Case of First Impression: The Dealer Act and Price Discrimination (Part 1)

The first reported decision addressing the price discrimination prohibitions in New York’s Dealer Act came down this past spring. In Audi of Smithtown, Inc. v. Volkswagen Group of America, Inc., Justice Emily Pines granted partial summary judgment in favor of the dealer-plaintiffs, finding that two incentive programs instituted by Volkswagen Group’s Audi division resulted in unlawful price discrimination. The author of this blog represents the plaintiffs in this action. A copy of the decision may be found here.

The benefits of both programs – the CPO Purchase Bonus Program and the Keep-it Audi Program – were tied to the number of returning off-lease vehicles purchased by each dealer from the Volkswagen Group’s wholly owned subsidiary and captive finance source,Audi Financial Services (“AFS”). The problem arose because Audi created an entirely different set of standards for new dealers that do not have an established portfolio of lease returns to purchase.

In the Keep-it-Audi Program, which is nominally administered by AFS, new dealers were automatically placed in the highest participation category which gave those dealers the lowest prices on off-lease purchases as well as the highest bonus on each certified pre-owned vehicle sold, without having to meet any program requirements. On the other hand, existing dealers’ off-lease purchase targets for the highest participation category with the best pricing advantages were almost impossible to achieve for many dealers.

Because the Keep-it-Audi Program, on its face, resulted in different pricing on off-lease vehicles for different dealers, Audi’s primary defense was that AFS, and not Audi, administered the program, owned the off-lease cars and sold them to dealers. However, the plaintiff-dealers pointed to a provision of New York’s Dealer Act that makes it unlawful for a manufacturer to use a subsidiary, including a captive finance source, to accomplish what is otherwise unlawful conduct under the act. Justice Pines agreed with the plaintiff-dealers, holding as follows:

The fact that the entity actually running the incentiveprograms is not a “franchisor” is not sufficient to avoid Summary Judgment, where the franchisor itself states that it created the program in conjunction with that entity and that the stated purpose of increasing the residual values of lease return Audi automobiles would inure to the Defendant's financial benefit. There is nothing written in the language of the law itself nor in its clear legislative history, which sought to avoid abuses occasioned by the differential economic positions of franchisor and franchisee dealer, stating that Section 463(2)(u) would only apply where the dealer was able to demonstrate some sort of intent on the part of the franchisor. It is the act of violating the statute through the captive entity, and not the intent to violate the act itself, which is made unlawful under the subject section.

Part 2 of this post will discuss Justice Pines' ruling on the CPO Purchase Bonus Program.