Beck Chevrolet Co. v. Gen. Motors LLC
| Decision Date | 03 May 2016 |
| Citation | 33 N.Y.S.3d 829,27 N.Y.3d 379,53 N.E.3d 706,2016 N.Y. Slip Op. 03412 |
| Parties | BECK CHEVROLET CO., INC., Appellant, v. GENERAL MOTORS LLC, Respondent. |
| Court | New York Court of Appeals Court of Appeals |
Arent Fox LLP, New York City (Russell P. McRory, James M. Westerlind and Michael P. McMahan of counsel), for appellant.
Seyfarth Shaw LLP, Boston Massachusetts (James C. McGrath, of the Massachusetts bar, admitted pro hac vice, and Katherine R. Moskop, of the Massachusetts bar, admitted pro hac vice, of counsel), for respondent.
Putney, Twombly, Hall & Hirson LLP, New York City (Philip H. Kalban of counsel), for Greater New York Automobile Dealers Association, Inc., amicus curiae.
Bressler, Amery & Ross, P.C., New York City (Eric L. Chase of counsel), for Van Wie Chevrolet, Inc., doing business as Evans Chevrolet, amicus curiae.
Bellavia Blatt & Crossett, P.C., Mineola (Leonard A. Bellavia and Shaun M. Malone of counsel), for New York State Automobile Dealers Association, amicus curiae.
Hogan Lovells U.S. LLP, New York City (John J. Sullivan of counsel), for Alliance of Automobile Manufacturers and another, amici curiae.
The United States Court of Appeals for the Second Circuit certified to this Court questions requiring our interpretation of two provisions of New York's Franchised Motor Vehicle Dealer Act (Dealer Act), codified at Vehicle and Traffic Law § 460 et seq. The first question concerns the propriety of a franchisor sales performance standard that relies on statewide data and some local variances, but fails to account for local brand popularity. Based on our reformulation of the question, we conclude that use of such a standard to determine compliance with a franchise agreement is unlawful under the Dealer Act. The second question asks whether a franchisor's unilateral change of a dealer's geographic sales area constitutes a prohibited modification to the franchise. We conclude that it does not.
The underlying federal action involves a dispute between franchisor and Chevrolet car manufacturer General Motors LLC (GM), and a Westchester County-based franchised motor vehicle dealer, Beck Chevrolet Co., Inc. Beck is a longtime automobile dealership with a Chevrolet franchise dating back to GM's predecessor-in-interest. During the predecessor's bankruptcy proceeding, Beck entered a wind-down agreement to terminate its franchise in exchange for a money payout. After GM acquired certain of the predecessor's assets, GM rescinded the wind-down agreement and entered a participation agreement with Beck. The participation agreement, along with Beck's dealer sales and services agreement with incorporated standard provisions (dealer agreement), allows Beck to operate as a GM franchise operation.
Under these agreements GM required Beck to achieve a specified level of sales performance within a geographic location designated by GM, referred to as an area of geographic sales and service advantage (AGSSA). The AGSSA consists of U.S. census tracts closest in proximity to the dealer, subject to certain traffic condition adjustments. GM carves out an individual dealer's AGSSA from a geographic sales region known as an area of primary responsibility (APR), which is shared by a group of dealers in the same urban location. Dealers, like Beck, are responsible for the sale and marketing of Chevrolet vehicles and products within their respective AGSSA.
GM measured Beck's sales performance based on a retail sales index (RSI), a methodology commonly employed by vehicle manufacturers in the United States, and applied by GM to all its dealers. The RSI is a percentage determined by a fractional equation, which divides a dealer's actual total retail sales during a particular time period by the dealer's expected sales. In other words, the mathematical representation of an RSI is actual sales (the numerator) over expected sales (the denominator), multiplied by 100.
Expected sales are determined using a multistep formula, whereby GM determines Chevrolet's statewide market share for a particular type of vehicle segment—for example a mid-sized sedan or pickup truck—then multiplies that number by the total retail motor vehicle registrations in the dealer's AGSSA for that same segment, and repeats the process for each vehicle segment. The results for each segment are combined to achieve the dealer's total expected sales in its AGSSA. By way of illustration, assume in a given year that Chevrolet has a particular mid-sized sedan model and that the sales of that model represent 12% of all mid-sized sedans sold in New York State (constituting one vehicle segment). Further assume that the number of mid-sized sedan registrations in a dealer's AGSSA is 1,500, meaning there are 1,500 mid-sized sedans registered in the AGSSA. In that case, 1,500 is multiplied by the 12% statewide share, equaling 180 expected sales for this segment. This same mathematical formula is repeated for each segment of vehicles in which Chevrolet competes, meaning in each segment for which Chevrolet has a model that could be sold in New York State. Assume four segments total, and that the formula results in the following expected sales by segment: 180, 120, 75, 25. These are added together for a combined number of 400. The 400 represents the dealer's total expected sales and will be the denominator in the equation used to determine the dealer's RSI.
