Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Tex. App.: Two of six challenged Volvo dealer incentive programs violated dealer law, (May 30, 2023)

By Steven D. Cole, J.D.

The two involved rewards based on customer satisfaction survey results.

The Texas Court of Appeals in Austin has affirmed a Final Order of the Texas Motor Vehicle Board (Board), which ruled that two of six challenged Dealer Incentive Programs operated by Volvo Cars of North America, LLC (Volvo) conflicted with provisions of the Texas motor vehicle dealer law (dealer law). One of Volvo’s Texas dealers had brought suit challenging the franchisor’s termination of its dealership, and in so doing alleged the franchisor violated the dealer law by implementing the six programs. The Board did not err in deciding that two of the programs linked to customer satisfaction surveys required adherence to unreasonable sales or service standards and treated franchise dealers inequitably in violation of the statute. The Board also did not err in concluding that the other four of Volvo’s other incentive programs did not offend the Texas dealer law (Star Houston, Inc. v. Volvo Cars of North America, LLC, May 25, 2023, Triana, G.).

Background. Star Houston, Inc. (Star), a relatively small Volvo franchise, contested Volvo’s 2016 decision to terminate their franchise relationship. For some time, Star’s sales had lagged behind those of virtually every other Volvo dealer in the same region and behind the sales numbers of other local dealers selling cars of similar brands. Despite Volvo personnel meeting with Star’s owner over many years to help improve sales, Star resisted Volvo’s suggestions. The Motor Vehicle Department, which regulates vehicle-dealer franchises in Texas, referred Star and Volvo to the State Office of Administrative Hearings to resolve their dispute, where two administrative law judges (ALJs) conducted a contested-case hearing.

During these proceedings, Star asserted challenges to six of Volvo’s Dealer Incentive Programs as violating several provisions of the dealer law. Two of these programs, CSI and SSI, rewarded dealers for positive customer satisfaction survey results obtained from purchasers and from owners who brought their vehicles to the dealership for service. A third program, FISI, rewarded dealers for conforming their facilities to Volvo’s specifications. A fourth, Volvo 360, incentivized dealers to purchased vehicles from auction after their leases had ended and re-sell them. Under a fifth program, dealers received rewards for maintaining certain advertising and accounting standards (retailer standards program). Finally, a category of bonuses existed for selling Volvo-brand options with new vehicles (factory options program).

The ALJs ruled against Star as to the termination of its franchise and most of Star’s claims regarding the Dealer Incentive Programs. Despite finding that the CSI and SSI programs violated the dealer law, the ALJs determined that sanctions/penalties against Volvo were not appropriate. The Board adopted the decision in full. Both Star and Volvo appealed the Board’s Final Order. Star did not challenge on appeal the Board’s approval in the Final Order of Volvo’s termination of Star’s franchise.

Standing. Even though the Final Order did not injure Volvo, Volvo had constitutional standing to challenge the Board’s rulings that the CSI and SSI programs violated two provisions of the dealer law because those rulings could have preclusive effect. Under Texas’ hybrid claims resolution process for certain civil damages claims relating to the sale of motor vehicles, courts will defer to the Board’s findings of fact and conclusions of law contained in any final order that is the basis of the action.

CSI and SSI programs. The CSI and SSI programs violated the dealer law by requiring Star to adhere to unreasonable sales or service standards, the court held. Firstly, the court found that customer satisfaction survey scores related to sales or service and were used by Volvo as criteria for deciding when to terminate a dealer’s franchise. Secondly, a distributor’s mandate that its dealers meet standards for eligibility in incentive programs suffices as “requiring adherence.” Thirdly, testimony indicated that the surveys did not reliably measure customer satisfaction, rendering use of their scores “unreasonable.”

The court recounted the Board’s findings, including that Volvo uses a method called “top-box scoring”—only the highest scores (nines or tens out of ten or fives out of five) are credited to the dealer receiving such scores; any score that is not a top-box score counts as a zero. High-scoring dealers receive CSI or SSI bonuses, but Star’s non-top-box scores on the CSI and SSI surveys—particularly because of Star’s dated facilities—meant that it only rarely achieved CSI or SSI bonus payments

The Board’s findings about top-box scoring and Volvo’s limiting the scoreable questions to only four out of a much longer survey were supported by testimony from Star’s expert. He opined that the survey results do not reliably measure customer satisfaction and cannot reveal anything more than merely the customers’ responses to specific questions. Beyond this reliability problem, the expert identified two further unsound assumptions made by Volvo when it tied the CSI and SSI survey results to per-vehicle payments made to its dealers

These programs violated a separate dealer law provision by treating franchised dealers of the same brand unfairly or inequitably, the court affirmed. As a low-volume seller of cars, the small number of customer surveys rendered Star susceptible to large swings in its CSI and SSI scores, since one bad survey could “sink” the dealership. Even Volvo’s expert backed conclusion this up when he testified that a small number of surveys for Star could lead to large swings in its CSI and SSI scores, the court noted. This testimony plus the expert testimony provided by Star gave the Board a reasonable basis to conclude that the CSI and SSI programs were unfair, inequitable, or discriminatory to Star.

The other programs. The court first dispensed with Star’s challenges to the factory options program since it did not violate the dealer law in any way. It also rejected Star’s argument that the Dealer Incentive Programs as a whole were unreasonable because they were never incorporated in Star’s franchise agreement with Volvo, noting that no legal authority supported such a claim.

As for the FISI, Volvo 360, and retailer standards programs, none treated dealers inequitably. Star argued that they resulted in large-volume dealers unfairly taking sales from Star because they would receive a bonus per car sold, which they could then allocate toward lower sales prices, thereby hindering Star’s ability to compete. But the record indicated that Star’s poor sales record predated all of the Dealer Incentive Programs, which belied Star’s position on this matter.

There was no evidence that the Dealer Incentive Programs violated the dealer law’s prohibition against unreasonably requiring a franchised dealer to purchase special tools and equipment, nor that the Volvo 360 program required franchised dealers to involuntarily acquire vehicles. Volvo 360 utilized an auction process; thus, no dealer was required to take a car without having already placed a bid for it.

The Dealer Incentive Programs did not unlawfully grant Volvo control over its franchised dealerships, as they did not direct or influence Star’s management and policies. Star’s reluctance to acquiesce to Volvo’s suggestions to improve sales and its refusal to operate its business in the ways that the challenged programs incentivized suggested a lack of control by Volvo.

Star did not carry its burden of showing that the FISI program required it to remodel or renovate its facilities as a prerequisite to receiving a model or series of vehicles. Star also failed to evince that Volvo operated its Dealer Incentive Programs in bad faith. Volvo paid its bonuses to dealers twice per year; these payments were not linked to the sales of individual vehicles.

Concurring opinion. Justice Triana concurred in the judgment, writing separately only to explain that she would have analyzed the issue of Volvo’s standing under the Administrative Procedures Act as an aggrieved party rather than applying the common law’s standing analysis.

The case is No. 03-21-00239-CV.

Attorneys: Brit T. Brown (Akerman, LLP) for Volvo Cars of North America, LLC n/k/a Volvo Car USA, LLC. Dennis M. McKinney, Office of Attorney General, for Board of the Texas Department of Motor Vehicles. William David Coffey III (Coffey & Alaniz, PLLC) for Star Houston, Inc.

Companies: Volvo Cars of North America, LLC n/k/a Volvo Car USA, LLC; Board of the Texas Department of Motor Vehicles; Star Houston, Inc.

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