Beck Chevrolet Co., Inc., Appellant,v.General Motors LLC, Respondent.

Brief

N.Y.June 2, 2015

To be Argued by: RUSSELL P. MCRORY (Time Requested: 30 Minutes) CTQ-2015-00002 Court of Appeals of the State of New York BECK CHEVROLET CO., INC., Appellant, – v. – GENERAL MOTORS LLC, Respondent. –––––––––––––––––––––––––––––– ON APPEAL FROM THE QUESTION CERTIFIED BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT IN DOCKET NOS. 13-4066-CV AND 13-4310-CV BRIEF FOR APPELLANT ARENT FOX LLP Attorneys for Appellant 1675 Broadway, 34th Floor New York, New York 10019 Tel.: (212) 484-3900 Fax: (212) 484-3990 Date Completed: July 31, 2015 DISCLOSURE STATEMENT Beck Chevrolet Co., Inc. it is a private non-governmental party. It has no parent corporation. There is no publicly held corporation that holds 10 percent or more of its stock. TABLE OF CONTENTS Page i INTRODUCTION .................................................................................................... 1 QUESTIONS CERTIFIED FOR REVIEW ............................................................. 4 JURISDICTIONAL STATEMENT ......................................................................... 5 STATEMENT OF FACTS ....................................................................................... 5 A. Beck is a Family-Owned Business and a Longstanding GM Dealer, Having Operated a Chevrolet Franchise from its Present Location for Decades ............................................... 5 B. After Initially being Designated a Wind-Down Dealer in the GM Bankruptcy, GM and Beck Entered into a Participation Agreement ............................................................ 6 C. GM Evaluates Beck’s Sales Performance and Imposes Facility Requirements Based on an Unfair and Unreasonable State Market Share Benchmark .......................... 7 D. GM Unfairly Increased Beck’s Sales and Facility Obligations by Improperly Adding Census Tracts to Beck’s AGSSA that are Closer to Other Dealers .................... 15 E. The District Court Created an “Egregiousness” Standard Not Found in the Dealer Act .................................................... 17 F. GM’s Attempt to Terminate Beck is Stopped by the New York DMV ............................................................................... 18 G. The Second Circuit Also Casts Doubt on GM’s Methodology ............................................................................ 20 SUMMARY OF THE ARGUMENT ..................................................................... 22 ARGUMENT .......................................................................................................... 24 POINT I THE DEALER ACT IS A REMEDIAL STATUTE ENACTED TO PROTECT DEALERS FROM UNFAIR CONTRACTS AND TO OVERRIDE THEIR TERMS ......... 24 TABLE OF CONTENTS (continued) Page ii POINT II NUMEROUS COURTS AND ADMINISTRATIVE TRIBUNALS HAVE HELD THAT GM’S RSI STANDARD IS UNREASONABLE BECAUSE IT FAILS TO ACCOUNT FOR FACTORS OUTSIDE OF A DEALER’S CONTROL ...................................................... 27 A. The Beck New York DMV Proceeding ................................... 28 B. North Shore .............................................................................. 29 C. Landmark ................................................................................. 32 D. Halleen ..................................................................................... 34 E. Kinlaw ...................................................................................... 35 F. Eaton ........................................................................................ 36 G. Andy Chevrolet ........................................................................ 37 H. Non-GM Cases Involving Regional Market Share .................. 37 POINT III THE EVIDENCE IN THIS CASE DEMONSTRATED THAT GM’S STATEWIDE STANDARD IS UNREASONABLE ................................................................. 39 A. The Federal Trial Testimony ................................................... 39 B. GM’s Statewide Standard Applied to Downstate Dealers Like Beck is Unreasonable Under the Dealer Act ................... 44 POINT IV GM’S CHANGE TO BECK’S AGSSA WAS AN UNFAIR FRANCHISE MODIFFICATION ........................... 47 CONCLUSION…………………………………………………………………...53 - iii - TABLE OF AUTHORITIES Page(s) CASES Andy Chevrolet Co. v. General Motors Corp., Case No. 05-01-MVDB-304-J (Ohio Mot. Veh. Dealer Bd. Aug. 22, 2006) ................................................................................................................... 37 Arciniaga v. Gen. Motors Corp., 418 F. Supp. 2d 374 (S.D.N.Y. 2005), rev’d on other grounds, 460 F.3d 231 (2d Cir. 2006) ......................................................................................... 51, 52 Audi of Smithtown, Inc. v. Volkswagen Group of America, Inc., 32 Misc. 3d 409 (Sup. Ct., Suffolk Cnty. 2011), aff’d, 100 A.D.3d 669 (2d Dep’t 2012) ................................................................................................... 45 Beck Chevrolet Co. v. Gen. Motors LLC, 787 F.3d 663, 668 (2d Cir. 2015) ................................................................. 20, 21 Bronx Auto Mall, Inc. v. Am. Honda Motor Co., Inc., 934 F. Supp. 596 (S.D.N.Y. 1996), aff’d., 113 F.3d 329 (2d Cir. 1997) ..... 24, 45 DaimlerChrysler Vans LLC v. Freightliner of New Hampshire, Inc., No. 03-304, 2004 WL 51314 (D.N.H. Jan. 8, 2004) .......................................... 51 Eaton Motor Company, Inc. v. General Motors Corp., Docket No. 04-0019 OIC (Tex. Dep’t of Transp., Mot. Veh. Div. Jan. 17, 2006) ............................................................................................................. 36, 37 Ford Motor Co. v. Claremont Acquisition Corp., 186 B.R. 977 (C.D. Cal. 1995) ........................................................................... 38 General Motors Corp. v. Kinlaw, 78 N.C. App. 521, 338 S.E.2d 114 (N.C. App. Ct. 1985) ...................... 34, 35, 36 Halleen Chevrolet v. GMC, Case No. 03-050MVDB-277-SS (Ohio Mot. Veh. Dealers Bd. Jul. 21, 2006), aff’d sub nom., General Motors Corp. v. Halleen Chevrolet, Case No. 06CVF-11739 (Ohio Ct. Com. Pleas, Franklin Cnty., Sep. 20, 2008) .. 34, 35 - iv - JJM Sunrise Automotive, LLC v. Volkswagen Group of America, Inc., 46 Misc. 3d 755 (Sup. Ct., Nassau Cnty. 2014) ................................................. 50 Landmark Chevrolet Corp. v. General Motors Corp., Docket No. 02-0002 LIC (Tex. Mot. Veh. Bd. Sep. 16, 2004), aff’d sub nom., Austin Chevrolet, Inc. v. Motor Vehicle Board, 212 S.W.3d 425 (Tex. Ct. App. 2006) ............................................................................... 32, 33, 34 Madsen v. Chrysler Corp., 261 F. Supp. 488 (N.D. Ill. 1966) ..................................................... 38, 39, 40, 42 Marquis v. Chrysler Corp., 577 F.2d 624 (9th Cir. 1978) .............................................................................. 37 Mt. Lebanon Motors Inc. v. Chrysler Corp., 283 F. Supp. 453 (W.D. Pa. 1968) ...................................................................... 38 Nissan North America, Inc. v. Royal Nissan Inc., 794 So. 2d 45 (La. Ct. App. 2001) ................................................................ 48, 49 North Shore, Inc. v. General Motors Corp., No. MVRB 79-01 (Ill. Mot. Veh. Rev. Bd. May 28, 2003), aff’d, sub nom., General Motors Corp. v. Illinois Motor Vehicle Review Board, 361 Ill. App. 3d 271 (Ill. App. 2005), aff’d, 224 Ill. 2d 1 (2007) .......................passim Racine Harley-Davidson, Inc. v. Div. of Hr’gs and Appeals, 292 Wis. 2d 549, 717 N.W.2d 184 (2006) ................................................... 49, 50 Rodriguez v. Perales, 86 N.Y.2d 361 (1995) ......................................................................................... 46 Sims v. Nissan North Am., Inc., Nos. 12AP 833, 13AP 835, 2013 WL 3270914 (Ohio Ct. App., Jun. 25, 2013) .................................................................................................................. 37 Swartz v. Chrysler Motors Corp., 297 F. Supp. 834 (D. N.J. 1969) ......................................................................... 38 Van Wie Chevrolet, Inc. v. General Motors, LLC, No. 0284/2012 (Sup. Ct., Onondaga Cnty) ........................................................ 50 - v - STATUTES Veh. & Traf. Law §§ 460, et seq. ......................................................................passim 12 U.S.C. § 1226(b) ................................................................................................. 51 28 U.S.C. § 1291 .............................................................................................. 5, 9, 10 28 U.S.C. § 1441(a) ................................................................................................... 