Appeals Court Affirms Decision in Price Discrimination Case

Last year, in Audi of Smithtown Inc. v. Volkswagen Group of America, Inc., Justice Emily Pines of the Suffolk County Supreme Court issued the first decision addressing the price discrimination provisions of New York's Dealer Act.  (Justice Pines' decision may be found here).  The Court found that two Audi incentive programs violated the Dealer Act.   (My prior posts on this decision may be found here and here).   On November 15, 2012,  the Appellate Division: Second Department affirmed Justice Pines' decision in its entirety.  (The Second Department's decision may be found here).  The plaintiffs were represented in this case by this author.

The Second Department agreed with Justice Pines that the two Audi incentive programs at issue violated the New York Dealer Act's prohibition against price discrimination.  Under the two programs at issue, the Keep-it-Audi Program and the CPO Purchase Bonus Program, a dealer earned incentives based on the number of off-lease returns purchased by that dealer.  For qualifying dealers, the Keep-it-Audi Program offered preferential pricing on off-lease purchases and the CPO Purchase Bonus Program offered preferential pricing on purchases of new vehicles.

The crux of this case was that new Audi dealers automatically received the lowest prices on off-lease purchases that existing dealers were rarely, if ever, able to earn.  The existing dealers further argued that this resulted in them having higher costs to earn the bonus on new vehicles.   The Dealer Act broadly prohibits price discrimination but contains a safe harbor for incentive programs that affect price, so long as they are available to all dealers "on a proportionately equal basis."

Several of the Second Department's findings deserve particular attention.  First, that the Dealer Act's price discrimination statute covered not only Audi’s sales of new vehicles to its dealers, but also sales of off-lease vehicles by Audi's captive finance source, Audi Financial Services.  Second, that a vehicle's price can be affected by both up-front discounts and post-sale rebates.  Third, an incentive program affecting price will violate the Dealer Act if certain dealers must incur disproportionately higher costs to earn the benefits of the program.

In keeping with its regulatory and remedial purpose, the Second Department interpreted the Dealer Act’s two-tier pricing provisions broadly,  which may call into question the legality of many rebate-based incentive programs.  For example, incentive programs tied to facility upgrades could be deemed to violate the Dealer Act if a dealer is unable to meet the standard for reasons outside of its control (i.e. zoning) or if certain dealers are subject to disproportionally more expense to qualify (i.e. price of real estate).  Such programs could be held to not be available to all dealers on a proportionately equal basis, which would take them outside of the statutory safe harbor.