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.

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.

NY Dealer Act Amended

New York's Dealer Act has been amended to prohibit manufacturers from requiring dealers to monetarily contribute to programs and promotions absent each dealer's written consent. This amendment takes effect on January 1, 2012

New York Regulates Brokers

On September 23, 2011, the Governor signed legislation amending Article 35-B of the General Business Law that strengthens regulation of automobile brokers. Article 35-B first became law in 1989 and this new legislation represents the first and only amendment in over 20 years.

Article 35-B prohibits advance fees; sets standards for brokerage contracts including a right of rescission; requires that advance payments be held in escrow; and prohibits certain deceptive trade practices.

The 2011 amendment requires that the brokerage contract disclose the dealer from which the motor vehicle was purchased, all fees and commissions paid by the dealer to the broker in connection with the transaction. The amendment also requires brokers to obtain a surety bond in teh amount of $75,000. Finally, the amendment imposes requirements that all broker advertising discloses that the broker is not a licensed motor vehicle dealer, whether any fees may be imposed by the broker and that no warranty repair services will be provided by the broker.

The amendment takes effect on December 22, 2011.

BMW Lowers Warranty Reimbursement

BMW has, or soon will, revise its policy for warranty reimbursement, including both labor and parts reimbursement. With respect to labor, BMW currently pays on the basis of 8 Flat Rate Units ("FRUs") per hour. The new FRU will be 10 per hour. Therefore, a repair that books for 10 FRU's will be paid for 75 minutes under the old system, but only for 60 minutes under the new system. This affects not only the dealership but also negatively impacts technician pay.

On the parts side, BMW is/will be paying only 30% above cost for parts used in warranty repairs – significantly lower than the retail price for those parts.

The relevant section of New York's Franchised Motor Vehicle Dealer Act provides as follows:

§ 465. Procedures relating to warranties. 1. Every franchisor shall properly fulfill any warranty agreement and/or franchisor's service contract and shall compensate each of its franchised motor vehicle dealers for warranty parts and labor in amounts which reflect fair and reasonable compensation for such work...For parts...and labor reimbursement, fair and reasonable compensation shall not be less than the price and rate charged by the franchised motor vehicle dealers in the community or marketing area for like services to non-warranty and/or non-service contract customers, provided such price and rate are reasonable.

The Dealer Act requires factories to give dealers "fair and reasonable compensation" for warranty work. "Fair and reasonable compensation" is further defined as the price or rate charged by the dealers in the same community for the same services provided to non-warranty customers. In short, BMW must pay its dealers for warranty work at the going local retail rate for labor and the going local retail price for parts.

Effective January 1, 2009, this provision of the Dealer Act will be amended to provide a more specific mechanism for determining fair and reasonable compensation for warranty parts and labor:

For purposes of this section, the price and rate charged by the franchised motor vehicle dealer for parts may be established by submitting to the franchisor one hundred sequential nonwarranty customer-paid service repair orders or the number of sequential nonwarranty customer-paid service repair orders written within a ninety day period, whichever is less, covering repairs made no more than one hundred eighty days before the submission, and declaring the price and rate, including average markup for the franchised motor vehicle dealer as its reimbursement rate. The reimbursement rate so declared shall go into effect thirty days following the declaration and shall be presumed to be fair and reasonable, however a franchisor may rebut such presumption by showing that such rate so established is unfair and unreasonable in light of the practices of all other franchised motor vehicle dealers in the vicinity offering the same line make. The franchised motor vehicle dealer shall not request a change in the reimbursement rate more often than twice in each calendar year. In establishing the labor reimbursement rate, the franchisor shall not require a franchised motor vehicle dealer to establish said rate by a methodology, or by requiring information, that is unduly burdensome or time consuming to provide, including, but not limited to, a transaction by transaction calculation.

Thus, starting January 1, 2009, dealers can establish their own warranty labor rates and parts prices by submitting a given number of nonwarranty customer-paid service repair orders and declaring the price and rate and average markup. Rates and prices established by the dealer in the this manner are presumed to be “fair and reasonable” however the factory can attempt to rebut by showing such rates and prices are unfair compared to the practices of other dealers of the same line make in the area. Dealers can use this process no more than twice per year to “self-change” their prices and rates.

In short, New York’s current statute provides significant protections for the dealers – dealers must be paid fair and reasonable compensation for warranty work and such compensation is pegged to the prices and rates changed by dealers in the same area or market. The amendments to the Dealer Act taking effect in January 2009 give dealers another tool that effectively allows them to set their own reimbursement rates and policies by submitting nonwarranty customer-paid service repair orders and declaring their rate, prices and markup.