility]. Tex. Occ. Code § 2301.652(a)(1).

9. [Continental Imports] is in substantial compliance with its dealer franchising agreements. Tex. Occ. Code § 2301.653(a)(2).

6 10. A new [Mercedes-Benz] dealership in South Austin will promote healthy inter-brand and intra-brand competition in the relevant markets. Tex. Occ. Code § 2301.652(a)(3).

11. Establishing a new [Mercedes-Benz] dealership in South Austin will not cause [Continental Imports] to suffer significant harm. Tex. Occ. Code § 2301.652(a)(4).

12. Establishing a new [Mercedes-Benz] dealership in South Austin is in the public interest. Tex. Occ. Code § 2301.652(a)(5).

13. The evidence failed to establish that [Swickard Austin] will be harmed if the Application is denied. Tex. Occ. Code § 2301.652(a)(6).

14. Current and reasonably foreseeable projections of economic conditions, financial expectations, and the market for new motor vehicles in the relevant market area favor the establishment of a new [Mercedes-Benz] dealership in South Austin. Tex. Occ. Code § 2301.652(a)(7).

Following issuance of the Board’s order, Continental Imports filed suit for judicial review in

Travis County District Court, and Swickard Austin removed the suit to this Court pursuant to

Texas Occupations Code section 2301.751. See Tex. Occ. Code § 2301.751(b).

Continental Imports raises three general complaints about the Board’s order.

Continental Imports asserts that the Board’s determinations regarding the statutory factors for

establishing good cause were not supported by substantial evidence, that the Board failed to

follow agency precedent, and that the Board’s order fails to comply with section 2301.711(b)(3)

of the Texas Occupations Code because it does not provide “the reasons for the particular

actions taken.” We address each of these complaints in turn.

Substantial Evidence

We first consider whether there is substantial evidence in the record to support the

Board’s determinations on each of the seven statutory factors it must consider in determining

whether good cause exists to establish a new Mercedes-Benz dealership in Austin.

7 1. Adequacy of Representation

MB USA presented evidence that nationwide, Mercedes-Benz sales exceed those

of its primary competitors (BMW, Lexus, and Audi) but in the Austin AOI2 Mercedes Benz

vehicle registration has lagged behind its competitors. Moreover, in the Austin AOI, Mercedes-

Benz has underperformed compared to its competitors in terms of sales volume and registration

effectiveness since 2012, ranking lowest of market dealers in registration effectiveness.

Mercedes-Benz fell further behind as a brand in the Austin AOI after BMW opened a South

Austin dealership in 2018, registering 330 vehicles compared to 925 by BMW, 912 by Lexus,

and 665 by Audi. MB USA’s expert testified that, based on the national registration benchmark,

expected Mercedes-Benz vehicle registrations in the Austin AOR3 in 2016 was 2,006, but there

were only 1,581 registrations for a shortfall of 425. Mercedes-Benz’s registration effectiveness

in the Austin AOR was 78.8 percent, with 100 percent representing an “average” registration

effectiveness. Additionally, the proposed South Austin AOI was the fourth worst in registration

effectiveness under the national standard and the third worst under the Texas standard. MB

USA’s expert testified that the Austin market consistently performs below average, whether

applying the national or Texas average. MB USA disputed Continental Imports’s argument that

it is unable to capture more registrations due to lack of supply of certain vehicles because that

lack of supply would affect dealers nationwide and would not explain why Continental Imports

falls below national benchmarks. The ALJs found that the evidence established that Mercedes-

Benz was not adequately represented in terms of vehicle sales in the Austin AOI and AOR and

2 “AOI” is an initialism for “Area of Influence,” which is a geographic area defined by a collection of contiguous ZIP codes around the location of a given dealer. 3 “AOR” is an initialism for “Area of Responsibility,” which is a collection of AOIs that are connected economically by things like retail shopping and commuting patterns.

8 that it is being outsold by its competitors in Austin. The ALJs found that Mercedes-Benz lags

further behind its competitors in Austin than it does in Texas and nationally and that Continental

Imports’s assertion that this lag is due to supply issues was not compelling.

