NEW YORK COURT FINDS DEALER TARGETS UNREASONABLE AND UNFAIR

A recent decision by the New York Court of Appeal in relation to motor vehicle distributors setting sales targets for Dealers under a franchise agreement is relevant to Australian Dealers.

The Dealer Act

The Court held that General Motors LLC (GM) acted unlawfully by using a sales performance target based on statewide data and some local variance but which failed to account for local brand popularity. The failure to account for local brand popularity was held to be ‘unreasonable and unfair’ in breach of section 463 of the New York Vehicle and Traffic Law (Dealer Act). Section 463(2)(gg) provides that:

“[i]t shall be unlawful for any franchisor, notwithstanding the terms of any franchise contract: … [t]o use an unreasonable, arbitrary or unfair sales or other performance standard in determining a franchised motor vehicle Dealer’s compliance with a franchise agreement. Before applying any sales, service or other performance standard to a franchised motor vehicle Dealer, a franchisor shall communicate the performance standard in writing in a clear and concise manner.”

Retail Sales Index

The Dealer appellant was required by GM to achieve a Retail Sales Index (RSI) over three years from 70 in the first year to 85 in the second year and to 100 in the third.

In the middle of the second year GM notified the Dealer that it would extend the Dealer Agreement into future years on condition that the Dealer met its performance requirements, including achieving the 85 RSI by the second year’s end and the 100 RSI in the third year. Failure to meet the RSI in the second year meant that “GM shall have no obligation to extend the Dealer Agreement”.

By separate letter GM also informed the Dealer that it was increasing its Area of Responsibility (AOR) by four census tracts in a certain county and reducing the AOR by seven tracts in another.

The claim – unreasonable and unfair

The Dealer commenced legal proceedings claiming that GM’s reliance on the RSI was unreasonable and unfair as a matter of law because it failed to account for local customer preferences and low brand popularity for Chevrolet vehicles in New York’s downstate region.

The decision

The Court held that a performance standard that requires ‘average’ performance based on statewide sales data in order for a car Dealer to retain its dealership is “unreasonable, arbitrary or unfair” under the Dealer Act because it does not account for local variations beyond adjusting for the local popularity of general vehicle types. The Court stated:

“Whether a performance standard is ‘unreasonable, arbitrary or unfair’ depends on considerations unique to the franchise business, which is driven by sales in a competitive market. [*7]A performance standard that measures Dealer success based on data that fails to accurately represent market challenges would appear to undermine the franchisor and Dealer’s common goal of selling and servicing vehicles and franchisor products. At a minimum, VTL Section 463(2)(gg) forbids the use of standards not based in fact or responsive to market forces because performance benchmarks that reflect a market different from the Dealer’s sales area cannot be reasonable or fair…”

“Thus GM measures a Dealer’s sales performance by comparison to a statewide class of Dealers, but adjusts the standard to reflect certain local market peculiarities with respect to one metric: local consumer purchasing preferences for certain vehicle types. Although having made the determination to incorporate local concerns in its dealer performance standard, GM has also specifically chosen to exclude from its measure the impact of customer brand preference on dealership sales. Yet customer purchases are influenced not solely by preferences for a type of vehicle, for which GM accounts through its segmentation formula, but also by brand popularity and import bias. Moreover, those Dealers, like Beck, who service an assigned area in which Chevrolet is less popular are disadvantaged when measured against Dealers in other parts of the state in which the Chevrolet brand is stronger and facilitates Dealer sales performance. Therefore, once GM determined that statewide raw data must be adjusted to account for customer preference as a measure of Dealer sales performance, GM’s exclusion of local brand popularity or import bias rendered the standard unreasonable and unfair because these preference factors constitute market challenges that impact a Dealer’s sales performance differently across the state. It is unlawful under Section 463(2)(gg) to measure a Dealer’s sales performance by a standard that fails to consider the desirability of the Chevrolet brand itself as a measure of a Dealer’s effort and sales ability.”

