Federal Court Dismisses Arbitration Act Case

A previous post discussed a Dealer Arbitration Act case pending United States District Court in West Islip.  That case involved former Chrylser dealers that were rejected in bankruptcy but were successful in their arbitratations against Chrylser Group.   Judge Wexler previously held that, although the successful dealers could not be "continued" or "reinstatated" like GM wind-down dealers, they could "added" to Chrylser Group's dealer network and were, therefore, entitled to "customary and usual letters of intent."  A non-jury trial was held on December 3, 2012 on the sole issue of whether Chrysler Group did, in fact, offer the dealers a "customary and usual letter of intent."

In a decision entered on January 24, 2013, Judge Wexler agreed with Chrysler Group.  The Court considered 135 letters of intent (LOIs) issued by Chrysler Group between June 2009 and April 2011.  Of these 135 LOIs, 50 were with rejected dealers that reached pre-arbitration settlements with Chrysler Group; 32 were with rejected dealers that, like the plaintiff, prevailed in arbitration; and the remaining 53 were with new dealers not previously affiliated with Old Chrysler. 

The plaintiff dealers asked the Court to focus on 4 terms in their LOIs: site approval, existing dealer protests, facility requirements, and an option to purchase the facility.

The Court noted that 13 of 15 terms appeared in all 135 LOIs it reviewed.  As to the specific 4 terms highlighted by the plaintiff, those terms appeared in the majority in all LOIs (and the one relating to dispute resolution was removed in any event).

In determining that Chrysler Group did offer "customary and usual letters of intent," the Court held: (1) that LOIs did not need to be identical in order for them to customary and usual; (2) that the challenged LOI should be compared against the entire universe of 135 LOIs offered during the period, not just the subset of those offered to new dealers; and (3) that all LOI terms must be considered, not just selected terms.  The Court concluded as follows:

"Upon such review, based upon the facts set forth above, [the] court concludes that there is overwhelming evidence that the Letters of Intent offered to Plaintiffs were the customary and usual letters of intent offered to other dealers during the relevant time period, and that the Letter of Intent therefore fully complied with the [Dealer Arbitration] Act's requirements."

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.

Post-Dealer Arbitration Act Litigation Nearing An End

In the aftermath of the Chrysler and GM bankruptcies, Congress enacted section 747 of the Consolidated Appropriations Act of 2010 (“Dealer Arbitration Act”), which created an arbitration process by which Chrysler dealers could challenge their rejection and GM dealers could challenge their being wound down. Under the Dealer Arbitration Act, a successful dealer could obtain the following relief: “continuation, or reinstatement of a franchise agreement, or to be added as a franchisee to the dealer network of the covered manufacturer in the geographical area where the covered dealership was located when its franchise agreement was terminated, not assigned, not renewed, or not continued.” In other words, a successful dealer could be continued, reinstated, or added. In such event, the manufacturer was required to “provide the dealer a customary and usual letter of intent to enter into a sales and service agreement.”

Now, disfavored dealers were treated differently in the Chrysler and GM bankruptcies. In the Chrysler bankruptcy, the franchise agreements of disfavored dealers were formally “rejected” under section 363 of the Bankruptcy Code. On the other hand, in the GM bankruptcy, the franchise agreements of disfavored dealers were actually assumed, but subject to wind-down agreements executed during the bankruptcy. Under these wind-down agreements, GM’s disfavored dealers received a modest payment and were given time to sell off their remaining inventory and close down operations in an orderly manner. In other words, rejected Chrysler dealers were left behind in the bankruptcy whereas GM’s wind-down dealers continued on post-bankruptcy for a time with so-called New GM. That difference – outright rejection in the Chrysler bankruptcy versus assumption and wind-down in the GM bankruptcy - would prove critical in the arbitration process to come.