With regard to whether Mercedes-Benz is adequately represented in terms of

service, Continental Imports presented evidence that it is capturing all the realistically achievable

service opportunities in the Austin AOI. Continental Imports asserted that it has achieved higher

Service Opportunity Index scores than the national, regional, and area benchmarks. Continental

Imports provided testimony that it is building a new parking garage and additional service bays

that will expand its service department and help it continue to adequately represent Mercedes-

Benz in terms of service in the future. MB USA countered this evidence by providing evidence

that as of December 2018, 12,400 Mercedes-Benz vehicles were registered in the Austin AOI

and 4,615 of those vehicles had not been serviced by a Mercedes-Benz dealer within the past

13 months. According to MB USA, this constituted lost service value of almost $5.7 million.

Of the 7,900 vehicles that were serviced, 43 percent were serviced by Continental Imports

and 20 percent by other Mercedes-Benz dealers. MB USA presented evidence that Continental

Imports’s service department is at full capacity and its customers experience longer than average

wait times for service other than oil changes. MB USA witnesses testified that these problems

will not be solved by adding service bays because the issue is Continental Imports’s inability to

retain service technicians. MB USA also disputed Continental Imports’s testimony that younger

vehicle owners prefer taking their vehicles to be serviced at independent providers, asserting that

the evidence instead indicates that younger owners are going to independent service providers

because they are not able to get timely service from the dealers. Based on the evidence

presented, the ALJs found that, although Continental Imports performs better in terms of service

9 than sales, Mercedes-Benz is not being adequately represented on service in the Austin AOI.

The ALJs found that a significant number of Mercedes-Benz vehicles are being serviced by

independent providers, leaving millions of dollars in service lost to Mercedes-Benz. The ALJs

found that although the construction of additional service bays may help alleviate the service

wait times and potentially increase the number of vehicles Continental Imports can service, there

was no evidence presented to suggest that the impact would be large enough to significantly

reduce the lost service opportunity.

The ALJs stated that, taking into account the evidence regarding growth of the

Austin market in terms of population and high-income households and evidence that Continental

Imports has below-average sales effectiveness, the preponderance of the evidence shows that

Continental Austin is not adequately representing the Mercedes-Benz brand in terms of sales.

Additionally, the ALJs stated that the evidence presented shows that the Austin market has

ample service opportunity to support an additional dealership, and that significant service

opportunity is being lost. The ALJs concluded that the evidence presented regarding the

adequacy of representation factor demonstrated that the Mercedes-Benz product lines were not

being adequately represented as to sales or service in the Austin AOR.

2. Substantial Compliance with Dealer’s Franchise

MB USA argued that Continental Imports was not in compliance with its

franchise agreement because it did not achieve 100 percent sales effectiveness, which it

maintains constituted a substantial and material breach that significantly impaired the purpose of

the franchise requirement. There was evidence that Continental Imports achieved 61.6 percent

sales effectiveness in 2014, 71.1 percent sales effectiveness in 2017, and 62.8 percent sales

10 effectiveness in 2018. As of September 2019, Continental Imports had sales effectiveness of

approximately 75 percent. Continental Imports provided testimony that MB USA recently

renewed its franchise agreement and approved its parent company’s purchase of another

dealership. Moreover, MB USA had not sent any franchise noncompliance or cure notices

concerning any sales performance contractual obligations.

The ALJs rejected MB USA’s assertion that failure to achieve 100 percent sales

effectiveness demonstrated a failure by Continental Imports to comply with the franchise

agreement. The ALJs noted that the franchise agreement was not introduced into evidence and

there was no support for MB USA’s assertion that the franchise agreement required that

Continental Imports achieve 100 percent sales effectiveness. The authority MB USA relied on

was an easily distinguishable case in which the franchise agreement was introduced into

evidence and the parties did not dispute that the franchisee was required to meet 100 percent

of its minimum sales requirement. The ALJs found that MB USA failed to meet its burden

of demonstrating Continental Imports’s non-compliance with its franchise agreement and,

consequently concluded that Continental Imports was in compliance with its dealer franchise

agreement.