5 1 INTRODUCTION The Second Circuit has asked this Court to answer two certified questions and decide two matters of first impression under New York’s Franchised Motor Vehicle Dealer Act, Veh. & Traf. Law §§ 460, et seq. (“Dealer Act”). The first certified question concerns Dealer Act § 463(2)(gg), which prohibits motor vehicle franchisors from using “unreasonable, arbitrary or unfair” sales performance standards to evaluate dealers. Here, the question is whether GM’s statewide market share benchmark is unfair, unreasonable, or arbitrary for Beck when it does not take into account most local consumer preferences and market conditions. The issue is particularly critical for downstate Chevrolet dealers like Beck because Chevrolet’s statewide market share is dominated by upstate markets where Chevrolets are considerably more popular and Chevrolet dealers are much more numerous. Over 80% of Chevrolet dealers are located in the upstate 53 counties and three-quarters of all Chevrolets sold in New York State are sold in the upstate 53 counties. With respect to the first certified question, GM’s sales performance standard is unfair and unreasonable as a matter of law because, mathematically, at any one time it renders half of its dealer network in New York violation of their contractual obligations. As discussed below, GM’s standard franchise agreement requires all of its dealers to obtain a Retail Sales Index (“RSI”) score of 100 or greater. A 2 score of 100 RSI means that the dealer’s sales performance is “average” as compared to the brand’s performance in the state as a whole. A score below 100, which is a violation of the dealer agreement, means that the dealer’s score is “below average.” But as a matter of mathematical necessity, approximately half of all dealers will have RSI scores below 100 when RSI is a moving target that is calculated as an average of the dealer population in the state. Accordingly, GM’s use of a statewide market share benchmark, combined with its failure to take into account most local market conditions and consumer preferences, renders half of all of its New York dealers in violation of their contractual sales performance obligations. More importantly, it renders 83% of all downstate Chevrolet dealers, including Beck, in violation of their contractual sales performance obligations. This makes these dealers subject to punitive actions by GM, up to and including termination. Giving a manufacturer such subjective power over half of all its New York dealers, and 83 percent of its downstate dealers, is precisely what the New York Legislature sought to prevent when it enacted the Dealer Act in general, and subdivision (gg) in particular. If this Court finds otherwise, the protections for dealers granted by the Legislature will be rendered ineffectual. In fact, GM ultimately did attempt to terminate Beck’s franchise based on Beck’s purported failure to meet GM’s flawed statewide market share benchmark. 3 In Beck’s administrative challenge to the attempted termination, an administrative law judge found in Beck’s favor, holding that GM’s sales performance standard was not only unreasonable, but was also arbitrarily applied by GM. The second certified question concerns Dealer Act § 463(2)(ff), which prohibits franchisors from imposing unfair franchise modification on their dealers. Here, GM unilaterally enlarged Beck’s contractually assigned market territory and assigned Beck new and additional territory that was closer to other dealers. Enlarging Beck’s market territory increased Beck’s sales objectives and increased Beck’s facility requirements. Dealer Act § 463(2)(ff) defines a modification as “any change or replacement of any franchise if such change or replacement may substantially and adversely affect the new motor vehicle dealer’s rights, obligations, investment or return on investment.” (emphases added) The enlargement of Beck’s market territory indisputably increases Beck’s obligations; therefore, GM’s unilateral increase to Beck’s market territory is a “modification” regulated by the Dealer Act. Accordingly, both of the Second Circuit’s certified questions should be answered in the affirmative. 4 QUESTIONS CERTIFIED FOR REVIEW 1. Is a performance standard that requires “average” performance based on statewide sales data in order for an automobile dealer to retain its dealership “unreasonable, arbitrary, or unfair” under New York Vehicle & Traffic Law section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types? 2. Does a change to a franchisee’s Area of Primary Responsibility or AGSSA constitute a prohibited “modification” to the franchise under section 463(2)(ff), even though the standard terms of the Dealer Agreement reserve the franchisor’s right to alter the Area of Primary Responsibility or AGSSA in its sole discretion? 5 JURISDICTIONAL STATEMENT This case was originally commenced in Westchester County Supreme Court on April 27, 2011, by plaintiff-appellant Beck Chevrolet Co., Inc. (“Beck”), and was removed to federal court by defendant-respondent General Motors LLC (“GM”), pursuant to 28 U.S.C. § 1441(a) on the ground of diversity jurisdiction. The district court granted summary judgment dismissing most of Beck’s claims and disposed of Beck’s remaining claims (and GM’s counterclaim) after a bench trial. Beck timely appealed from the district court’s final judgment. The Second Circuit had appellate jurisdiction pursuant to 28 U.S.C. § 1291. By Opinion and Order dated May 19, 2015, the Second Circuit affirmed the district court’s judgment in part; but certified two questions to this Court. On June 4, 2015, this Court accepted the certified questions. This Court has jurisdiction pursuant to Section 500.27 of the Rules of Practice of the Court of Appeals of the State of New York. STATEMENT OF FACTS A. Beck is a Family-Owned Business and a Longstanding GM Dealer, Having Operated a Chevrolet Franchise from its Present Location for Decades Beck is a motor vehicle dealer and GM franchisee, operating a Chevrolet dealership that has existed at the same location in Yonkers, New York since the 1930s. Beck has been owned and operated by the Geller family for almost four decades. (A330) 6 B. After Initially being Designated a Wind-Down Dealer in the GM Bankruptcy, GM and Beck Entered into a Participation Agreement GM emerged out of the 2009 bankruptcy of General Motors Corp. (“Old GM”), having acquired most of Old GM’s operating assets, including Old GM’s dealer agreements. (A875.12) Initially, GM assumed Beck’s dealer agreement subject to a wind-down agreement, under which Beck was to sell down its inventory and cease operations in an orderly manner. (A331) After the bankruptcy sale, GM rescinded the wind- down agreement and entered into a participation agreement (“Participation Agreement”) with Beck, under which Beck would continue as a Chevrolet dealer. (A128-136) The Participation Agreement, effective September 2009, contains several provisions relating to sales performance, customer service, working capital and facility renovations: (a) Sales Performance Standard: Beck was required to attain a Retail Sales Index (“RSI”) of 70 for 2010, 85 for 2011 and 100 for 2012. (b) Customer Service Standard: Beck was required to achieve a customer service index (“CSI”) equal to the average CSI in Chevrolet’s Northeast Region during 2010 through 2012. (c) Facility Standard: Beck was required to enroll in GM’s facility image program, called Essential Brand Elements (“EBE Program”), and to renovate its facility in accordance with the program. (d) Working Capital Standard: Beck was required to meet GM’s working capital standards. 7 (collectively, the “Performance Requirements”.) (A133-134) Thereafter, Beck and GM entered into a renewal dealer agreement effective November 1, 2010 (“Dealer Agreement”), which expressly incorporated the Participation Agreement. (A667) C. GM Evaluates Beck’s Sales Performance and Imposes Facility Requirements Based on an Unfair and Unreasonable State Market Share Benchmark 1. GM’s Statewide Market Share Benchmark Favors Upstate Dealers GM assigns each dealer a geographic territory called an Area of Primary Responsibility (“APR.”) In urban areas like the New York metropolitan area, APRs are shared by several dealers, and each individual dealer is assigned an Area of Geographic Sales and Service Responsibility, (“AGSSA”) within the APR. APRs and AGSSAs are comprised of census tracts defined by the U.S. Census Bureau. (A392-393) Census tracts are typically assigned to the closest dealer, with certain exceptions to account for road networks, natural barriers and consumer shopping patterns. (A672) Whenever a new motor vehicle is purchased or leased, that vehicle is registered at the customer’s address with the state. This registration data is compiled by census tract and used by manufactures like GM for a variety of purposes, including measuring sales performance. (A392) As part of the sales 8 performance evaluation process, manufacturers also divide the universe of motor vehicles into individual vehicle class segments (e.g., mid-sized sedans, small SUVs, etc.). (A1232-1235) Utilizing this registration and segmentation data, GM measures a dealer’s sales performance by a metric called Retail Sales Index. RSI is a fraction, expressed as a percentage, where the numerator is all of a dealer’s retail sales wherever made and the denominator is the dealer’s expected sales: RSI = Actual Sales x 100 Expected Sales (A1525) Expected sales, the RSI denominator, is calculated by applying Chevrolet’s statewide market share, in each vehicle segment, to all of the competitive retail motor vehicle registrations in the dealer’s AGSSA: Expected Sales = Chevy’s Statewide Market Share in Segment x Segment Registrations in AGSSA (repeated for each vehicle segment in which Chevrolet competes) (A1525) To illustrate, Chevrolet’s entrant in the mid-sized sedan vehicle segment is the Malibu. (A1234) In 2012, the Malibu had a 6.39% market share in all of New York State among mid-sized sedans. (A1236) That 6.39% market share is then applied to all of the mid-sized sedan registrations in Beck’s AGSSA (i.e., 1,796 9 mid-sized sedans) and the result (i.e., 115) is added to Beck’s expected sales. (A1240) This calculation is repeated for all the vehicle segments in which Chevrolet competes to arrive at the total expected sales number (i.e., 335), which is plugged in as the denominator of the RSI formula. (Id.) This basic formula is used by virtually all motor vehicle manufacturers to evaluate their dealers and their dealer networks’ sales performance. Nomenclature may differ but the essential formula is the same, with the exception that some manufacturers use regional market share instead of state market share. For Chevrolet, upstate New York dominates the state average benchmark against which all Chevrolet dealers in the state are judged. In 2012, in the upstate 53 counties, there were 50,553 Chevrolet registrations out of 274,794 competitive registrations,1 representing a market share of 18.4%. (A1261) But in the nine downstate counties, there were only 18,355 Chevrolet registrations out of 288,009 competitive registrations, or 6.37%. (A1257) In other words, in upstate New York, Chevrolet enjoys almost triple its market share of competitive registrations compared to downstate New York. 51% of all competitive cars and light trucks are registered in the nine downstate counties, but only 27% of Chevrolets are registered in the nine downstate counties. Eight of the nine downstate counties are the worst—dead last—in terms of Chevrolet registration effectiveness. (A1244- 1 Competitive registrations are registrations of motor vehicles in those segments where Chevrolet competes. 