US court tells GKN to pay out pounds 331m

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The Independent Online
GKN, one of the UK's biggest car components groups, was dealt a serious and unexpected setback yesterday when a US court ordered the company to pay up to $554m (pounds 331m) in damages in a dispute over its American car exhaust business.

The scale of the award stunned the company and analysts and could wipe out its cash reserves and hit this year's final profit figures. The shares fell sharply on the news and despite some recovery in later trading closed down 35.5p at pounds 10.09p.

The class action was brought by small garage owners who operated franchises for Meineke Discount Muffler Shops, GKN's retail car exhaust chain and a tiny part of the group's world-wide operations. The jury in the district court in Charlotte, North Carolina, agreed that advertising commission payments charged to the franchise operators by Meineke's in-house agency were illegal.

They claimed GKN had defrauded them by covering up the payments after having pledged that the in-house advertising agency would not make a profit or charge commission.

Franchising is big business in the US but has attracted controversy in recent years over heavy-handed tactics by some multinational companies. The jury had used its discretion to award additional damages on top of the original claim for $31m to cover the commission money. Under US court rules the damages are then tripled. Though the award against GKN is for $398m, it could be as high as $554m.

A spokesman for the company said he was shocked by the announcement and said GKN would launch an appeal against the final judgment, expected in January. "All the advice we had been getting was that we had a very strong case and that advice still stands as far as we're concerned. We're confident we'll win through on appeal, which will be heard by three judges rather than a small town jury." However, the group is likely to have to lodge some or all of the cash in a bond with the court before the appeal, which could take up to a year to come to court. An extraordinary charge is likely to be made on GKN's accounts for 1996, though the final dividend, to be paid out in the spring, would not be cut.

GKN had cash reserves of pounds 483m on its books in its half-yearly accounts, which could be substantially reduced if the full award is upheld.