3. Desirability of a Competitive Marketplace

With regard to this statutory factor, the parties agreed that the establishment of a

new dealership increases price competition both within and between brands. Continental

Imports, however, argued that a new dealership would not result in lower prices for consumers

because it already faces price competition from other luxury brand dealerships. Continental

Imports also asserted that MB USA failed to prove that there is enough realistically available lost

11 opportunity in the marketplace to support the new dealership without harming Continental

Imports and, consequently, competition will not increase in a “healthy way.” Continental

Imports argued that Swickard Austin should have been required to submit a dealer application,

including a business plan, a balance sheet, a “breakeven” analysis,4 and other financial

projections in order to show that the proposed dealership would further healthy competition.

Continental Imports maintained that without reliable proof of the proposed dealership’s

estimated revenues and expenses, Swickard Austin could not show that it would be generating

profit to sustain itself rather than relying on Continental Imports to “subsidize” the new

dealership until some future time when the Austin market has grown enough to support

three dealerships. Continental Imports based this argument on its determination that, because

Swickard Austin proposed to sell primarily entry-level A- and C-class vehicles, it will be selling

most of its new vehicles at a loss.

MB USA countered that there was no evidence that Swickard Austin would sell

its vehicles at a loss and pointed to evidence of Swickard Austin’s success in creating profitable

and successful dealerships in other geographic locations. MB USA also relied on the evidence of

lost opportunity in the market in arguing that the market would support a new dealership without

the need for the existing dealership to “subsidize” it.

The ALJs rejected Continental Imports premise that the current Austin market

cannot support three dealerships. There was evidence that Continental Imports has a higher than

average gross profit on sales of new vehicles, charging more for vehicles than its peers on an

average per unit basis. There was evidence that Continental Imports increased its gross profit on

4 Continental Imports contends that the “breakeven” analysis includes, among other things, projected operating revenues, expenses, and financial information sufficient to determine a dealership’s “breakeven” point and its likelihood of being profitable.

12 finance, insurance, and service contract products sold with new vehicles. The ALJs considered

evidence that sufficient lost opportunity exists in the Austin market to support a new dealership

without causing harm to Continental Imports, specifically that the geographic area for the new

dealership is an underrepresented area for the brand, it has recent and projected population

growth, and includes a large distribution of higher-income households. The ALJs also

considered evidence that commercial and residential development is considerable and the

location is convenient for customers. The ALJs found that Continental Imports did not

demonstrate why it was necessary for Swickard Austin to submit a business plan or evidence of

its “break even” point for profitability to establish that adding a new dealership will promote

competition in the marketplace. The ALJs relied on evidence that Continental Imports is a

highly profitable dealership that is in a good position to compete in the market to conclude that

opening a new dealership would promote healthy competition in the marketplace.

4. Harm to Continental Imports

Continental Imports asserted that, pursuant to the Board’s previous order in

Landmark Chevrolet Corp. v. General Motors Corp., Chevrolet Motors Division,

No. 02-0002LIC (Tex. DMV Dec. 9, 2004), an existing dealer is not required to sacrifice its

profits to the proposed dealership if the amount of realistically achievable lost opportunity in the

market is fewer than the number of new units the proposed dealership must sell in order to break

even. Continental Imports’s experts testified that there is insufficient realistically achievable lost

opportunity in the Austin market to support a third dealership without reducing Continental

Imports’s profits. MB USA also presented evidence of untapped market opportunity, and the

ALJs found this evidence more persuasive. The ALJs also noted that, while in the Landmark

13 case the Board found that there was insufficient evidence of untapped opportunity in the market

to support an additional dealership, the Board stated that it is acceptable for an existing

dealership to experience some lost profits when a new dealership is established.