10 46) In the best of the lot, Suffolk County, Chevrolet only ekes out 47th place out of 62 counties. (A1246) These stark numbers lead to rather dramatic RSI scores for Chevrolet’s 23 downstate dealers. (A1263) 19 of the 23 GM dealers, or 83%, fall significantly below the contractual standard of 100 RSI. (Id.) Of the four downstate dealers exceeding 100 RSI, three are located in Suffolk County, and only one does so by a significant margin. (Id.) GM admits that there is not a single sales-effective Chevrolet dealer in Rockland, Westchester, the Bronx, Manhattan, Staten Island, Brooklyn and Nassau. (A1069) But, among the 23 downstate Chevrolet dealers, Beck’s RSI score falls right smack dab in the middle. (A1263) In addition to evaluating sales performance, GM also uses state market share to set a dealer’s planning volume, which is used to determine that dealer’s required facility size. (A334-335) The higher a dealer’s planning volume, the larger the facility size, and the greater are the requirements that must be met to be compliant. By tying facility requirements to planning volumes based on achieving a state average benchmark that fails to take into consideration factors that are out of the dealers’ control, the facility requirements for downstate dealers like Beck are artificially and unreasonably inflated. If Beck’s planning volume were calculated using more localized geographical benchmarks, then Beck would easily be considered a “small” facility 11 under GM’s guidelines, and, accordingly, its renovation requirements would be significantly less onerous and less expensive. (A344) The requirements of a small versus a medium-small facility under GM’s guidelines are significantly different. (A345) 2. GM Does Not Adjust for Factors that are Depressing Sales for Downstate Dealers Segmentation or “segment-adjustment” does account for certain factors because it only counts registrations in segments where Chevrolet competes. Registrations in most luxury segments do not affect RSI. Segmentation takes into account local popularity of individual segments (e.g., if pick-up trucks generally are more or less popular in a given AGGSA compared to the rest of the state). But GM adjusts for no other factors. (A1147) Indeed, GM’s position is that no other adjustments are necessary or appropriate. (A1147-1149) In other words, according to GM, the popularity of the Chevrolet Malibu relative to the popularity of all other mid-sized sedan models should be constant across all of New York State, from Montauk to Buffalo. According to GM, after adjusting for segment popularity, any deviance from state average is the result of dealer effort. But, as the evidence shows, there are numerous other factors that affect the sales performance of GM dealers in the nine downstate counties (dealers in Westchester, Rockland, Bronx, New York, Queens, Kings, Richmond, Nassau, and Suffolk Counties; also referred to herein as the “Downstate Dealers”) differently than 12 GM’s upstate dealers. These factors are outside the dealers’ control; provide GM’s upstate dealers with a distinct advantage; and, importantly for this appeal, severely disadvantage the Downstate Dealers. The result, as shown by hard data, is that Downstate Dealers, like Beck (which performs superbly in almost every other important metric), are relegated to the bottom of GM’s New York State Chevrolet dealers with respect to sales performance—a mathematical inevitability that results from a sales performance metric that requires half of the dealer population to be in a failing category and, hence, subject to unfair leverage by GM. As elicited in discovery and at trial, there are numerous factors that depress sales for the Downstate Dealers, as compared to upstate New York dealers. Chief among these factors is the increased competition faced by Downstate Dealers from imports and other brands that Chevrolet does not face in upstate New York: 13 LINE MAKE 9 DOWNSTATE COUNTIES 53 UPSTATE COUNTIES NEW YORK STATE Ford 29 99 128 Nissan 29 30 59 Chrysler 28 89 117 Toyota 26 36 62 Honda 24 28 52 Chevrolet 23 111 134 Hyundai 20 24 44 Subaru 20 30 50 Volkswagen 19 21 40 (A1453-A1461) As this chart derived from GM’s own expert report demonstrates, domestic brands, especially Chevrolet, have an oversized presence in upstate New York, while the Downstate Dealers have to contend with a roughly equal or greater presence by Toyota, Honda and Nissan. To put this in perspective, in downstate New York there is one Honda dealer for each Chevrolet dealer, but upstate there are four Chevrolet dealers for every Honda dealer. There are vast areas of upstate New York where Chevrolet dealers face little or no import competition, but upstate New York dominates GM’s New York State market share benchmark. Segment- 14 adjustment does not take into account the level of competition faced by local dealers compared to the benchmark. In addition, Downstate Dealers faced a significant dip in advertising spending by GM during the relevant period, decreasing from $27 million in 2009 to just $15 million in 2011, and only recovering as of 2012. A GM-produced spreadsheet demonstrates the dip as follows: 2009 2010 2011 2012 Total Spend 27,015,200 23,040,700 15,287,200 27,900,600 Share of Voice 7.85% 5.67% 3.9% 6.43% (A1463-1464) This demonstrates that GM advertising in the Chevrolet brand declined dramatically in the New York DMA in 2010 and 2011, only recovering in 2012. This document also shows that GM advertising declined not only absolutely, but also relative to its competition (i.e., while Chevrolet advertising substantially declined, the spending of Ford, Honda, Toyota, etc. increased). GM’s own expert testified that the amount of manufacturer advertising could affect the brand’s performance in the market. (A1157) Segment-adjustment does not take into account the level of or change in manufacturer advertising in a local market compared to the benchmark market. Finally, GM’s Northeast Regional Director for the Chevrolet brand testified that GM exited the lease market for a time following the bankruptcy. (A1467) He 15 also testified that downstate customers prefer leasing to a greater extent than upstate customers, who are “less reliant on leasing.” (A1468-1469) Segment- adjustment does not take into account the popularity of leasing in a market and the availability of manufacturer-supported lease programs compared to the benchmark market. This, then, is the fundamental dispute: whether segmentation alone provides sufficient adjustments for local market conditions and consumer preferences in the New York City metropolitan area versus New York State as a whole. The New York State benchmark is dominated by dealers in fundamentally dissimilar markets in upstate New York, where domestic brands in general, and Chevrolet in particular, are more popular, where Chevrolet dealers are more numerous, and where customers are less affected by GM’s business decisions to reduce its advertising spending and exit the lease market. D. GM Unfairly Increased Beck’s Sales and Facility Obligations by Improperly Adding Census Tracts to Beck’s AGSSA that are Closer to Other Dealers One of the variables that goes into the calculation of a dealer’s expected sales—the RSI denominator—is the AGSSA to which the state benchmark is applied. Because GM calculates a dealer’s expected sales based on the total new vehicle registrations in that dealer’s AGSSA, the addition of census tracts to a dealer’s AGSSA necessarily increases the amount of sales necessary to attain a 16 RSI of 100 (i.e., statewide average). The larger the AGSSA (in terms of total number of new vehicle registrations), the greater the sales that are necessary to meet GM’s sales obligations. An improperly drawn AGSSA, containing census tracts that are closer to and should be assigned to other dealers, unfairly increases the dealer’s sales obligations and facility requirements under GM’s system. This increases the likelihood that GM will seek to terminate that dealer’s franchise for failing to meet its contractual sales performance requirements. (A393-394) Here, on April 22, 2011, GM formally notified Beck that it was enlarging Beck’s AGSSA (“AGSSA Modification Notice”). (A234-239) These adjustments added census tracts to Beck’s AGSSA that were closer to other dealers, thereby unfairly increasing Beck’s sales obligations and facility requirements. Beck received no benefit from the additional census tracts. In fact, the change increased Beck’s obligations by including census tracts for which other closer GM dealers would have a greater opportunity, based on the proximity advantage, in which to make sales. The AGSSA Modification Notice expressly stated that it was being “provided pursuant to New York Vehicle & Traffic Law §463(2)(ff)(1)”—the provision specifically governing franchise modifications. (A234) Beck complained that the addition of these other census tracts was unfair to Beck and would artificially inflate Beck’s sales targets. (A350-351) GM’s own internal 17 analysis agreed “that there may be sufficient evidence to support dealer’s concern.” (A674-675) E. The District Court Created an “Egregiousness” Standard Not Found in the Dealer Act The issue of the reasonableness of GM’s statewide market share benchmark was squarely before United States District Judge Alvin K. Hellerstein of the Southern District of New York in a four-day bench trial in September 2013. On September 25, 2013, Judge Hellerstein decided the case in favor of GM. Instead of a considered written opinion, the district court issued an oral decision from the bench. (A1197-1228; A1673-1674) The federal district court’s legal analysis and statutory construction were flawed. The district court completely disregarded a long line of cases and administrative decisions finding GM’s RSI to be unreasonable. Without any statutory basis, the district court held that the reach of subdivision (gg)’s prohibition of “unfair, unreasonable or arbitrary” sales performance standards is limited solely to the most flagrant violations, holding that “it is only the egregious decision that should be labeled arbitrary or unfair.” (A1703-1705) Beck timely appealed the district court’s final judgment to the Second Circuit. 