Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.Y. App.: Sales performance standard must account for local brand popularity, (May 4, 2016)

By Greg Hammond, J.D.

Use of a sales performance standard that fails to account for local brand popularity to determine a franchisee’s compliance with a franchise agreement is unlawful under New York’s Franchised Motor Vehicle Dealer Act, the New York Court of Appeals has held. The U.S. Court of Appeals in New York City had asked the state high court to interpret two provisions of the Dealer Act in an action in which a dealer claims General Motors LLC violated the Dealer Act (Beck Chevrolet Co., Inc. v. General Motors LLC, May 3, 2016, Rivera, J.).

The underlying action involves a dispute between General Motors LLC (GM) and a franchised motor vehicle dealer, Beck Chevrolet Co., Inc. Beck filed two Dealer Act claims for injunctive and declaratory relief, based on the GM’s performance standard and changes in the Area of Geographic Sales and Service Advantage (AGSSA). The district court held against Beck on both claims, and the appellate court certified two questions concerning the propriety of GM’s performance standard and unilateral modification under the Dealer Act.

Brand popularity, import bias. The first certified question, as reformulated by the Court, was: Is a performance standard that uses “average” performance based on statewide sales data in order to determine an automobile dealer’s compliance with a franchise agreement “unreasonable, arbitrary, or unfair” under New York Vehicle & Traffic Law section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types?

Although GM made the determination to incorporate local concerns in its dealer performance standard, according to the Court, GM specifically chose to exclude the impact of customer brand preference on dealership sales. However, consumer purchases are influenced by brand popularity and import bias, the Court stated. In addition, 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. Consequently, the Court concluded that 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.

AGGSA revision. The second certified question was: 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?

The Court of Appeals concluded that such a change is not an impermissible modification within the meaning of the Dealer Act. Section 463(2)(ff)(1) is concerned only with modifications that result in negative consequences for the dealer, according to the Court, or those that “may substantially and adversely affect the new motor vehicle dealer’s rights, obligations, investment or return on investment.” In the instant case, because a revision to a dealer’s geographic sales area could improve a dealer’s sales performance opportunities and competitive position, the Court could not say that such a revision would categorically violate the Dealer Act. Such a change must be assessed on a case-by-case basis, the Court stated.

The case is No. 48.

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

Cases: FranchisingDistribution NewYorkNews