New York Law Review

Tag: Franchise Law

  • Beck Chevrolet Co., Inc. v. General Motors LLC, 27 N.Y.3d 530 (2016): Dealer Performance Standards and Franchise Modifications Under the New York Franchised Motor Vehicle Dealer Act

    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.

  • Carvel Corp. v. Noonan, 3 N.Y.3d 182 (2004): Tortious Interference with Prospective Economic Relations Requires Wrongful Means

    3 N.Y.3d 182 (2004)

    To sustain a claim for tortious interference with prospective economic relations in New York, a plaintiff must demonstrate that the defendant’s conduct constituted a crime, an independent tort, or conduct aimed solely at harming the plaintiff; otherwise, the conduct must be considered egregious wrongdoing.

    Summary

    Carvel franchisees sued Carvel Corporation, alleging that Carvel’s supermarket distribution program tortiously interfered with their prospective economic relations. The New York Court of Appeals was asked to determine if the evidence presented at trial permitted a jury finding in favor of the franchisees on this claim. The court held that it did not, clarifying that to succeed on such a claim, the franchisee must show either criminal or tortious conduct, actions intended solely to inflict harm, or, at minimum, egregious wrongdoing. Carvel’s conduct, motivated by economic self-interest and not aimed solely at harming franchisees, did not meet this threshold.

    Facts

    Until the early 1990s, Carvel distributed its ice cream exclusively through franchised stores, assuring franchisees of this practice. Facing declining business, Carvel implemented a supermarket program, selling its products through supermarkets either directly or through franchisees who opted into the program (at a cost). Most franchisees did not participate. The franchisees alleged the supermarket program, including bargain pricing and coupon discrepancies, harmed their businesses. Franchise agreements varied: “Type A” agreements restricted Carvel from establishing another store within a quarter mile, while “Type B” agreements were non-exclusive and allowed Carvel to sell through various channels, including supermarkets.

    Procedural History

    Several franchisees sued Carvel in federal court. Juries awarded damages to three franchisees on tort and contract claims. Carvel appealed to the Second Circuit Court of Appeals. The Second Circuit certified questions to the New York Court of Appeals regarding the tortious interference claim and punitive damages.

    Issue(s)

    1. Under applicable standards for a claim of tortious interference with prospective economic relations, did the evidence of the franchisor’s conduct in each of the three trials on review in these consolidated appeals permit a jury finding in favor of the franchisee?

    Holding

    1. No, because Carvel’s conduct, while potentially harmful to franchisees, did not constitute a crime, an independent tort, or conduct aimed solely at harming the franchisees, and was not egregious enough to support a tortious interference claim.

    Court’s Reasoning

    The court distinguished between inducing breach of contract and interfering with non-binding economic relations, noting the latter requires more culpable conduct. Referencing Guard-Life Corp. v. S. Parker Hardware Mfg. Corp. and NBT Bancorp Inc. v. Fleet/Norstar Fin. Group, Inc., the court explained that generally, a defendant’s conduct must amount to a crime or an independent tort to establish tortious interference with non-binding relations. An exception exists if the conduct is “for the sole purpose of inflicting intentional harm on plaintiffs,” but this did not apply as Carvel was motivated by economic self-interest. The court emphasized the “means” employed by Carvel were not “wrongful” or “culpable.” Making goods available in supermarkets at attractive prices, like any form of price competition, is not “economic pressure” rising to the level of wrongful conduct. The court stated the relationship between franchisor and franchisee is complex and contractual. The court reasoned that coupon programs and distribution are also economic pressure, but it is best decided by contract rather than tort law. As such, the Court of Appeals determined that tort law should not be used in this case. Judge Graffeo concurred, arguing that the improper conduct standard should apply in cases involving non-competitors but agreed that the Carvel did not act improperly and also answered the first certified question negatively.

  • Midan Restaurant, Inc. v. Board of Estimate, 67 N.Y.2d 800 (1986): Scope of Review for Revocable Consent Franchises

    Midan Restaurant, Inc. v. Board of Estimate, 67 N.Y.2d 800 (1986)

    The Board of Estimate has broad authority to review the character and fitness of applicants seeking a revocable consent franchise, including considerations beyond land use impact.

    Summary

    This case addresses the scope of review the New York City Board of Estimate can exercise when considering an application to renew a revocable consent to operate a sidewalk cafe. The Court of Appeals held that the Board’s review extends beyond land use impact to include the character and fitness of the applicant. The Board acted rationally in denying the application based on evidence suggesting the applicant’s principal had a criminal conviction and was attempting to force tenants out of nearby apartments. This decision clarifies that the Board’s oversight is broader than that of community or borough boards.