18 F. GM’s Attempt to Terminate Beck is Stopped by the New York DMV The concerns raised by this appeal—the application of an unreasonable, arbitrary, and unfair RSI standard—are not hypothetical. They actually occurred here. In June 2013, while the case before Judge Hellerstein was pending, GM notified Beck that it was going to terminate Beck’s franchise for failing to meet GM’s RSI sales requirements. (A1885) Beck filed a challenge to that termination with the New York State Department of Motor Vehicles (“New York DMV”) within its rights pursuant to the Dealer Act. (A1883) While Judge Hellerstein’s decision was on appeal, for seven hearing days between September 22 and October 2, 2014, Administrative Law Judge Walter Zulkoski held hearings regarding GM’s proposed termination of Beck’s franchise. Judge Zulkoski heard live-witness testimony from 3 fact witnesses and 4 expert witnesses, and received 193 exhibits into evidence. On October 6, 2014, Judge Zulkoski issued a written decision, finding: (i) GM’s use of statewide average market share without adequately factoring in local market conditions and consumer preferences to evaluate Beck’s sales performance was unreasonable under the Dealer Act; (ii) GM was unfairly not applying the standard uniformly to its dealers; (iii) Beck was otherwise materially meeting GM’s performance requirements; and (iv) therefore, GM did not have due cause under the Dealer Act to terminate Beck’s franchise. (A1883-1891) 19 Specifically, Judge Zulkoski found significant factors affecting Downstate Dealers that GM was not taking into account, including “stiffer competition from other makes, significant preference for other makes, reduced advertising by GM of the Chevrolet brand in the downstate market and Chevrolet’s low market share of vehicles in the downstate market.” (A1888) Moreover, GM was not applying the standard uniformly among below average dealers. 22 dealers in New York had lower RSIs than Beck but had not been issued termination notices from GM. (A1886) Judge Zulkoski posed the rhetorical question: “[I]s the standard reasonable if not all dealers are being held to it”? (A1888) Only failure to meet RSI was specified in GM’s termination notice (A1889). Indeed, otherwise “Beck met or exceeded the other requirements of the Participation Agreement” and “Beck out performs the district, zone and regional averages for GM training standards” and for “new car advertising.” (A1890) Judge Zulkoski then found that GM’s failure to account for these local conditions in the New York City market and GM’s failure to uniformly apply the RSI standard violated the Dealer Act (A1891): For the New York City metropolitan area, the RSI standard of GM is unreasonable as it does not realistically reflect the Chevrolet sales challenges that Beck and other New York metropolitan dealers face and GM is not applying the RSI uniformly to all dealers in New York and thus GM lacks due cause to terminate Beck’s franchise. 20 The New York DMV decision has prevented GM from terminating Beck’s franchise. GM has appealed that decision to the Administrative Appeals Board, which appeal is pending. G. The Second Circuit Also Casts Doubt on GM’s Methodology The Second Circuit heard oral argument on the appeal of the underlying district court decision on October 6, 2014, and issued its reasoned decision submitting certified questions to this Court on May 19, 2015. (A1897-1942) In analyzing GM’s sales performance evaluation methodology, the Second Circuit recognized that GM’s RSI requirement may create a no-win scenario for dealers located where the GM brand is weak: Unless all dealers attain the exact same market share, one would expect a substantial number of dealers to score higher than average each year. It necessarily follows that a substantial number will fall short as well. And as dealer performance improves, the sales required to achieve an RSI of 100 will increase. Beck Chevrolet Co. v. Gen. Motors LLC, 787 F.3d 663, 668 (2d Cir. 2015). Moreover, the Second Circuit recognized that GM’s statewide sales benchmark had come under significant judicial and administrative criticism: That several ALJs who routinely consider disputes between franchisors and franchisees have concluded that statewide averages are not reasonable performance indicators gives us pause. It seems sensible enough to conclude that car dealers located in different parts of a single state would face different barriers to success, including variations in local brand preferences. By 21 failing to take this into account, the existing performance standards make it likely that the lowest-performing dealers will be concentrated in areas in which GM’s brands are the weakest. Id. at 676. With respect to the AGSSA modification claim, the Second Circuit also recognized that a “modification” under the Dealer Act is “‘any change or replacement of any franchise if such change or replacement may substantially and adversely affect the new motor vehicle dealer’s rights, obligations, investment or return on investment.’” Id. at 676 (quoting Dealer Act § 463(2)(ff)(2)). Such a franchise includes the entire “written arrangement” between the parties, and may “extend beyond the Dealer Agreement to include secondary documents, including those defining Beck’s AGSSA.” Id. at 1928. At oral argument on GM’s summary judgment motion, GM’s counsel conceded that: “[w]e’re not arguing that it’s not part of the [dealer] agreement. We’re simply saying that the agreement allows us to change it from time to time in our sole discretion.” (A690) The Second Circuit left it to this Court to determine whether GM’s statewide sales performance standard, which does not take into consideration most local market conditions, is unreasonable, arbitrary or unfair under the Dealer Act, and whether GM’s change to Beck’s AGSSA constitutes a modification under the Dealer Act. As discussed below, both questions should be answered in the affirmative. 22 SUMMARY OF THE ARGUMENT In determining what the Dealer Act means, this Court should look first to the plain language of the statute. Then, if necessary, it should look to the legislative history of the Dealer Act, as well as to how other adjudicatory bodies have interpreted similar statutory language. The Dealer Act clearly prevents manufacturers from using “unreasonable, arbitrary or unfair” sales performance standards and from making unfair unilateral “modifications” that expand a dealer’s “obligations.” Like all the protections of the Dealer Act, these prohibitions apply “notwithstanding the terms of any franchise contract.” Dealer Act § 463(2). These provisions must be read in context. The New York Legislature established the Dealer Act to level the playing field that has historically favored manufacturers, and so the Dealer Act must be read broadly as a remedial act that favors dealers. While subsections (ff) and (gg) have not been interpreted by any New York State appellate court, several other courts and administrative agencies, including the New York DMV, have considered GM’s statewide performance standard and found it to be unreasonable for the same reasons articulated by Beck in this appeal. Moreover, the evidence presented in this matter strongly supports the unreasonableness and arbitrariness of GM’s RSI, as GM has sought to terminate Beck while 22 other dealers in New York State (12 of which are in 23 downstate New York) have lower RSI scores than Beck. Beck has met or exceeded all of the other important metrics. (A1886) Respectfully, the federal district court erred. It held that GM’s use of state segment adjusted market share was fair and reasonable. The district court’s legal analysis and statutory construction were, unfortunately, flawed. The district court completely disregarded a long line of cases and administrative decisions finding GM’s RSI to be unreasonable. Ignoring the Legislature’s express statement of purpose in enacting the Dealer Act and ignoring its proper judicial function to apply, rather than make, the law, the district court created out of whole cloth a requirement of “egregiousness” found nowhere in the statute. The implications of this case are substantial. The New York Legislature enacted the Dealer Act specifically to protect franchisees, like Beck, from being subject to onerous franchise terms dictated by the superior economic power of franchisors, like GM. The Dealer Act expressly overrides provisions in franchise agreements where manufacturers have given themselves the authority to dictate performance standards, facility requirements, renewal rights, inventory allocation, pricing and franchise modifications. The New York Legislature specifically added subdivisions (ff) and (gg) in 2008 in order to prevent manufacturers from imposing unfair franchise modifications and from using unreasonable, arbitrary, or unfair sales performance standards to evaluate, leverage or terminate dealers. 