Inequality of bargaining positions

While GM claimed that its methodology is consistent with industry norms, the Court observed that the retail auto industry is one where the parties hold unequal bargaining positions and industry standards may reflect the entrenchment of the very inequality and favouritism that the Legislature sought to counterbalance with the Dealer Act. Accordingly, GM was not permitted to rely on an “industry standard” to justify its performance standard if the standard was unreasonable or unfair in breach of the Dealer Act. The Court stated:

  • “[t]here is a great disparity in bargaining power between the motor vehicle manufacturer and the motor vehicle Dealer. The franchise agreements which have been developed over a long course of dealing between the manufacturer and the Dealer have reached a point where the Dealer has few if any rights in comparison to those of the motor vehicle manufacturer. This results in an undue imbalance in bargaining power and the Dealer is in many cases at the mercy of the manufacturer. In reality, the motor vehicle Dealer who frequently has millions of dollars invested in dealership real property, equipment and goodwill can do nothing to oppose the will of the manufacturer without jeopardizing this substantial investment. This bill seeks to provide certain basic protection for the Dealer in areas where such protection is deemed necessary. If enacted, the protection afforded the Dealer through the terms of the bill would counterbalance the numerous protections afforded the manufacturer under the terms of its franchise agreement with the Dealer. The result would be a healthier marketplace for all parties concerned…

Our interpretation of VTL Section 463(2)(gg) should not be understood as an invitation for a court to substitute its opinion for a franchisor’s determination of how best to achieve its bottom line business goals. Decisions about how best to improve the quality of dealerships and increase Dealer sales involve business judgments rightly left to franchisors, and not the courts. Nevertheless, the legislature, by its enactment of the Dealer Act, has determined it is in the interest of the state to subject a franchisor’s performance standards to statutory limits in order to prevent unfair business practices, and has seen fit to place review of franchisor standards squarely within the authority of the courts.”

Relevance to Australian Dealers

This recent New York court decision is relevant to Australian Dealers as Dealer sales targets or standards based on area of responsibility or prime market areas are contained in a large number of Australian Dealer Agreements. It is often the case that a Dealer who fails to meet such sales targets would be in breach of a Dealer Agreement and subject to performance review and possible loss of its dealership and its investments.

In 2013 the NSW Government enacted Part 6 of the Motor Dealers and Repairers Act (MDR Act) to provide statutory protection to Dealers against motor vehicle distributors which impose unfair contracts or engage in unjust conduct in relation to franchised Dealers who are in an unequal bargaining position.

Part 6 of the MDR Act states that a term of a Dealer Agreement is unfair if:

(a)    It would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b)    It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c)    It would cause detriment (whether financial or otherwise) to a party if it were to be relied on.

Dealer Agreements containing similar sales targets standards which fail to represent market place realities or which are set in an arbitrary manner may be likely to be in breach of Part 6 of the MDR Act and therefore void.

In addition, the November 2016 report by the ACCC in relation to the new national unfair contract legislation considered common terms of concern in a number of industries. The ACCC stated in relation to franchising (including motor vehicle retailing and repair) that “a variety of potentially unfair contract terms were considered including the right to unilaterally vary standards and operations manuals”. Unfortunately, most Dealers are not covered by the new national unfair contract legislation given the low financial turnover and employee thresholds. This is an area that warrants legislative reform so as to give the unfair contract legislation wider coverage and, in particular, for Dealers.

Conclusion

Legislative protections are only intended to counterbalance the unequal bargaining position between distributors and Dealers which include – as the New York decision stated – “the numerous protections offered to the manufacturer under the terms of its franchise agreement with the Dealer. The result would be a healthier marketplace for all parties concerned”. The court also made it clear that decisions on how best to improve the quality of dealerships and increase Dealer sales involve business judgements rightly left to motor vehicle distributors, and not the courts.
The Greater New York Automobile Dealers Association, New York State Automobile Dealers Association and the Alliance of Automobile Manufacturers and others appeared in the appeal proceedings as interested parties. Section 144 of the MDR Act (NSW) provides that a motor industry group may apply to the NSW Small Business Commission for assistance in dealing with a dispute about an unfair term of a supply contract or a class of supply contracts. AADA is the only registered motor industry group under the MDR Act.

This article does not deal with the second question determined by the New York appeal court relating to GM’s unilateral change to a Dealer’s geographic sales area (which the court upheld).

ROBERT GARDINI
PARTNER
HWL EBSWORTH

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