As stated, GM includes in the dealer's expected sales only registrations for vehicle segments in which Chevrolet competes, and does not include registrations for non-Chevrolet vehicle segments. Through this segmentation or “segment-adjustment” GM accounts for local popularity of particular types of vehicles. For example, if pickup trucks are less popular in a given AGSSA, compared to the rest of the state, a dealer's expected sales are adjusted downward.
A 100 RSI constitutes satisfactory performance of a dealer's sales obligations under the dealer agreement. Nevertheless, GM treats this not as a perfect score but as an average score, and as explained in the dealer agreement, GM expects dealers below 100 “to pursue available sales opportunities exceeding this standard.” GM's dealer rating system classifies dealers as follows: “Superior” for a 100 or greater RSI, and the dealer is in the top 15% of all dealers in the state; “Satisfactory” for a 100 RSI and the dealer is not in the top 15%; “Needs Improvement” for a 85 to 99.9 RSI; “Needs Significant Improvement” for an 84.9 or lower RSI and the dealer is not in the bottom 15% of dealers in the state; and “Unsatisfactory” for an 84.9 or less RSI and the dealer is in the bottom 15%.
Applying this rating system to the hypothetical dealer in the prior example, if the dealer sells 400 Chevrolet cars, because its expected sales were also 400, the dealer's RSI is 100 (400 divided by 400 equals 1, multiplied by 100 to achieve an RSI as a percentage). Since the dealer achieved its target sales, which constitutes an average sales performance, the dealer would be rated “superior” if the dealer is in the top 15% of all dealers statewide, or “satisfactory” if the dealer is not in the top 15%. If the dealer with the same expected sales of 400 sells instead 200 Chevrolets, then its RSI is 50 (200 divided by 400 equals .5, multiplied by 100 to achieve an RSI as a percentage). The dealer achieved only half of its target sales, and would be rated as “needs significant improvement” if the dealer is not in the bottom 15% of all dealers, or “unsatisfactory” if the dealer is in the bottom 15%.
Unless all dealers meet or exceed their expected target sales, there will be some dealers who score below 100. A below 100 score is below average performance. Since the expected sales number is based on an adjusted state market average, as the number of sales increases, so do the number of actual sales necessary to achieve a 100 RSI. In other words, the RSI sales performance measure moves upward (or downward) depending on market variations. Consequently, a dealer's performance is dependent on the performance in the market against which the dealer is measured, and the statewide market is subject to local variations, only one of which is reflected in the RSI (vehicle segment preference).
Under the participation agreement, GM required Beck to trend-up to the 100 RSI average benchmark within three years. In the first year Beck had to attain an RSI of 70, in the second year an 85 RSI, and a 100 RSI in its third year. When Beck failed to timely achieve these RSI scores it defaulted on the participation agreement, and potentially became subject to a “needs significant improvement” or “unsatisfactory” dealer rating.
In the middle of the second year, GM notified Beck that it would extend the dealer agreement into future years on condition that Beck 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 achieve the 85 RSI in the second year meant that “GM shall have no obligation to extend the Dealer Agreement.” By separate letter GM also informed Beck that it was increasing its AGSSA by four census tracts in Westchester County, and reducing the AGSSA by seven tracts in Bronx County.
After Beck sued GM in state court alleging violations of the Dealer Act based on the performance standard and changes in the AGSSA, GM removed the action to the United States District Court for the Southern District of New York. After procedural history not relevant to the questions certified to us, Beck filed amended complaints asserting, inter alia, two Dealer Act claims for injunctive and declaratory relief. The first claim alleged that GM used an unreasonable, arbitrary and unfair performance standard in determining Beck's compliance with its agreements, pursuant to Vehicle and Traffic Law § 463(2)(gg), and sought to enjoin GM from using a New York statewide average to calculate Beck's sales performance. Beck claimed the RSI was unreasonable and unfair as a...
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