24 For all of these reasons, the certified questions should be answered in the affirmative. ARGUMENT POINT I THE DEALER ACT IS A REMEDIAL STATUTE ENACTED TO PROTECT DEALERS FROM UNFAIR CONTRACTS AND TO OVERRIDE THEIR TERMS “Distribution through franchised dealers has a long history in the United States because it serves important purposes for manufacturers and other suppliers.” Bronx Auto Mall, Inc. v. Am. Honda Motor Co., Inc., 934 F. Supp. 596, 607 (S.D.N.Y. 1996), aff’d., 113 F.3d 329 (2d Cir. 1997). “[T]he history of franchised distribution in this century has seen a tug of war between franchisors seeking to exercise control of independent franchisees and franchisees fighting back through litigation and legislative activities.” Id. “[F]ranchised dealers, especially in the automobile industry, have procured the enactment of legislation designed to protect them against the superior economic power of the franchisors.” Id. at 608. The Dealer Act is a “prominent example.” Id. The Dealer Act overrides the broad power and discretion that manufacturers have given themselves in their franchise agreements. Its manifest purpose is to protect automobile dealers from abuse and overreaching by manufacturers: in order to promote the public interest and the public welfare and in the exercise of its police power, it is 25 necessary to regulate motor vehicle manufacturers, distributors and factory or distributor representatives and to regulate dealers of motor vehicles doing business in this state in order to prevent frauds, impositions and other abuses upon its citizens and to protect and preserve the investment and properties of the citizens of this state. Dealer Act § 460. The “aim of the [Dealer Act] is to establish an equilibrium of bargaining power between the motor vehicle manufacturer and the motor vehicle dealer.” Memorandum in Support of Legislation, Governor’s Bill Jacket, L. 1983, ch. 815, § 1. The Legislature intended to protect dealers from the historically unequal bargaining power enjoyed by automobile manufacturers: There is a great disparity in bargaining power between the motor vehicle manufacturer and the motor vehicle dealer. The franchise agreements which have been developed over a long course of dealing between the manufacturer and the dealer have reached a point where the dealer has few if any rights in comparison to those of the motor vehicle manufacturer. This results in an undue imbalance in bargaining power and the dealer is in many cases at the mercy of the manufacturer. In reality, the motor vehicle dealer who frequently has millions of dollars invested in dealership real property, equipment and good will can do nothing to oppose the will of the manufacturer without jeopardizing this substantial investment. This bill seeks to provide certain basic protections for the dealer in areas where such protection is deemed necessary. If enacted, the protection afforded the dealer through the terms of the bill would counterbalance the numerous protections afforded the manufacturer under the terms of its franchise agreement with the dealer. The result would be a healthier marketplace for all parties concerned. 26 Id. (emphases added). The Legislature has amended the Dealer Act several times to address continuing abuses by manufacturers against dealers and evolving business practices. The Legislature amended the Dealer Act in 1992 because: In recent years, many abuses have arisen in the motor vehicle franchisor/franchisee industry, and more often than not the consumer is the ultimate loser. This bill will put an end to most of these abuses, establish a more equitable and efficient method of doing business in this industry, and thereby benefit the consumer. Memorandum in Support, Governor’s Bill Jacket, L. 1992 ch. 521 (emphasis added). In 2001, the Legislature again amended the Dealer Act to “address[ ] some of the evolving patterns of abuses and new business practices that have developed….” Introducer’s Memorandum in Support, Governor’s Bill Jacket, L. 2001 ch. 369 (emphasis added). The Legislature amended the Dealer Act in 2008, noting that it “was enacted in part to protect and preserve the investments made by dealers in the State of New York.” Introducer’s Memorandum in Support, Governor’s Bill Jacket, L. 2008, ch. 490. The 2008 amendment was justified on the grounds that, “[p]eriodically, it becomes necessary to update the law to clarify existing provisions and/or deal with new situations.” Id. The 2008 amendment added both of the provisions that are at issue in this case. 27 The Dealer Act prohibits numerous unfair business practices by manufacturers, among them unfair sales performance standards, unreasonable facility requirements, unfair franchise modifications, and price discrimination. See Dealer Act §§ 463(2)(c), (ff) and (gg). In each instance, the prohibition applies “notwithstanding the terms of any franchise contract.” Dealer Act § 463(2). Thus, in those areas of the automobile manufacturer/dealer relationship that the New York Legislature has chosen to regulate, the Dealer Act expressly overrides the franchise agreement. POINT II NUMEROUS COURTS AND ADMINISTRATIVE TRIBUNALS HAVE HELD THAT GM’S RSI STANDARD IS UNREASONABLE BECAUSE IT FAILS TO ACCOUNT FOR FACTORS OUTSIDE OF A DEALER’S CONTROL Disputes between manufacturers and dealers over sales performance arise in a variety of contexts. A manufacturer may use a dealer’s allegedly poor sales performance to justify a variety of actions, including terminating a dealer, adding a new dealer into a market (called an “add-point”), relocating an existing dealer, and disapproving a potential purchaser of an existing dealership. Though there is a dearth of reported New York state cases on this issue, each of the following cases from other jurisdictions (and one agency opinion from this jurisdiction) held that GM’s segment-adjusted state market share benchmark is unreasonable when it fails to adequately take into account local market conditions facing the dealer. 28 A. The Beck New York DMV Proceeding First and most importantly, the New York DMV, the agency tasked with regulating manufacturers and dealers and interpreting and enforcing the Dealer Act, has examined GM’s methodology as it has been applied to Beck and found it to be unfair and unreasonable, and arbitrarily applied. After a seven-day hearing with live testimony, a New York DMV administrative law judge found that GM’s use of statewide standards to evaluate Beck’s sales performance was unreasonable both because “it does not realistically reflect the Chevrolet sales challenges that Beck and other New York metropolitan dealers face” and because “GM is not applying the RSI uniformly to all dealers in New York.” (A1891) At the time that GM was attempting to terminate Beck for purportedly having poor sales performance, 22 other dealers in New York (12 of which were in downstate New York) had lower RSI scores than Beck but did not face termination. (A1886) Nor did Beck score poorly on GM’s other metrics. In fact, Beck was outperforming the district, zone and region in training and new car advertising; Beck was receiving commendations and awards from GM; and Beck was otherwise meeting or exceeding “the other requirements of the Participation Agreement” according to GM’s own documentation. (A268) The New York DMV’s opinion here is highly persuasive authority and is the only decision by any New York state adjudicatory body regarding the 29 reasonableness of GM’s use of statewide sales metrics. This Court can look to any source for persuasive reasoning, and should especially consider the reasoned opinion of the New York state agency specifically charged with interpreting and enforcing the Dealer Act. B. North Shore Next, of particular relevance here is an add-point protest that made it all the way to the Supreme Court of Illinois in 2007. North Shore, Inc. v. General Motors Corp., No. MVRB 79-01 (Ill. Mot. Veh. Rev. Bd. May 28, 2003), aff’d, sub nom., General Motors Corp. v. Illinois Motor Vehicle Review Board, 361 Ill. App. 3d 271 (Ill. App. 2005), aff’d, 224 Ill. 2d 1 (2007) (“North Shore”) (Compendium 1-97). The facts and legal arguments advanced in North Shore are almost identical to those at issue here. In North Shore, GM utilized an expert from Urban Science Applications, Inc. (“USAI”), like it did here. The ALJ in North Shore rejected the very same arguments that GM offered here: [USAI] ignores, however, [] that local customers might dislike a design more or less than others in the nation [or state]—the point, after all, is to adjust for “local customer preference.” [USAI’s] testimony on this point assumes a uniform reaction to a GMC product design throughout the nation [or state]. That may be true but cannot be assumed. Findings of Fact, Conclusions of Law, and Recommended Decision, at 25.2 The ALJ’s analysis continued: 2 The unpublished decisions cited herein are reproduced in the accompanying addendum. 30 [The dealers] argued that [USAI’s] standard adjusted only for “segment popularity” and not for any other local demographics and market conditions, whereas GM claims that the methodology adjusts for all of these factors. The truth is somewhere in between. [USAI’s] analyses adjusts for segment popularity and some, but not all, local demographics and market conditions. [USAI’s] segmented adjusted standard only adjusts for two kinds of factors. (1) those factors that affect all light truck dealers in Chicago—not just GMC dealers—within a particular segment; and (2) those factors that affect all GMC dealers throughout the area used as the standard (the state, the nation, etc.) not just GMC dealers in Chicago. Id. at 26 (emphasis added). The ALJ directly addressed the related issues of import bias and urban versus rural markets, much like the import bias that Downstate Dealers face here: [A] factor that is specific to GMC in Chicago…is not adjusted. [A] bias toward “import” models…would not be accounted for because it would not necessarily lower the overall registration (imports would just get more of the pie), and the other variable—national [or state] percentage of GMC penetration for that segment—would not be lower, either, because this import bias is not claimed to exist across the nation [or state] as much as in Glenview. Nothing then, would account for the hypothetical preference for import models that could have a very real impact on GMC sales in Chicago. Id. at 27 (emphasis added). Acknowledging that Chicago GMC dealers faced more competition than GMC dealers in the rest of Illinois (just like Downstate Dealers face more competition than upstate dealers here), the ALJ concluded: GMC will undoubtedly have a bigger slice of a market where less competition exists, thus inflating the state average penetration level to a percentage that will be harder for a 31 Chicago Metro dealer to obtain with the increased competition of Honda, Toyota, etc. Id. at 30. This casts doubt on the second variable in [USAI’s] formula— the national [or state] penetration average per segment. If GMC is facing relatively fewer competitors (particularly imports) nationwide