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.

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.