27 N.Y.3d 530 (2016)

A franchisor’s performance standard based on statewide sales data is unlawful under the New York Franchised Motor Vehicle Dealer Act if it fails to account for local market variations, specifically local brand popularity, when determining a dealer’s compliance with a franchise agreement. A franchisor’s unilateral change of a dealer’s geographic sales area does not automatically constitute a prohibited modification to the franchise, the dealer’s rights, obligations, investment or return on investment must be substantially and adversely affected.

Summary

In a dispute between General Motors (GM) and a Chevrolet dealer, the New York Court of Appeals addressed the legality of GM’s sales performance standard, which relied on statewide data but adjusted for local vehicle type preferences, and a unilateral change to the dealer’s sales territory. The court held that the performance standard was unlawful because it did not account for local brand popularity, thus potentially unfairly measuring the dealer’s performance. The court also held that the change in the sales territory did not automatically constitute an unlawful modification of the franchise under the New York Franchised Motor Vehicle Dealer Act. The court’s decision highlights the limitations on a franchisor’s ability to impose performance standards and modify franchise agreements, particularly when such actions may unfairly disadvantage the dealer.

Facts

Beck Chevrolet (Beck), a Chevrolet dealer, and General Motors (GM) were parties to a franchise agreement. GM used a Retail Sales Index (RSI) to measure Beck’s sales performance. The RSI compared a dealer’s actual sales to expected sales, which were calculated using statewide market share data and adjusted for vehicle type preferences. Beck alleged that this standard was unfair because it didn’t consider local brand popularity. GM also changed Beck’s Area of Geographic Sales and Service Advantage (AGSSA). Beck sued, alleging violations of the New York Franchised Motor Vehicle Dealer Act (Dealer Act).

Procedural History

Beck sued GM in State court. GM removed the action to the United States District Court for the Southern District of New York. The District Court ruled against Beck on both claims. The Second Circuit Court of Appeals determined that the resolution of the appeal depended on unsettled New York law and certified two questions to the New York Court of Appeals regarding the GM’s performance standard and the revision of Beck’s AGSSA.

Issue(s)

1. Whether a performance standard based on statewide sales data, but not accounting for local brand popularity, is “unreasonable, arbitrary or unfair” under New York Vehicle & Traffic Law § 463 (2)(gg)?
2. Whether a change to a franchisee’s Area of Geographic Sales and Service Advantage (AGSSA) constitutes a prohibited “modification” to the franchise under Vehicle & Traffic Law § 463 (2)(ff), even if the dealer agreement allows the franchisor to alter the AGSSA?

Holding

1. Yes, because the standard did not account for local variations, specifically, local brand popularity, in addition to vehicle type preference.
2. No, the change in AGSSA did not, on its face, constitute a prohibited “modification” to the franchise agreement.

Court’s Reasoning

The Court of Appeals began by analyzing the language of VTL § 463(2)(gg), which prohibits unreasonable, arbitrary, or unfair sales or performance standards. The court found that the statute’s purpose was to protect dealers from unfair business practices by franchisors. The court held that GM’s standard was unfair because, while it adjusted for the local popularity of vehicle types, it did not account for local brand preference. The Court stated, “It is unlawful under section 463 (2) (gg) to measure a dealer’s sales performance by a standard that fails to consider the desirability of the Chevrolet brand itself as a measure of a dealer’s effort and sales ability.” The court held that a franchisor may not rely on a standard that is unreasonable and unfair simply because of its prevalence within an industry the Legislature sought to regulate.

Regarding the second question, the court interpreted VTL § 463(2)(ff), which prohibits a franchisor from modifying a franchise if the change “may substantially and adversely affect the new motor vehicle dealer’s rights, obligations, investment or return on investment.” The court found that a change to a dealer’s AGSSA, the area where the dealer is responsible for sales, is a change that has the potential to impact the franchise agreement. The Court held that a change in AGSSA does not automatically violate the statute. Instead, the court held that such a change must be assessed on a case-by-case basis to determine its impact on the dealer.

A dissenting opinion argued that determining whether a performance standard is “unreasonable, arbitrary or unfair” requires a factual determination and, in this case, that the District Court’s factual findings should not have been disturbed.

Practical Implications

This decision provides guidance on what constitutes an “unreasonable, arbitrary or unfair” sales or performance standard under the New York Franchised Motor Vehicle Dealer Act. The court’s emphasis on the need for performance standards to reflect local market conditions highlights that franchisors must consider all relevant factors that may impact a dealer’s sales performance, including brand preference, when creating sales metrics. A performance standard that is not based in fact or responsive to market forces is not reasonable or fair. Additionally, franchisors cannot insulate themselves from the requirements of VTL § 463(2)(ff) by contractually reserving the right to modify a franchise agreement. The case also clarifies that the test for determining whether a modification is prohibited under the statute is whether the change has a substantial and adverse impact on the dealer. A revision of the AGSSA is not automatically violative, but should be assessed on a case-by-case basis, upon consideration of the impact of the revision on a dealer’s position.

Later cases should consider whether a performance standard reflects market realities and whether franchise modifications negatively impact a dealer’s business.