or statewide than in Chicago, then of course its penetration rates will be higher in those areas. [USAI’s] calculation does not adjust for this difference…. Suffice it to say that [USAI’s] analyses has limitations…. Id. at 31. In the end, we have already found that this adjusted national average (and state average) is flawed because it indisputably does not adequately account for those differences and the only basis we have for finding that the Chicago Metro “underperforms” is that standard we have just criticized. Id. at 35. The Board’s decision was affirmed at every stage, including by the Supreme Court of Illinois, which recognized that “[t]he Board found that GMC’s experts used a measure of performance that was unrealistic in the metropolitan, multiple- dealer network at issue.” North Shore, 224 Ill. 2d at 20. The Illinois high court explained: GMC criticizes [the dealers’ expert’s] approach as “circular” because he relied solely on data from the Chicago area. But [the dealer’s experts’] approach offered the advantage of comparing the two relevant market areas to areas that were similar in most respects, including the fact that they were urban, that dealers sold heavily into one another’s territories, and that the climate was generally the same. By contrast, [USAI’s] 32 adjusted national and state standards took into account data from rural areas, where there was often far less competition and where customer tastes differed from those of customers in major cities like Chicago. In light of [the dealer’s expert’s] testimony and the other evidence, it was reasonable for the Board to conclude that [USAI’s] approach was not as valid a method as [the dealer’s expert’s] for measuring dealership performance in a multidealer area in a large metropolitan region. Id. at 21-22 (emphasis added). C. Landmark In Landmark Chevrolet Corp. v. General Motors Corp., Docket No. 02-0002 LIC (Tex. Mot. Veh. Bd. Sep. 16, 2004), aff’d sub nom., Austin Chevrolet, Inc. v. Motor Vehicle Board, 212 S.W.3d 425 (Tex. Ct. App. 2006) (“Landmark”), (Compendium 98-177) a Texas ALJ examined the issue of import bias in urban versus rural markets and found GM’s methodology to be unfair and unreasonable: In order to underscore the shortcomings of USAI’s segmentation analysis, Landmark offered evidence into the record suggesting that people who live in [metro areas] have shown a decided preference for imports. The record further indicates that, because of the relative availability of imports in [metro areas], this preference is regularly acted upon by consumers living in [metro areas]. As a result, Landmark argues, Chevrolet often performs poorly in [metro area] markets against a standard heavily weighted by markets where imports are not as readily available, namely [rural areas]. Landmark disputes any inference that segmentation, as defined by USAI, is capable of refining such an average to account for this distinction between [metro areas] and [rural areas]. Landmark rightly points out that the way to account for the distinction, and thus preclude it from unfairly inflating Chevrolet’s expected penetration in [metro areas], is not through 33 segmentation of an average heavily weighted by [rural area] markets where Chevrolet does not compete with imports but by separating out domestics from imports in calculating the average. Id. at 20 (emphasis added). The ALJ squarely rejected GM’s use of state market share adjusted only for segment popularity: [I]t seems patently unfair to conclude that a standard is appropriate for comparison with a given market if most markets used in creating the standard are fundamentally dissimilar to the market at issue. Stated another way, the ALJ cannot endorse a process that characterizes a market as “underperforming” simply because it fails to meet a standard so profoundly influenced by markets bearing so little resemblance to the market in question…. The problem with GM’s position on this issue, however, is that it deems as underperforming the markets used in creating the Texas [metro area] standard based on a comparison to [USAI’s] Texas average. This is a mind-bending bit of circular logic that is not so much a comment on the reasonableness of the Texas [metro area] standard as a refusal by GM to address, head-on, any shortcomings in the Texas standard…. Id. at 21. [T]he ALJ is not persuaded that a comparison of the Houston [metro area] to [USAI’s] Texas average is an apples-to-apples comparison. As such, the ALJ is equally unconvinced that the Texas average is a useful tool for accurately gauging Chevrolet’s performance in the Houston [metro area]. Id. at 22. In Landmark, the dealer “prov[ed] that [the Houston market] was fundamentally dissimilar to the vast majority of the markets used in creating the 34 [Texas Average] standard.” Austin Chevrolet, 212 S.W.3d at 436. Landmark had also “adduced evidence that people who live in [metro areas] have a preference for imported automobiles, showing that manufacturers of Asian automobiles alone made 40% of all retail sales in the Houston [metro area].” Id. at 436. Accordingly, the Texas Court of Appeals affirmed, finding that “the Texas [state] average standard [was] not a useful tool for accurately gauging Chevrolet’s performance in the Houston [metro area].” Id. at 437. D. Halleen In Halleen Chevrolet v. GMC, Case No. 03-050MVDB-277-SS (Ohio Mot. Veh. Dealers Bd. Jul. 21, 2006), aff’d sub nom., General Motors Corp. v. Halleen Chevrolet, Case No. 06CVF-11739 (Ohio Ct. Com. Pleas, Franklin Cnty., Sep. 20, 2008), (Compendium 178-213) an Ohio ALJ similarly criticized GM’s statewide standard: the expert for the [dealers] utilized an analysis of the Cleveland Metro standard. This is similar to the standard utilized in [North Shore]. [USAI’s] use of the state average was rejected in [Landmark] and [Kinlaw]. The Courts and Boards that have rejected the statewide average have expressed concerns that selecting a large state area does not adequately take into account local economic conditions affecting a particular dealer or market. In [the dealers’ expert’s] analysis, there are two statistically distinct data pools in generally rural Single Dealer Area (SDA) markets in Ohio as compared to generally urban MDA markets in Ohio. This is in contrast to the analysis of [USAI], which lumps all Ohio dealerships into one state average…. 35 Thus, there seems to be a distinct advantage of operating in a single dealer area rather than in a multiple dealer area in meeting the state average…. Halleen Chevrolet, at 13-14 (emphasis added). The dealer’s alternative metro area benchmark was found to be reasonable and appropriate, in contrast to GM’s state average benchmark: Thus, utilizing a state average segmented adjusted takes into account both single dealer markets and multiple dealer markets, which creates a statistical flaw when comparing the multiple dealer markets to the single dealer markets. In this case, [the dealer’s] expert used the Cleveland metropolitan market area, less the 10-mile RMA for comparison for sales purposes. This is a reasonable and appropriate standard to use as opposed to the state average. Cleveland Metropolitan area is large enough to provide an appropriate standard for consideration in this case. Considering the Cleveland Metropolitan area is an adequate barometer for expected sales allows for those unique factors to a multiple dealer area such as Cleveland that may be affecting the sale of Chevrolets in that market area. Id. at 14-15 (emphasis added). The ALJ concluded that the dealer “is performing as expected when using the better performance standard, the balance of the Cleveland Metropolitan area, as opposed to inappropriate State average, segment adjusted.” Id. at 17 (emphasis added). E. Kinlaw General Motors Corp. v. Kinlaw, 78 N.C. App. 521, 527, 338 S.E.2d 114 (N.C. App. Ct. 1985), a North Carolina Appellate Court also affirmed the rejection of GM’s standard methodology: 36 [GM] assesses the performance of its dealerships by comparing an individual dealer’s market penetration with national, regional and local levels of market penetration…. These levels do not necessarily reflect economic conditions affecting an individual dealership. Further, a dealership’s performance relative to other dealerships cannot be assessed based on national, regional and local penetration levels alone…. [I]n any given year one-half of all [of GM’s] dealers have market penetration below national or regional levels. [GM] failed to identify any acceptable level below national and regional levels. The Commissioner could thus find [GM’s] standards unreasonable. GM’s method of assessing sales performance could enable it to terminate half of its franchise agreements. Kinlaw, 78 N.C. App. at 527. F. Eaton In Eaton Motor Company, Inc. v. General Motors Corp., Docket No. 04- 0019 OIC (Tex. Dep’t of Transp., Mot. Veh. Div. Jan. 17, 2006), (Compendium 214-260) the Texas hearing officer recognized that GM’s methodology means that, at any given time, about half of all dealers are below state average and, therefore, “are not in compliance with the sales performance standard in the dealer agreement.” Eaton Motor at 12. The hearing officer hit the nail on the head in concluding that that: a standard that disqualifies 50% of all Texas Chevrolet dealers from being eligible for a dealership transfer is per se unreasonable. The RSI 100 standard also keeps 50% of all Texas Chevrolet dealers from staying in compliance with their franchise agreement. It is the 37 ALJ’s opinion that … the manufacturer’s RSI 100 standard is unreasonable. Id. at 23. G. Andy Chevrolet In Andy Chevrolet Co. v. General Motors Corp., Case No. 05-01-MVDB- 304-J (Ohio Mot. Veh. Dealer Bd. Aug. 22, 2006), (Compendium 261-285) the Ohio DMV Board also rejected GM’s use of state average market share, noting that more than half of the 14 dealers in Andy’s APR were not able to meet GM’s contractual standard. See Andy Chevrolet at ¶ 48. Rather than state average, the Board evaluated Andy Chevrolet against the other 13 dealers in its APR and found that “[a]fter reviewing and considering the Cleveland APR intraband and interbrand