As it did with the adequate representation factor, Continental Imports argued that

evidence of Swickard Austin’s “breakeven” number is critical to establish that Continental

Imports would not be harmed by the establishment of a new dealership. Continental Imports

asserted that the market for entry-level luxury vehicles is insufficient to support the new

dealership because there were only 114 entry-level retail registrations lost to competitors in the

Austin AOR, 37 of which were in the proposed South Austin AOI as of May 2019. Continental

Imports argued that there was no evidence or explanation of how this lost sales opportunity could

support the 916 vehicle sales MB USA had assigned to the proposed dealership. MB USA

countered that the 916 vehicle planned sales volume was an estimate for the year 2023, not for

2019, which it stated was not an unreasonable estimate given the projected growth in the Austin

area. The ALJs found that Continental Imports failed to demonstrate that Swickard Austin’s

“breakeven number” was necessary to show that Continental Imports will not be harmed in

the face of persuasive evidence that sufficient opportunity exists in the market to sustain the

proposed dealership.

Continental Imports provided anecdotal evidence that when Mercedes-Benz

Georgetown relocated from Temple to Georgetown in 2004, Continental Imports’s new vehicle

sales dropped 35 percent within 90 days, its total profits dropped 45 percent (from $2 million to

$1 million) and it took four to five years for its profits to return to 2004 levels. Continental

Imports also testified that it believed it would lose service business to a new dealership. The

ALJs found this testimony to be unpersuasive as to whether Continental Imports would be

14 harmed, noting that Mercedes-Benz Georgetown’s relocation occurred 16 years earlier and the

Austin economy and luxury vehicle market had changed significantly since then.

Both Continental Imports and MB USA offered expert testimony regarding lost

sales opportunity in the existing market. Continental Imports argued that Mercedes-Benz USA’s

expert’s methodology was flawed because it unrealistically assumed that every ZIP code in the

Austin AOR should be at 100 percent registration effectiveness when, in fact, there are

significant demographic differences among ZIP codes. Continental Imports also faulted the

expert testimony on the ground that the gross-loss number used was inflated and unreliable

because there was no determination of the normal or expected level of gross loss present in the

Austin AOR or the amount of gross loss that would remain if the proposed dealership were

established. Finally, Continental Imports challenged this expert testimony because it made no

determination of the normal level of expected in-sell in the Austin AOR or the amount of in-sell

that would remain if the proposed dealership were established.

The ALJs detailed the testimony of each of the parties’ experts and explained that

it found Continental Imports’s projections and analyses unpersuasive. The ALJs explained that

the methodologies that Continental Imports’s experts used have not been accepted by the

automotive industry or the Board, and their chosen methodologies were not improvements on

the accepted methodologies used by MB USA’s experts.

The ALJs also detailed the competing testimony about the lost service opportunity

in the market presented by the parties’ experts as well as evidence that Continental Imports’s

profitability is not dependent on new vehicle sales but rather on fixed operations such as service,

parts, and body shop departments. The ALJs stated that it was unpersuaded by Continental

Imports’s arguments regarding potential losses, finding that they were unsupported by the record

15 or relied on expert testimony and reports that the ALJs did not find to be persuasive. Based on

the evidence presented, including forensic analysis that showed Continental Imports would

compete effectively with a new dealership given its diversification and profitability, the ALJs

concluded that Continental Imports would suffer little or no harm from the addition of a new

sales point in South Austin.

5. Public Interest

Continental Imports, relying on PFDs in previous dealership application hearings,

asserted that the public interest factor could not be satisfied without reliable proof of the

proposed dealership’s estimated revenues and expenses because an unprofitable dealership

could not be in the public interest. Continental Imports also asserted that, without an analysis of

the number of new vehicles the proposed dealership must sell to break even, harm to the

protesting dealer cannot be assessed for purposes of determining the public interest. Based on its

understanding that Swickard Austin’s business model included selling entry-level vehicles to

younger customers, Continental Imports argued that Swickard Austin could only be successful if

it took sales from Continental Imports because there were not otherwise sufficient entry-level

sales available in the market. MB USA countered that the previous PFDs addressed the

profitability of the existing dealership, rather than the proposed dealership, and found that

unprofitable existing dealerships are not in the public interest. As such, MB USA argued that the

previous PFD did not stand for the proposition that evidence of how many vehicles the new

dealership would need to sell to be profitable was required to demonstrate that a new dealership

would be in the public interest. The ALJs agreed with MB USA’s reading of the previous PFD,

finding that it did not discuss requiring proof of the proposed dealership’s estimated revenues

16 and expenses but, rather, discussed the profitability of existing dealerships. The ALJs also

found that Continental Imports’s assertion that a “large volume” of entry-level sales was not

realistically available in the market was vague and unsupported by the evidence in the record.