Following the arbitrations, successful rejected Chrysler dealers were presented with letters of intent that many of them argued violated the Dealer Arbitration Act because they did not simply reinstate those dealers but rather imposed all sorts of conditions and limitations, such as facility upgrades. In addition, a conundrum was created in instances where New Chrysler had inserted a new dealer into the territory previously assigned to the rejected dealer and that new dealer had territorial rights under their state’s automobile franchise act.

Several lawsuits were commenced around the country and the consistent result was that, although GM’s wind-down dealers could be “continued” or “reinstated,” rejected Chrysler dealers could only be “added.” This is because wind-down GM dealers were operating under existing franchise agreements with New GM, whereas rejected Chrysler dealers had no legal relationship with New Chrysler. Thus, they could only be “added” to New Chrysler’s dealer network and all they were entitled to was a “customary and usual letter of intent to enter into” a franchise agreement. From this ruling, courts also consistently held that the Dealer Arbitration Act did not pre-empt state automobile franchise laws, meaning that existing New Chrysler dealers could challenge the addition of a successful rejected dealer under a state dealer act’s relevant market area provision.

These issues are playing out in United States District Court for the Eastern District of New York in Eagle Auto Mall Corp. v. Chrysler Group LLC, Case No. 10-cv-3875 (Wexler, J.). By order dated December 23, 2011, Judge Wexler held that the plaintiff dealers were only entitled to be “added” to New Chrysler’s subject to “a customary and usual letter of intent.” Judge Wexler “interpreted this to mean that Plaintiffs were entitled to an offer under terms that were usual and customary at the time of the offer, and not those governing Plaintiffs’ pre-bankruptcy dealership agreements.” However, Judge Wexler went on to hold that whether the letters of intent offered by New Chrysler were usual and customary was a question of fact for trial and denied summary judgment. New Chrysler’s motion for reconsideration was also denied.

After close of discovery, New Chrysler again moved for summary judgment, based on the decision of the court in Los Feliz Ford, Inc. v. Chrysler Group LLC, 10-cv-6077 (C.D. Ca. April 9, 2012), which held that no issues of fact existed as to whether the letter of intent at issue there was “customary and usual”. However, by order dated September 28, 2012, Judge Wexler disagreed and adhered once again to his prior holding that issues of fact remained:

…the issue is whether the letters of intent offered to Plaintiffs here were substantially the same as those offered to dealers who were given the opportunity to be added as new franchisees to the dealer network during the same period. The court has reviews the parties submissions and cannot hold, based upon those papers alone, whether such terms were offered to the Plaintiffs here.

Eagle Auto Mall proceeded to a bench trial of December 3, 2012 and is awaiting decision following the submission of post-trial briefs.

Facility Agreements Not Always Enforceable

A New York state court held that written agreements to renovate dealership facilities are not necessarily enforceable.  In Compass Motors, Inc. v. Volkswagen Group of America, 36 Misc.3d 283, 944 N.Y.S.2d 845 (Sup. Ct. Orange Co. 2012), Volkwagen and Compass Motors had entered into a Facility Renovation Agreement, which contained a clause stating:

"If Dealer shall...fail to comply timely with any provisions of this Addendum, or if Dealer shall fail to comply with any  of [Volkwagen's] requirements at the Dealer's Premises, then Dealer agrees that regardless of the weight or magnitude of, or reason for, such failure, [Volkswagen] may, at its option, terminate the Dealer Agreement..., and shall be under no obligation to offer to enter into any subsequent Dealer Agreement with Dealer.  Dealer acknowledges that, in that event, [Volkswagen] would have good cause for terminating or failing to renew the Dealer Agreement"

After failing to renovate the facility in accordance with the Agreement, Volkwagen issued Compass a 90-day notice of termination.  The dealer sued claiming, inter alia, that Volkswagen did not have good cause to terminate its franchise under New York's Dealer Act.  Volkswagen moved to dismiss that claim but the Court denied that motion, despite its being undisputed that the dealer had failed to comply with the Agreement.