    Facts

    Midan Restaurant, Inc. applied to the New York City Board of Estimate for renewal of its revocable consent to operate an enclosed sidewalk cafe. Thomas Lydon signed a sidewalk cafe occupancy contract as “V.P.” for Midan Restaurant, Inc., and two checks on behalf of the restaurant. Information was presented to the Board indicating that Thomas Lydon, a de facto corporate principal of Midan Restaurant, Inc., had been convicted of assaulting a tenant. Testimony at a public hearing suggested Lydon was attempting to force tenants out of apartments in buildings adjoining the restaurant.

    Procedural History

    The Board of Estimate denied Midan Restaurant’s application to renew its revocable consent. Special Term reversed the Board’s determination, holding that the denial was arbitrary and capricious. The Appellate Division affirmed the Special Term’s decision. The New York Court of Appeals reversed the Appellate Division’s order and reinstated the Board of Estimate’s determination.

    Issue(s)

    Whether the Board of Estimate, in reviewing an application for renewal of a revocable consent to operate a sidewalk cafe, is limited to considering only land use impact or whether its scope of review can include the character and fitness of the applicant.

    Holding

    No, because the New York City Charter provisions grant the Board of Estimate a broader scope of review that includes the authority to review the character and fitness of applicants seeking a revocable consent franchise.

    Court’s Reasoning

    The Court of Appeals reasoned that the New York City Charter distinguishes between the scope of review for community or borough boards and that for the Board of Estimate. Section 366-a(b) of the City Charter proscribes community and borough boards from considering issues other than land use impact. However, sections 67(4) and 197-c(f) grant the Board of Estimate a broader scope of review, allowing it to consider the character and fitness of applicants. The court found that the Board had a rational basis for denying the application, citing evidence that Thomas Lydon was a de facto corporate principal, his prior conviction for assault, and testimony indicating attempts to force tenants out of nearby apartments. The Court stated, “The Board was entitled to conclude, on the basis of the information before it, that Thomas Lydon was at least a de facto corporate principal of Midan Restaurant, Inc.” and that “This conviction, together with public hearing testimony pointing to the conclusion that Lydon was seeking to force tenants out of apartments, some of which were located in buildings adjoining the restaurant, provided the Board with a rational basis for denying the application to renew the revocable consent to operate the enclosed sidewalk cafe.”

  • Tappan Motors, Inc. v. Volvo of America Corp., 63 N.Y.2d 111 (1984): Defining ‘Good Cause’ for Franchise Termination

    Tappan Motors, Inc. v. Volvo of America Corp., 63 N.Y.2d 111 (1984)

    A motor vehicle franchise agreement can be terminated for good cause when a dealer fails to meet contractual obligations, such as maintaining an adequate parts inventory.

    Summary

    Tappan Motors sued Volvo, alleging wrongful franchise termination under General Business Law § 197. The trial court sided with Tappan, but the Appellate Division reversed, finding good cause for termination due to Tappan’s deficient performance. The New York Court of Appeals affirmed the Appellate Division, holding that Tappan’s failure to maintain an adequate parts inventory, a contractual obligation, constituted good cause for termination. The court found that the weight of the evidence supported Volvo’s claim of insufficient performance by Tappan, obviating the need to definitively interpret the “good cause” requirement of the statute.

    Facts

    Tappan Motors, a Volvo dealer, was threatened with termination of its franchise by Volvo of America Corp. Tappan Motors then initiated legal action against Volvo in November 1979. Volvo alleged that Tappan failed to meet the obligations of the franchise agreement, specifically regarding the maintenance of an adequate parts inventory. Volvo argued this deficiency justified the franchise termination. Tappan argued compliance with the franchise agreement.

    Procedural History

    The trial court initially enjoined Volvo from terminating the franchise after a nonjury trial, finding Tappan had complied with the franchise agreement obligations. The Appellate Division reversed, finding both legal and factual errors and holding Volvo’s termination was justified due to deficiencies in Tappan’s performance. Tappan appealed to the New York Court of Appeals. The Court of Appeals affirmed the Appellate Division’s order and the prior nonfinal Appellate Division order brought up for review.

    Issue(s)

    Whether the Appellate Division erred in determining that Volvo had good cause to terminate the dealership agreement with Tappan Motors based on the insufficiency of Tappan’s performance, particularly its breach of the contractual duty to maintain an adequate parts inventory.

