Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D.N.Y.: Volkswagen may be liable for unfair franchise agreement, (Jun 11, 2014)

By Jody Coultas, J.D.

Volkswagen franchisees stated, in part, New York Franchised Motor Vehicle Dealer Act claims against Volkswagen Group of America, Inc. based on allegedly unfair franchisee standards and benefit programs, the federal district court in White Plains, New York has held (CMS Volkswagen Holdings, LLC v. Volkswagen Group of America, Inc., June 6, 2014, Román, N.).

Volkswagen’s Dealer Agreement outlines how it evaluates each dealer’s sales performance, called the Dealer Sales Index (DSI). The DSI is calculated by applying Volkswagen’s regional segment-adjusted market share to a dealer’s Primary Area of Influence. The DSI is also used to set objectives for dealers (the Variable Bonus Program or VBP). After the dealerships informed Volkswagen of changes to their ownership structure, Volkswagen requested additional documentation regarding the change in structure and demanded that the dealerships sign new dealer agreements that contained additional agreements. The dealerships sought injunctions and declaratory relief under the Motor Vehicle Dealer Act.

Section 463(2) (g) of the Motor Vehicle Dealer Act makes it unlawful to sell or offer to sell any new motor vehicle to any franchised motor vehicle dealer at a lower actual price than the actual price offered to any other franchised motor vehicle dealer for the same model vehicle similarly equipped or to utilize any device including, but not limited to, sales promotion plans or programs that result in such lesser actual price.

Volkswagen was granted dismissal of the dealership’s Section 463(2) (g) Dealer Act claims for declaratory and injunctive relief. The dealership, Hudson Valley Volkswagen, LLC, alleged that it could not meet the standards for the VBP due to the fact its consumers disfavored German cars. Volkswagen argued that it could not be held liable under Section 463(2) (g), even if it did fail to take into account the “unique” characteristics of the preferences of the market, because the safe harbor provision of Section 463(2) (g) only applies where the bonus program is applied on a disproportionate basis. Here, all dealerships were treated equally, and the benefits were available to all dealers. Taking consumer preferences into account in order for the bonus program to be applied on a proportionately equal basis would defeat the objective standard of the safe harbor provision and would be difficult given the difficulty of quantifying consumer preference. Consumer preferences are outside the control of the franchisor and not taking this factor into consideration does not mean that the VBP was applied disproportionately.

Hudson Valley stated a Section 463(2) (gg) Motor Vehicle Dealer Act claim against Volkswagen, according to the court. Section 463(2) (gg) of the Dealer Act makes it illegal for a franchisor “[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.” It was plausible that Volkswagen’s DSI was unreasonable, arbitrary, or unfair. The DSI takes into account different categories of vehicles in calculating the DSI, but not consumer preferences. Hudson Valley argued that Volkswagen’s adjustment of regional market share only for segment popularity and no other local consumer preferences violated Section 463(2)(gg). The threat of falling out of compliance with the DSI, which could result in the termination of the Dealer Agreement, was sufficient to establish a case or controversy. The allegations were sufficient to state claim.

The dealerships failed to state claims that Volkswagen unreasonably withheld its consent to the transfer of ownership interests and made unreasonable modifications to the Dealer Agreements in violation of the Dealer Act, according to the court. The court also allowed the dealerships to amend the complaint to add two additional claims under the Dealer Act. The dealerships also had the right to seek attorney’s fees, costs, and disbursements.

The case is No. 13-cv-03929(NSR).

Attorneys: Russell Pries McRory (Robinson Brog Leinwand Greene Genovese & Gluck) for CMS Volkswagen Holdings, LLC and Hudson Valley Volkswagen, LLC. Barry Werbin (Herrick, Feinstein LLP) and Randall L. Oyler (Barack Ferrazzano Kirschbaum & Nagelberg LLP) for Volkswagen Group of America, Inc.

Companies: Hudson Valley Volkswagen, LLC; Volkswagen Group of America, Inc.

Cases: FranchisingDistribution NewYorkNews