Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2d Cir.: Appeals court could not predict state court’s resolution of New York Dealer Act issues, (May 20, 2015)

By Greg Hammond, J.D.

A motor vehicle dealer could not obtain reversal of a decision that General Motors LLC’s performance metrics are neither unfair nor unreasonable and that GM’s expansion of the dealer’s sales area did not constitute a “modification” of its franchise agreement under New York’s Franchised Motor Vehicle Dealer Act. In certifying certain questions concerning the application of the Dealer Act to the New York Court of Appeals, the U.S. Court of Appeals in New York concluded that New York state law is insufficiently developed in these areas to predict with confidence how the New York Court of Appeals would resolve these questions (Beck Chevrolet Co., Inc. v. General Motors LLC, May 19, 2015, Sack, R.).

Background. Beck Chevrolet Co., Inc., a vehicle dealership, filed suit against franchisor GM, alleging violations of the Dealer Act for modifying the franchise agreement without due cause, applying arbitrary or unfair sales performance standards, refusing to deliver vehicles, and unlawful nonrenewal of the franchise. The district court ruled in GM’s favor on Beck’s Dealer Act claims, denied both parties’ applications for attorney fees, and dismissed GM’s counterclaim for rescission as moot and legally insufficient.

On appeal, Beck argues: (1) GM’s method of calculating Retail Sales Index (RSI) is not fair or reasonable under the Dealer Act because it does not account for local brand preferences; (2) GM’s expansion of Beck’s Area of Geographic Sales and Service Advantage (AGSSA) constituted a modification of Beck’s franchise in violation of the Dealer Act; (3) GM violated the Dealer Act by refusing to deliver all of the inventory Beck ordered; and (4) Beck was the prevailing party on its price discrimination and unlawful modification claims and therefore was entitled to attorney fees. GM cross-appealed the district court’s order dismissing its counterclaim for rescission.

Reasonableness of performance metrics. Beck argued that GM’s performance standards are unreasonable, arbitrary, or unfair under the Dealer Act, and that the district court erred in reading an “egregiousness” requirement into the Dealer Act, misread relevant case law, and improperly constrained Beck’s ability to present its case. The court, however, noted that neither the New York Court of Appeals nor the Appellate Division of the New York Supreme Court has interpreted the Dealer Act’s prohibition of “unreasonable, arbitrary or unfair sales or other performance standard[s].” Because of the court’s desire to avoid potentially inconsistent results in state, federal, and administrative courts, it certified the following question for the New York Court of Appeals to determine: Is a performance standard that requires “average” performance based on statewide sales data in order for an automobile dealer to retain its dealership “unreasonable, arbitrary, or unfair” under New York Vehicle & Traffic Laws section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types?

Modification of Dealer Agreement. Beck also appeals the district court’s finding that the exercise of contractually conferred discretion—GM’s right to revise the Dealer’s Area of Primary Responsibility at its sole discretion—generally does not constitute a modification of the Dealer Agreement. The appellate court, however, was not convinced that the Dealer Act contemplated that result. Absent any state appellate court decisions on how the New York Court of Appeals would rule on this issue, the court certified the following question: Does a change to a franchisee’s Area of Primary Responsibility or AGSSA constitute a prohibited “modification” to the franchise under section 463(2)(ff), even though the standard terms of the Dealer Agreement reserve the franchisor’s right to alter the Area of Primary Responsibility or AGSSA in its sole discretion?

Vehicle allocation. Beck next argued that the lower court erred in granting summary judgment on its claim that GM wrongly refused to deliver requested vehicles. The court rejected this argument, finding that the district court properly determined that the admissible evidence was insufficient to permit a rational juror to find in favor of Beck. Specifically, there was no evidence that suggested GM’s system for allocating vehicles was unreasonable or unfair. GM used an equitable allocation system based on past performance, and it modified the system to offer additional inventory to Beck. However, Beck refused a majority of what GM offered, including 146 vehicles offered in January 2011, but two months later ordered 151 vehicles beyond GM’s allocation. GM’s refusal to deliver the exact number of vehicles Beck asked for in the month it asked for them did not constitute a failure to deliver a reasonable quantity of vehicles within a reasonable time, the court concluded.

Attorney fees. The lower court also did not abuse its discretion in denying Beck’s request for attorney fees, because the court’s decision was not based on an erroneous view of law or on a clearly erroneous assessment of the evidence. Rather, its decision to deny attorney fees based on the “good faith nature of the claims and defenses,” was within the range of permissible decisions in light of the Dealer Act’s permissive language, the appellate court decided.

Rescission. With regard to GM’s counterclaim for rescission, the appellate court determined that rescission would be appropriate if GM first demonstrated due cause and provided Beck with both notice and opportunity to cure. Because GM failed to satisfy either of those prerequisites, the district court’s dismissal of this claim was affirmed.

Evidentiary issues. The court rejected the parties’ challenges to several evidentiary issues. First, Beck challenged the lower court’s exclusion of a portion of an expert witness report comparing the number of non-GM competitor dealerships in upstate New York and Downstate New York. Even if this was error, however, Beck suffered no prejudice because it was able to elicit the same testimony without the report that it would have been able to with it, rendering the introduction of the report duplicative and unnecessary, the court decided.

Second, Beck challenged the lower court’s exclusion of a document reflecting the amount of advertising money spent, which allegedly demonstrated that GM spent less on advertising in the New York City area in 2010 and 2011 than in 2009 and 2012. This was properly excluded, the court found, because Beck attempted to use this evidence to cross-examine GM’s expert witness on a topic that was beyond the scope of his direct examination, and any comparison that did not include relative spending upstate and downstate was minimally useful.

Third, the appellate court determined that the district court did not err in foreclosing Beck’s attempt to cross examine GM’s expert on whether GM’s exit from the market for leasing vehicles to drivers could have adversely impacted downstate dealers. The court found that the expert did not testify about leasing on direct examination, and he testified on cross examination that leasing did not have an impact on RSI calculations and that he was unaware of any bearing it may have had on Beck’s situation. The district court therefore acted within its discretion in limiting this line of questioning, the court concluded.

Lastly, GM challenged the lower court’s exclusion of evidence that Beck’s own operational decisions were at fault for its poor performance. This evidence was properly excluded, however, because it would not have been relevant to the question of whether GM employed an unreasonable, arbitrary, unfair sales or other performance standard, the court concluded. The lower court’s decision was therefore partially affirmed, and the remaining questions were certified to the New York Court of Appeals.

The case numbers are 13-4066 and 13-4310.

Attorneys: Russell P. McRory (Arent Fox LLP) for Beck Chevrolet Co., Inc. James C. McGrath (Seyfarth Shaw LLP) for General Motors LLC.

Companies: Beck Chevrolet Co., Inc.; General Motors LLC

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