The dealer argued, among other things, that "the termination was invalid because the requirement that the dealership be renovated was neither reasonable nor necessary and, in any event, was impossible to perform..."  In denying Volkwagen's motion, the Court found that Volkswagen failed to offer any evidence on this issue.  The Court noted that the Dealer Act places the burden of proof on the franchisor to prove that both due cause and good faith exist to terminate a franchise, and Volkswagen failed to do so. 

This holding comes as no surprise.  By its terms, the protections of the Dealer Act govern notwithstanding the terms of the franchise.   A manufacturer cannot, by contract, force a dealer to waive its statutory rights.  Here, despite the rather remarkable clause in the Agreement quoted above, the Court held that Volkswagen failed to meet its burden by relying merely on the terms of the Agreement and the undisputed fact that Compass had failed to comply with those terms.  Rather, Volkswagen still needed to establish due cause and good faith.

Case of First Impression: The Dealer Act and Price Discrimination (Part 2)

In a case of first impression, two Audi dealers obtained summary judgment against Audi holding that two incentive programs(the Keep-it-Audi Program and the CPO Purchase Bonus Program) violated the price discrimination prohibitions in New York's Dealer Act. Part 1 of this Article discusses the programs in general and the Court's ruling with respect to the the Keep-it-Audi Program. Part 2 of this article focuses on the Court's ruling with respect to the CPO Purchase Bonus Program.

Unlike the Keep-it-Audi Program, which is adminstered by AFS, the CPO Purchase Bonus Program is administered directly by the Audi. With both prgrams existing dealers have to meet off-lease purchase targets; however while new dealers were simply automatically granted the highest participation category in the Keep-it-Audi Program, in the CPO Purchase Bonus Program new dealers were given CPO sales targets. Qualifying dealers received 1.5% to 2% of MSRP on the sale of each new Audi vehicle. Audi argued that the plaintiff-dealers earned CPO Purchase Bonus Program money in almost all the quarters at issue and, therefore, could not have suffered any harm. However, the dealer-plaintiffs countered that the benefits of the CPO Purchase Bonus Program were not available to them on a proportionately equal basis as the statute requires because new dealers could obtain their pre-owned inventory at a lower cost than existing dealers as a result of the pricing advantages enjoyed by new dealers under to the Keep-it-Audi Program and because new dealers were also free to source their inventory at the wholesale auctions. As a result, the plaintiff dealers’ argued, it was cheaper and easier for new dealers to earn the incentive monies under the program. The Court agreed, holding as follows:

There is no manner in which the bonus offered on new automobiles sales under the CPO program to new automobile dealers is proportionately similar to the bonus offered existing dealers. New dealers receive their bonus, reflected in lower prices on new cars, based on their sale of certified pre-owned automobiles they are permitted to purchase. New dealers can obtain the inventory necessary to obtain lower sale prices on new vehicles through the use of their advantageous position in the Keep It Audi Program. The existing dealers' bonus under the CPO program is again totally dependent on the percentage of lease return vehicles they are able to purchase. Plaintiffs have already established that they are at a financial disadvantage with regard to the price they are charged for those vehicles because new dealers are placed in the highest bonus category without need to have any preexisting expenditures. In effect, existing dealers are required to purchase most of their pre-owned vehicles at the highest cost if they are to have any opportunity to receive the benefits of these two incentive programs, while new dealers are free to purchase their pre-owned inventory at lower prices from auction houses and thereby secure the benefits of both programs.

This case provides substantial guidance on how many manufacturer incentive programs tied to the attainment of various benchmarks may run-afoul of state price discrimination statutes, including incentive programs run by captive finance sources.

The complaint in this action alleged only New York statutory claims under the Dealer Act and not any claims under the federal price discrimination statute known as the Robinson Patman Act. An excellent article discussing this case and contrasting state and federal price discrimination claims is available here.

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.

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.