competition, Andy Chevrolet is an adequately performing Chevrolet dealer.” Id. at ¶ 54. H. Non-GM Cases Involving Regional Market Share Manufacturers using regional market share instead of state market share as their benchmark to evaluate dealer sales performance have also met with limited success in enforcing that benchmark in the face of dealer protection statutes. See Sims v. Nissan North Am., Inc., Nos. 12AP 833, 13AP 835, 2013 WL 3270914, at *5 (Ohio Ct. App., Jun. 25, 2013) (“rigid adherence to the RSE was not a reasonable standard.”); Marquis v. Chrysler Corp., 577 F.2d 624, 632 (9th Cir. 1978) (“The nature of MSR renders it suspect as the single indicator of satisfactory 38 sales performance [and] has the practical effect of transforming a large proportion of those agreements into franchises terminable at the pleasure of the manufacturer.”); Ford Motor Co. v. Claremont Acquisition Corp., 186 B.R. 977, 989 (C.D. Cal. 1995) (“regional average comparison was an inappropriate measure of sales performance…. Given that numerous dealers will by definition be below average, allowing manufacturers to rely heavily on a regional average comparison as the sole measure of sales performance would give them too great an opportunity to terminate dealerships….”); Swartz v. Chrysler Motors Corp., 297 F. Supp. 834, 837-838 (D. N.J. 1969) (MSR’s “basic failure immediately becomes clear: The formula does not take into account the socio-economic level of the particular area surrounding the dealership or use as a factor the greater or lesser degree of acceptability which Dodge automobiles have in the vicinity of the dealership…. In addition, it is clear that, given the method by which MSR is calculated, approximately one-half of all Chrysler dealers would be subject to termination at any time….”); Mt. Lebanon Motors Inc. v. Chrysler Corp., 283 F. Supp. 453, 456 (W.D. Pa. 1968) (“failure to meet MSR does not per se prove inadequate or unsatisfactory sales performance, in view of the criteria for determining MSR and a dealer’s fair share thereof. Testimony indicated that sometimes more and sometimes less than 50% of dealers fall below the prescribed figure.”); Madsen v. Chrysler Corp., 261 F. Supp. 488, 495, 506 (N.D. Ill. 1966) (“to the extent that any 39 of the factors … deviate from the regional average, a dealer may be under or over MSR while still performing adequately under the circumstances. […] We conclude that MSR calculated … without adjustment for the various factors herein discussed and which results at all times in a substantial number of dealers being in technical default is an arbitrary, coercive and unfair provision….”) POINT III THE EVIDENCE IN THIS CASE DEMONSTRATED THAT GM’S STATEWIDE STANDARD IS UNREASONABLE A. The Federal Trial Testimony At trial, the facts in the federal district court were not in dispute. The parties’ experts did not contest each other’s statistics. It is undisputed that when using Chevrolet’s New York State segment-adjusted market share as a benchmark, Beck’s RSI was 50.81% in 2011 and 50.60% in 2012. (A1241-1242) This put Beck squarely in the middle among the five Chevrolet dealers in the downstate counties of Westchester County and the Bronx.3 (A1252-1253) It also put Beck squarely in the middle among all of the 23 Chevrolet dealers in New York’s nine downstate counties. (A1263-1265) It is undisputed then that only 4 of the 23 downstate Chevrolet dealers attained an RSI of 100 (and 3 of the 4 are in Suffolk County). (Id.) This also means that 19 of the 23 downstate Chevrolet dealers (a whopping 83%) are, just 3 A geography referred to during trial as “Westchester Plus Fringe.” 40 like Beck, not in compliance with GM’s contractual requirement of 100 RSI. (Id.) These are rather stark numbers that would give any reasonable person pause about using a statewide benchmark to evaluate downstate dealers like Beck. Beck’s expert, Joseph Roesner (“Roesner”), testified extensively about the differences between the downstate and upstate markets. (A923-970) Beck, like almost all downstate Chevrolet dealers, is not alone in appearing to be poorly performing when compared to state average. Chevrolet’s registration effectiveness in the downstate counties is consistently far below state average. Registration effectiveness compares the total number of new Chevrolet retail registrations in a given geography by all Chevrolet dealers to the expected sales at state average. Put simply, whereas sales effectiveness measures an individual dealer’s sales performance, registration effectiveness measures a brand’s performance in a given geography. Of New York’s 62 counties, the eight worst in terms of registration effectiveness are the downstate counties of Rockland, Westchester, Bronx, Manhattan, Staten Island, Brooklyn, Queens and Nassau. The best downstate county in 2012, Suffolk County, only manages to eke out 47th place out of the 62 counties. (A1244-1246) The Chevrolet brand performs poorly in downstate New York not only in absolute terms but also when compared to all other brands. Roesner relied on a quarterly market report of the New York State Automobile Dealers Association 41 (“NYSADA”) that was entered into evidence and showed 2012 brand performance across New York State. (A1254-1256) Page 2 shows that the Chevrolet brand performs worst, by far, in the metro New York City market as compared to other regions of the State. (A1255) Page 6 focuses in on New York’s nine downstate counties and shows that the domestic brands have a 32.1% market share in New York State as a whole but only a 22.3% market share in downstate New York. It further shows that Chevrolet has a particularly tough time in these areas. (A1256) Chevrolet’s market share in the nine downstate counties as compared to state market share is simply terrible: MARKET SHARE IN THE NINE DOWNSTATE COUNTIES AS COMPARED TO STATE MARKET SHARE Honda 120.2% Hyundai 113.8% Nissan 116.4% Volkswagen 107.3% Jeep 99.6% Toyota 98.8% Mitsubishi 90.5% Mazda 94.6% Chrysler 79.4% Subaru 78.9% Kia 69.6% 42 Ford 69.4% Dodge 62.3% GMC 61.6% Buick 59.6% Chevrolet 46.4% Suzuki 31.8% (A1256) Chevrolet is the worst among the top 20 brands and the second worst among all brands (the only brand shown to be worse than Chevrolet is Suzuki, which was in bankruptcy). (Id.) When only counting the segments where Chevrolet competes, Chevrolet does worse in downstate New York. Chevrolet’s segmented market share in New York State overall in 2012 is 12.17%. (A1236) But the dichotomy between upstate and downstate is substantial. In New York’s 53 upstate counties in 2012, Chevrolet enjoys an 18.4% market share. (A1261) But in the 9 downstate counties, Chevrolet only has a 6.37% market share. (A1257) In other words, Chevrolet’s upstate market share is nearly triple its downstate market share. Statewide, about half of all cars and light trucks are sold in the 9 downstate counties, but only about a quarter of Chevrolets are sold in downstate New York. Clearly there is a problem with the Chevrolet brand in downstate New York. These undisputed statistics point directly to there being factors outside of Beck’s 43 control affecting its (and the other downstate dealers’) RSI score when based on state average. As discussed above, those factors include: (1) increased competition faced by Downstate Dealers from import brands as compared to upstate New York (A1147-48); (2) substantially decreased advertising by GM in the New York metropolitan area during the relevant time period (A1463-1464); and (3) the failure of GM to offer leasing during the relevant time period, as downstate customers overwhelmingly prefer leasing compared to upstate customers (A1467-1469). It would be fundamentally unfair to permit GM to cull Beck from the herd and use it (or any other downstate GM dealer with an RSI score below 100 that GM may target in the future) as a scapegoat for Chevrolet’s institutional problems in the New York metropolitan area. There should be no mistake: a negative answer to the first certified question would give GM the green light to terminate (or take other negative action against) the 83% of Chevrolet dealers in downstate New York that come nowhere close to 100 RSI. It is precisely that sort of overwhelming and arbitrary power that the Dealer Act is intended to counter. Based on these statistics, Roesner ran various RSI models for Beck using more localized geographies as a benchmark. The results are dramatic and consistent. Under each of the alternate benchmarks,4 Beck’s 2012 RSI was between 85 and 91, not 50, when GM’s segment-adjusted statewide benchmark is 4 The alternate benchmarks include Westchester Plus Fringe (A1251), the 9 Downstate Counties (A1231), a 30-mile Ring around Beck (A1273), and GM’s own “New York Zone” (A1282). 