Instead, the ALJs found that the evidence demonstrated sufficient lost opportunity, including of

entry-level sales, were available to support the proposed dealership.

The ALJs found that the public interest would benefit from increased competition

in the marketplace, the convenience of having an additional dealership, job creation from the

construction and operation of the proposed dealership, and the new tax base created by additional

vehicle and parts sales. The ALJs detailed the evidence presented that construction of the

dealership would create 141 full-time jobs with a combined direct and indirect impact of $9.4

million in labor income and a $12.9 million addition to the Austin gross regional product. There

was evidence that dealership operations would support 376 full-time equivalent positions for

the dealership and indirect businesses, with a total earned income of $21.6 million per year.

The ALJs reiterated their finding that there was evidence that the Austin market is sufficient

to support a new Mercedes-Benz dealership without taking sales from the existing dealers.

Based on the evidence presented, the ALJs concluded that establishing a new Mercedes-Benz

dealership in South Austin was in the public interest.

6. Harm to Swickard Austin

The ALJs considered evidence as to whether denial of the application to establish

a new dealership would cause harm to Swickard Austin. There was evidence that Swickard

Austin borrowed money to acquire the proposed site and paid fees for attorneys and architects.

Continental Imports, however, argued that Swickard Austin would be able to recoup all costs and

17 fees by selling the proposed location. The ALJs noted that Swickard Austin and MB USA had

the burden of demonstrating harm to Swickard Austin. Although there was evidence that

Swickard Austin might lose some unspecified portion of the total purchase price of the property

if the application were denied, it was also possible that Swickard Austin would recoup all funds

expended or even make a profit. The ALJs found that the evidence presented was too

speculative to establish meaningful harm to Swickard Austin if the application were denied. The

ALJs concluded that the evidence failed to establish harm to Swickard Austin.

7. Projections of Economic Conditions, Financial Expectations, and the Market

The ALJs considered evidence addressing “reasonable foreseeable projections of

economic conditions, financial expectations, and the market for new motor vehicles in the

relevant market area.” There was evidence that Austin has grown significantly over the last

decade and its overall population is projected to continue growing in the future. Austin is

expected to continue seeing increases in higher incomes per household, growth in overall income

in the economy, higher employment and lower unemployment, and strong growth in income and

wages. There was evidence that Austin will continue to grow despite possible recessions and its

economy will recover more quickly than other economies if a recession does occur. There was

evidence that Austin has seen gains in luxury vehicle sales since 2014. Despite agreeing that the

economic conditions and market for new vehicles in the Austin market are positive, Continental

Imports disputed that a new dealership would be profitable. It also asserted that sales of the

Mercedes-Benz brand have been declining nationally and in Texas.

The ALJs noted that there was extensive evidence regarding the current and

projected economic growth and diversification and population growth in the Austin market with

18 significant growth in higher-income households. It also cited evidence that luxury vehicle sales

in Austin have risen steadily since 2014 and the fact that the parties do not dispute the economic

strength of the Austin market. The ALJs concluded that current and reasonably foreseeable

projections of economic conditions, financial expectations, and the market for new motor

vehicles favored the establishment of a new Mercedes-Benz dealership in South Austin.

After hearing evidence on each of the seven statutory good-cause factors, the

Board determined that five of the factors—adequacy of representation; desirability of a

competitive market; harm to Continental Imports; the public interest; and projections of

economic conditions, financial expectations, and the market—weighed in favor of establishing a

new dealership. The Board determined that one factor—Continental Imports’s compliance with

its franchise agreement—weighed against establishing a new dealership and one factor—harm to

Swickard Austin if application were denied—weighed neither for or against establishing a new

dealership. Based on its evaluation of the statutory factors, the Board concluded that good cause

existed for the establishment of the proposed Mercedes-Benz dealership in South Austin and that

Swickard Austin’s application should be granted.

