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.

Rejected Chrysler Dealers Commence Takings Action against the United States

On February 17, 2011, 64 former Chrysler dealers commenced a 'takings' action in the United States Court of Claims against the United States titled Alley's of Kingsport, Inc v. United States of America, Case No. 11-CV-0100. The 'takings' clause, which is found in the Fifth Amendment of the United States Constitution, provides that private property shall not be taken for public use without just compensation. A classic example of a taking occurs when the government takes private land to build a road. The takings clause of the Fifth Amendment mandates that the government pay just compensation for that land.

In this lawsuit, the former dealers assert that their automobile franchises were private property that were taken by the government for public use and, as a result, they are entitled to just compensation. The former dealers allege that Chrysler's restructuring plan did not call for the termination of dealer franchises but that the government's Automotive Task Force imposed that requirement as a condition to financing the restructuring.

Lots of Holiday Season Activity in Chrysler Bankruptcy Case (Part 2 of 3)

On December 30, 2009, New and Old Chrysler jointly filed a second motion to enforce the automatic stay and the bankruptcy court’s orders approving the sale of assets to New Chrysler and the rejection of 789 dealer agreements (the “Second Enforcement Motion”). The Second Enforcement Motion is directed to several rejected dealers that filed state proceedings to enjoin the creation of new franchises in their former markets. The rejected dealers appear to have a plausible defense: they based their state law proceedings on the recent federal arbitration law that went into effect on December 16, 2009. Those dealers argued that because they may be awarded their franchises back by an arbitrator, New Chrysler should be enjoined from filling those points until the arbitration is concluded.

Of course, Old and New Chrysler were having none of it and demanded that those rejected dealers withdraw their state proceedings. The dealers refused and the Second Enforcement Motion resulted. Because the premise underlying the state proceedings is to preserve the remedy afforded the rejected by Congress in the arbitration legislation, it will be very interesting to see how this motion plays out. A copy of the Second Enforcement Motion may be found here.

Lots of Holiday Season Activity in Chrysler Bankrptcy Case (Part 1 of 3)

Quite surprisingly, the Christmas and New Year’s holiday week was marked by several interesting filings in the Chrysler bankruptcy case relevant to dealers. First, on Christmas Day, a motion was filed seeking reconsideration of the bankruptcy court’s decision and order granting the Debtors’ motion to reject 789 dealer agreements. Second, on December 30, the Debtors and New Chrysler filed a second joint motion seeking injunctive relief and sanctions against certain rejected dealers that filed state law proceedings against New Chrysler. Third, on New Year’s Eve, Debtors’ and New Chrysler filed an adversary proceeding against Oregon, Maine, North Carolina and Illinois state officials seeking a declaratory judgment and injunctive relief to enjoin the enforcement of certain state statutes enacted or soon to be enacted that would have the effect of negating or impacting the effect of the termination of the rejected dealers’ franchises.

On Christmas Day, a small group of former Chrysler dealers whose franchise agreements were rejected filed a motion (the “Reconsideration Motion”) that asks Bankruptcy Judge Gonzalez to reconsider his opinion and order approving the rejection of their franchise agreements. The Reconsideration Motion can be found here. Rather remarkably (to say the least), the Reconsideration Motion accuses Judge Gonzalez of committing a fraud on the court by mischaracterizing the testimony of Fiat executive Alfredo Altavilla in his opinion approving the Debtors’ rejection motion (the “Rejection Opinion”).

In that regard, the Reconsideration Motion focuses on footnote 21 of the Rejection Opinion, which states, in pertinent part, that “Altavilla also responded affirmatively to a question regarding whether a dealership network needed to be for the Fiat Transaction to close, stating that a ‘restructuring needs to occur’” The Reconsideration Motion argues that the footnote mischaracterizes the actual hearing testimony which is quoted in full as follows:

Question: If this transaction closes without an absolute requirement of a particular number of dealers that are being terminated, would Chrysler still go through with this deal – I mean, rather, would Fiat still go through with this deal?

Answer: The answer is that a restructure needs to occur. Whether it occurs before or after the closing of the deal is not a material difference.

The Reconsideration Motion also argues that Judge Gonzalez ignored testimony by Chrysler executives that the Debtors’ estates received no value in exchange for accelerating the ‘rationalization’ of the dealer network through the use of the contract rejection power in bankruptcy.

As for a remedy, the dealers do not argue that New Chrysler could be forced to reinstate them; rather, they argues that the rejections can be reversed within the bankruptcy proceeding and the Debtors’ estates forced to assume those dealer agreements. They argue that would have the effect of converting claims under those previously-rejected franchise agreements from general unsecured claims (that have little chance of payment) into priority administrative expense claims (that stand a reasonable chance of getting paid, at least in part).