And Now...the Rest of the Story

As radio personality Paul Harvey was known to say: “in a minute, you’re going to hear…the rest of the story. Late this summer, in Gray v. Toyota Motor Sales, U.S.A., Inc., Case No. 10-CV-3081 (E.D.N.Y. August 25,2011), Toyota prevailed on a motion to dismiss a complaint based on Toyota’s refusal to approve two proposed sales of the dealership to other existing Toyota dealers. If the decision itself was bad for the dealer, the aftermath only got worse. The action was commenced in federal court in the Eastern District of New York and assigned to District Judge Joanna Seybert.

In 2006, Toyota first refused to approve the dealer’s sale, for over $32 million, of its franchise, facility and other assets to Group 1 Automotive, on the ground that Group 1 had an unsatisfactory CSI rating. In 2007, Toyota refused to approve another sale, for $31 million, to an individual, also on the ground that the proposed purchaser had a poor CSI rating. Finally, in 2008, Toyota approved the sale of the dealership to yet another individual, but for only $24 million. However, the selling dealer only commenced an action challenging Toyota’s two prior refusals in 2010. The complaint alleged common law claims (breach of contract, tortious interference with contract and prospective economic advantage, negligence and fraud) and violations of New York’s Franchised Motor Vehicle Dealer Act and the Federal Automobile Dealer’s Day in Court Act.

The dealer’s common law claims were premised on the arguments that Toyota’s decisions to reject the buy-sells based on the purchasers’ CSI ratings were either (1) per se unreasonable; or (2) a pretext for some other ulterior motive.

Judge Seybert rejected the ‘unreasonable per se’ argument outright, noting that “[c]ustomer good will is critical to any business, and it is logical for [Toyota] to be concerned about its dealers’ ability to satisfy their customers….This is particularly true because car dealers are often the face of a manufacturer, responsible for the ongoing integrity of the brand.” The Court more broadly rejected the dealer’s assertions that Toyota’s rejections were unreasonable in fact, a pretext for some other motive or fraudulent because the factual allegations in the complaint were conclusory and lacking in detail.

Judge Seybert also dismissed all of the claims based on New York’s Dealer Act. The dealer alleged that Toyota’s refusals violated section 463(2)(k) of the Dealer Act that makes it unlawful for a manufacturer to “unreasonably withhold consent to the sale or transfer” of a franchised dealership. Critically, section 463(2)(k) requires that a dealer commence an action or proceeding within 120 days after receiving notice of the manufacturer’s withholding of its consent to the proposed sale. Here, the dealer did not do so within 120 days of either of Toyota’s refusals and the section 463(2)(k) claim was dismissed.

The plaintiff dealer also alleged a violation of section 466 of the Dealer Act, which prohibits a manufacturer from imposing unreasonable restrictions on the sale or transfer of motor vehicle franchise. Here, the Court found that a 3-year statute of limitations period applied to a section 466 claim. That would appear to preclude an action based on the rejected Group 1 buy-sell but would not preclude an action based on the second rejected buy-sell. Nevertheless, Judge Seybert ultimately dismissed the section 466 claims for the same reasons she dismissed the common law claims: that “they are too conclusory to be credited.”

Finally, the Court dismissed the federal dealer’s day in court claim finding that the complaint failed to allege coercive, intimidating or threatening conduct as required by the statute.

However, Judge Seybert granted the plaintiff dealer leave to file an amended complaint within 30 days but the dealer elected not to do so. Then, without objection, Toyota obtained entry of a final judgment in its favor dismissing the action in its entirety.

And now, as Paul Harvey says…the rest of the story.

With judgment in hand, Toyota filed a motion pursuant to section 469 of the Dealer Act for attorney’s fees and costs in excess of $300,000 as the prevailing party in the action. That motion is now fully briefed and pending decision.

The Gray case contains a lot of lessons in terms acting promptly in commencing actions based on New York’s Dealer Act, properly pleading common law and statutory claims against manufacturers and exiting a case without creating additional unintended liability.