Continental Imports challenges the Board’s order in several respects. First,

Continental Imports asserts that because there was no evidence of what Swickard Austin’s

“breakeven” point would be or how many cars it would have to sell to be profitable, the Board

could not have reasonably assessed five of the statutory factors it was required to consider in

making its good cause determination. Continental Imports maintains that agency precedent

requires that an applicant for a new dealership provide evidence of the proposed dealership’s

building plans, projected operating revenues, expenses, or other financial information needed to

determine the new dealerships “breakeven” point and its likelihood of profitability and without

19 that evidence, the Board could not “allow a dealership to be licensed in an extremely competitive

or hyper-competitive market.” We do not agree that an applicant is required to present the Board

with evidence of any specific type for the Board to reasonably assess the statutory factors.

Rather, the Board makes decisions based on specific proposals at specific geographic points in

specific markets at specific times and we must uphold those decisions if there is substantial

evidence to support them. See Grubbs Nissan Mid-Cities, Ltd., 2007 WL 1518115, at *6. This

Court has previously held that “the standard employed by the [Board] varies based on the facts

and circumstances in each case.” See Austin Chevrolet, 212 S.W.3d at 435. The Court also

noted that the Board has not committed itself to the use of a single standard for evaluating any of

the statutory factors and has used a variety of standards in its decisions. Id. Here, the Board

explained that it did not need evidence of Swickard Austin’s “breakeven” point to evaluate any

of the statutory factors in light of extensive evidence presented on each of the factors. For

example, with regard to the adequacy of representation factor, the ALJs detailed the evidence

they relied on and rejected Continental Imports’s assertion that it needed to have Swickard

Austin’s business plans and projections to establish that adding a new dealership would promote

competition in the marketplace and serve the public interest. The statute neither limits nor

prescribes the type of evidence that the Board considers in making its good cause determination.

There was substantial evidence supporting each of the Board’s determinations on the seven

statutory factors notwithstanding the lack of evidence of Swickard Austin’s “breakeven”

point. The lack of evidence of Swickard Austin’s “breakeven” point did not render the Board’s

order arbitrary or capricious. See Public Util. Comm’n v. Texas Indus. Energy Consumers,

620 S.W.3d 418, 427-30 (Tex. 2021) (rejecting argument that Commission had, in previous

cases, “set a standard” that required certain type of evidence to demonstrate prudence of

20 utility’s decision to complete construction of power plant and upholding Board’s determination

despite absence of such evidence because Board applied appropriate prudence standard for

assessing utility’s decision to complete construction and substantial evidence supported

Commission’s conclusions). The Texas Supreme Court explained that whether an agency’s

decision is arbitrary or capricious looks to the Board’s process. A Board decision is arbitrary if

it: “(1) failed to consider a factor the legislature directs it to consider; (2) considers an irrelevant

factor; or (3) weighs only relevant factors that the legislature directs it to consider but still

reaches a completely unreasonable result.” City of El Paso v. Public Util. Comm’n of Tex.,

883 S.W.2d 179, 184 (Tex. 1994). Here the record contains extensive evidence on each of the

statutory factors, the ALJs’ findings of fact and conclusions of law reveal that it carefully

considered each factor, and the Board concluded that five of the seven weighed in favor of

establishing a new dealership. The Board’s order was not arbitrary or capricious simply because

the Board did not require Swickard Austin to present evidence of its “breakeven” point. There is

a reasonable basis in the record for the Board’s conclusions on each of the statutory factors.

Continental Imports also complains that the Board’s order was arbitrary and

capricious and not supported by substantial evidence because, in its view, the expert testimony

and evidence presented by MB USA and Swickard Austin on the issue of lost sales and service

opportunity addressed only hypothetical, and not realistic, service and sales available for capture.