    Holding

    Yes, because the weight of the evidence more nearly comports with the holding of the Appellate Division that Volvo had good cause to terminate the dealership because of the insufficiency of Tappan’s performance, particularly breach of its contractual duty to maintain on premises an adequate parts inventory to meet the current and reasonably anticipated service requirements of its customers.

    Court’s Reasoning

    The Court of Appeals focused on whether the evidence supported the Appellate Division’s finding of good cause for termination. The court determined that Tappan’s failure to maintain an adequate parts inventory constituted a breach of its contractual duty and justified the termination. This decision was based on the court’s assessment of the weight of the evidence presented. The court explicitly stated that it did not need to determine whether section 197 imposed a “good cause” requirement or, as Volvo claimed, protected only against arbitrary and capricious terminations because it agreed with the Appellate Division’s finding of good cause. The court did not delve into a deep analysis of the statutory interpretation of General Business Law § 197, as the factual determination of Tappan’s breach was sufficient to resolve the case. The dissenting judges believed that the weight of the evidence supported the trial court’s original findings. The dissent referenced the analysis presented in the dissenting memorandum of Justice Vito J. Titone at the Appellate Division, signaling a disagreement regarding the factual assessment of Tappan’s performance.

  • Fort Plain Bridge Co. v. Smith, 1863 N.Y. Gen. Term. LEXIS 104 (1863): Legislative Power to Grant Competing Franchises

    1863 N.Y. Gen. Term. LEXIS 104

    A state legislature can grant a franchise that impairs or destroys the value of a previously granted franchise, absent an express prohibition in the original grant.

    Summary

    Fort Plain Bridge Co. sued Smith for building a competing bridge near its own, alleging it infringed on their franchise. The court held that the state legislature’s repeal of a section in Fort Plain Bridge Co.’s charter that prohibited competing bridges meant the company had no exclusive right. Absent an express prohibition in the original grant, the legislature could authorize a competing bridge even if it diminished the value of the original franchise. Furthermore, to claim nuisance, the plaintiff needed to prove special damages distinct from the general public.

    Facts

    Fort Plain Bridge Co. was incorporated with the right to build a bridge and collect tolls. Initially, their charter prohibited any other bridge within a mile. Smith constructed a competing bridge near Fort Plain’s bridge after the legislature repealed the exclusive provision in Fort Plain’s charter. Fort Plain Bridge Co. claimed Smith’s bridge infringed upon their franchise and was a nuisance.

    Procedural History

    The case originated in a lower court, which ruled in favor of Smith. Fort Plain Bridge Co. appealed to the General Term of the Supreme Court of New York, arguing that Smith’s bridge unlawfully interfered with their franchise. The General Term affirmed the lower court’s decision.

    Issue(s)

    1. Whether the state legislature’s repeal of the exclusivity clause in Fort Plain Bridge Co.’s charter allows the legislature to authorize a competing bridge.
    2. Whether the construction of a bridge without legislative authority constitutes a nuisance that can be challenged by a party who does not suffer specific damages different from the general public.

    Holding

    1. Yes, because after granting a franchise, the legislature can grant a similar franchise to another party, even if it impairs the first franchise’s value, unless expressly prohibited in the original grant.
    2. No, because to maintain an action against a public nuisance, the plaintiff must demonstrate special damages distinct from those suffered by the general public.

    Court’s Reasoning

    The court relied on The Charles River Bridge v. The Warren Bridge to establish the principle that a state legislature can grant a franchise that diminishes the value of a prior franchise unless explicitly prohibited. The repeal of the exclusivity clause in Fort Plain’s charter removed any such prohibition. The court stated, “Since the case of The Charles River Bridge v. The Warren Bridge (11 Peters, 420), it has been understood to be the law, that it is competent for the legislature, after granting a franchise to one person, or corporation…to grant a similar franchise to another…the use of which shall impair or even destroy the value of the first franchise, although the right so to do may not be reserved in the first grant; unless the right so to do is expressly prohibited by the first grant.” Regarding the nuisance claim, the court reasoned that even if Smith’s bridge obstructed navigation, only those who suffered unique damages could bring a cause of action. The court cited precedent that “no one has the right to abate it, or sustain an action for damages occasioned by the erection, unless he has himself sustained some damages not sustained by the rest of the community.” The court acknowledged the possibly unfair outcome, stating, “I am free to say that I would be glad to see the old common law restored, which denied to the legislature the power to take away or impair a franchise granted by it; but the law is settled the other way, and we must conform to it.”