The ALJs detailed the competing expert’s testimony on both lost sales and lost service

opportunities available in the market, ultimately accepting the expert testimony provided by

Mercedes Benz USA and Swickard Austin. During the hearing process, the Board is free to

determine that “[one] party had the more convincing experts and appropriate methodology to

evaluate the statutory good cause factors.” Austin Chevrolet, 212 S.W.3d at 437-38. The Board

21 fully explained its decisions regarding lost sales and service opportunities available in the market

and did not act in an arbitrary or capricious manner. Rather, the Board determined that, based on

the evidence presented during the hearing process, Swickard Austin and MB USA had the more

convincing experts and more appropriate methodology to evaluate this statutory factor for the

Austin market for the time in question.

Continental Imports also asserts that it relied on agency precedent requiring proof

of an applicant’s “breakeven” point and, consequently, was harmed when the Board deviated

from this precedent by not requiring Swickard Austin to present that evidence in support of its

application. As has already been discussed, the Board’s decision was based on its evaluation of

the seven statutory factors and the PFD contains extensive fact findings related to those factors

that are supported by substantial evidence. “An agency is not bound to follow its decisions in

contested cases in the same way that a court is bound by precedent.” Flores v. Employees

Retirement Sys. of Tex., 74 S.W.3d 532, 533-34 (Tex. App.—Austin 2003, pet. denied).

Moreover, while the Board may have considered or relied on evidence of a proposed dealership’s

“breakeven” point in other cases, there is no Board rule or policy that requires an applicant to

present that type of evidence in order for the Board to assess the statutory factors. The statute

simply requires that the Board consider all the statutory criteria to make its good cause finding.

“[A]n agency’s final order must reflect that the agency considered the statutory factors, and its

underlying findings must be stated in such a way that a reviewing court can reasonably evaluate

whether the underlying findings support the statutory factors.” Grubbs Nissan Mid-Cities,

Ltd. 2007 WL 1518115, at *9. We may not substitute our judgment for that of the Board on

questions committed to the Board’s discretion. See Austin Chevrolet, 212 S.W.3d at 431. So

long as the evidence is such that reasonable minds could have reached the conclusion reached

22 by the agency, a reviewing court must uphold the agency’s final order. See Charter Med.-Dall.,

665 S.W.2d at 452-53. Having reviewed the record, we conclude that the evidence demonstrates

a reasonable basis for the Board’s determination that there was good cause for the establishment

of a new Mercedes-Benz dealership in South Austin despite not having before it evidence of the

new dealership’s “breakeven” point.

Finally, Continental Imports asserts that the Board’s order does not comply with

Texas Occupations Code section 2301.711(b)(3), which provides that the Board’s order must

“give the reasons for the particular actions taken.” See Tex. Occ. Code § 2301.711(b)(3).

Continental Imports argues that because the Board’s order adopts the ALJs’ findings of fact and

conclusions of law, but does not state that it is adopting the PFD as well, that the Board has

failed to “give the reasons” for denying its protest and granting Swickard Austin’s application to

establish a new dealership. The Board’s order states that “The Board enters this Final Order

having considered the administrative record.” The administrative record includes all the

evidence presented to the ALJs during the hearing, as well as the ALJs’ PFD—both the findings

of fact and conclusions of law and the 78 pages of analysis of the evidence presented at the

hearing. The reason for concluding that good cause existed for establishing a new dealership is

plainly the Board’s determinations regarding each of the statutory factors which are set out in the

conclusions of law. Each of these conclusions of law is supported by extensive fact findings

explaining how the Board reached a determination on which statutory factors weighed in favor of

and which weighed against establishing a new dealership. The mere fact that the Board’s order

does not recite that it was adopting the PFD, in addition to the 223 findings of fact and the

sixteen conclusions of law, does not obscure the reason for the Board’s decision. The Board’s

order complies with the statute’s requirement that the Board give the reasons that it denied

23 Continental Imports’s protest and granted Swickard Austin’s application to establish a new

Mercedes-Benz dealership in South Austin.

CONCLUSION

Because we conclude that the Board did not act in an arbitrary and capricious

manner or abuse its discretion and that the Board’s order is supported by substantial evidence

and not affected by other error of law, we affirm the Board’s final order.

__________________________________________ Chari L. Kelly, Justice

Before Chief Justice Byrne, Justices Kelly and Smith

Affirmed

Filed: January 6, 2023