44 used. (A1269, A1278, A1287) The results are summarized in an exhibit entered into evidence (A1291-1292) (see also A1497). B. GM’s Statewide Standard Applied to Downstate Dealers Like Beck is Unreasonable Under the Dealer Act By enacting subdivision (gg) of Section 463(2) of the Dealer Act in 2008, the New York Legislature specifically targeted sales performance standards as an area where manufacturers were engaging in abusive conduct and unfair business practices requiring remedial legislation. Nevertheless, the federal district court here ignored the New York statutory imperative and, instead, relied on “[t]he fact that all automobile manufacturers in the United States evaluate their dealers using measures similar to statewide RSIs” as an “indication of the reasonableness in using state average.” (A1217) But, if so, why did the Legislature enact subdivision (gg)? Surely the Legislature knew what it was doing when it used such broad language in subdivision (gg). The Legislature must have been aware of the near- universal use by all manufacturers of methodologies like GM’s RSI standard, and was certainly aware of the substantial judicial and administrative criticism that that methodology had received. Subdivision (gg) is part of remedial legislation that the Legislature has repeatedly stated is intended to protect dealers, counterbalance the undue and oppressive bargaining power of manufacturers, and address abuses and unfair business practices. The fact that all of the manufacturers utilize a similar 45 unfair standard that places half of their dealer bodies in breach of their franchise agreements does not serve as evidence of that practice’s reasonableness. Instead, it only serves to highlight the wisdom of the Legislature’s enactment of subdivision (gg) to prevent such conduct. Of course manufacturers would seek to apply a sales performance standard that puts half of their dealers in technical breach, allowing those manufacturers to apply the very leverage against dealers that the New York legislature sought to counteract. New York courts have consistently interpreted the Dealer Act in a sympathetic light to effectuate its remedial purpose; namely, to protect dealers. See Audi of Smithtown, Inc. v. Volkswagen Group of America, Inc., 32 Misc. 3d 409, 416 (Sup. Ct., Suffolk Cnty. 2011), aff’d, 100 A.D.3d 669 (2d Dep’t 2012) (“where a statute is stated to be remedial in nature, the court must, in this context, consider the alleged wrong sought to be remedied by such legislation and construe the act to suppress the wrongdoing and advance the remedy set forth”); Bronx Auto Mall, supra, 934 F. Supp. 596 (showing of irreparable harm not needed to obtain injunctive relief under the Dealer Act). The district court here ignored the Legislature’s repeated and clear statements of legislative purpose and, instead, imposed its own judicially-created standard of “egregiousness.” Such language is nowhere to be found in the Dealer Act, and does not reflect subsection (gg)’s prohibition of “unreasonable, arbitrary 46 or unfair” sales standards. The dictionary5 shows that these words are not all the same: unfair: treating people in a way that favors some over others: not fair, honest, or just. unreasonable: not fair, sensible, or appropriate: not reasonable. arbitrary: not planned or chosen for a particular reason: not based on reason or evidence. egregious: very bad and easily noticed. It is a fundamental canon of statutory construction that each word of a statute must be accorded a separate and distinct meaning and effect. See, e.g., Rodriguez v. Perales, 86 N.Y.2d 361, 366 (1995) (“It is well settled that in the interpretation of a statute we must assume that the Legislature did not deliberately place a phrase in the statute which was intended to serve no purpose and each word must be read and given a distinct and consistent meaning.”) (citations omitted). Here, the district court did the opposite and conflated the distinct concepts of unfairness, unreasonableness and arbitrariness into a single, and tougher, concept of egregiousness. Dealers like Beck must be protected from GM’s abusive practices. Thus, the first certified question must be answered in the affirmative. 5 These definitions are found at www.m-w.com (last visited Aug. 3, 2015). 47 POINT IV GM’S CHANGE TO BECK’S AGSSA WAS AN UNFAIR FRANCHISE MODIFFICATION Section 463(2)(ff) of the Dealer Act allows a dealer to challenge any unfair modification of its franchise. A “modification” is defined as “any change or replacement of any franchise if such change or replacement may substantially and adversely affect the new motion vehicle dealer’s rights, obligations, investment or return an investment.” Dealer Act § 463(2)(ff)(2). “A modification is deemed unfair if it is not undertaken in good faith; is not undertaken for good cause; or would adversely and substantially alter the rights, obligations, investment or return on investment.” Id. at §463(2)(ff)(3). “[T]he franchisor shall have the burden of proving that such modification is fair and not prohibited.” Id. In the AGSSA Modification Notice, GM notified Beck that its AGSSA was being redefined. (A234-239) GM itself acknowledged that the AGSSA revision constituted a “modification” under the Dealer Act by specifically stating: “This notice is provided pursuant to New York Vehicle & Traffic Law § 463(2)(ff)(1).” (A234 (emphasis added)) Beck’s expert concluded that GM’s proposed AGSSA revision “would result in a lower sales performance for Beck based on GM’s method of measurement.” (A1574) GM’s own internal analysis of Beck’s objection found that “[p]reliminary analysis indicates there may be sufficient evidence to support dealer’s concern.” (A674-675) 48 Beck was entitled to, and did, assert a statutory claim to require GM to prove that the proposed modification was “fair,” which is defined by Dealer Act § 463(2)(ff)(3) to mean that the modification: (1) was undertaken in good faith; (2) was undertaken for good cause; and (3) would not have a substantial and adverse effect on Beck’s rights and obligations. The district court’s reliance GM’s contractual discretion is seriously misplaced because the Dealer Act governs “notwithstanding the term of [the] franchise contract.” Dealer Act § 463(2). The AGSSA Modification Letter itself states that it constituted notice of a modification pursuant to subdivision (ff). (A806) At oral argument, GM admitted that it was “not arguing that [the AGSSA] not part of the agreement.” (A1575 (emphasis added)) The district court’s holding is also contrary to the only reported decisions directly on this issue. In Nissan North America, Inc. v. Royal Nissan Inc., 794 So. 2d 45 (La. Ct. App. 2001), two dealers commenced administrative protests with the Louisiana Motor Vehicle Commission because Nissan had deleted a single census tract from each of their assigned market areas and added those tracts to a new dealer’s market area. The dealer’s administrative challenge proceeded under the franchise modification provision of Louisiana’s dealer act. The Commission found that the removal of the census tracts modified those franchises and that it was unreasonable. The judicial district court and Court of 49 Appeal both affirmed. At all levels, the very same arguments advanced by GM here were rejected: While it is obviously true that Nissan has the right to assign PMAs as it sees fit, that right is not absolute. When a claim arises that the manufacturer’s assignment of PMAs violate Louisiana law, the Commission and the courts are authorized to determine the right result in light of the law of this state and the terms of the contract. Id. at 49. The Court of Appeal affirmed that Nissan’s proposed change to the dealers’ market area violated the franchise modification provisions of the Louisiana dealer act. This issue arose again in 2006 before the Supreme Court of Wisconsin. See Racine Harley-Davidson, Inc. v. Div. of Hr’gs and Appeals, 292 Wis. 2d 549, 717 N.W.2d 184 (2006). In Racine, a motorcycle dealer challenged Harley-Davidson’s change to its assigned market territory under various provisions of the Wisconsin dealer act, including its franchise modification provision. The Wisconsin high court held that Harley-Davidson could not unilaterally change a dealer’s assigned market territory, notwithstanding its broad contractual discretion in the dealer agreement, because “a manufacturer’s assignment of territory is an essential aspect of the franchise relationship and therefore part of the motor vehicle dealer agreement.” Id. at 596. Accordingly, Harley-Davidson could not change the dealer’s market area without satisfying the franchise modification provisions of the Wisconsin dealer act. The court noted that, “[i]f we were to hold that a 50 manufacturer may … reserve for itself the power to change the territory according to its good business judgment, we would in effect be allowing a manufacturer to enter into a motor vehicle dealer agreement forcing the dealer to waive the remedy and protections available to it under [the franchise modification provision of Wisconsin’s dealer act].” Id. at 598. There is also recent New York authority on this very question decided against GM. The Onondaga County Supreme Court held not once, but twice, that a change to a dealer’s AGSSA could be challenged as an unfair modification under Dealer Act § 463(2)(ff). See Van Wie Chevrolet, Inc. v. General Motors, LLC, No. 0284/2012 (Sup. Ct., Onondaga Cnty; see A1847-1849 and A1861.) In that case, Van Wie sued GM because GM wanted to relocate another Chevrolet dealer closer to Van Wie, which would result in the reassignment of some census tracts in Van Wie’s AGSSA to the relocating dealer. GM’s motion to dismiss the subdivision (ff) claim was denied because the reassignment of market territory could be deemed an unfair franchise modification. Van Wie continued on through discovery and summary judgment motions, and the Supreme Court granted summary judgment in Van Wie’s favor, holding that the reassignment of market territory was an unfair franchise modification under subdivision (ff).6 A1860-1863. 6 In JJM Sunrise Automotive, LLC v. Volkswagen Group of America, Inc., 46 Misc. 3d 755 (Sup. Ct., Nassau Cnty. 2014), the Nassau County Supreme Court recently held that subsection (ff) was inapplicable to a dealer’s challenge to Audi’s attempt to add a new dealer in a nearby area 51 GM’s contention that a change to the APR did not constitute a “significant amendment” was rejected by another district judge in the Southern District of New York: Courts have held that less important events than this constituted an amendment to the franchise agreement. For example, in DaimlerChrysler Vans LLC v. Freightliner of New Hampshire, Inc., No. 03-304, 2004 WL 51314, *1, *2, 2004 U.S. Dist. LEXIS 316, at *2, *4- *5 (D.N.H. Jan. 8, 2004), the court determined that the Target Agreements that proposed an annual sales objective, and thus would be used to determine the franchisee’s eligibility for bonuses, were considered amendments to the original contract for purposes of 12 U.S.C. § 1226(b). See id., 2004 WL 51314, *2, 2004 U.S. Dist. LEXIS 316, at *5. Similarly, the modification made to the Dealer Sales and Service Agreement in this case affects the sales projections and profits of the dealership. Even if the Addendum is not considered an amendment to the agreement, it is beyond peradventure an alteration or modification and would trigger the protections afforded by the statute. Arciniaga v. Gen. Motors Corp., 418 F. Supp. 2d 374, 379 (S.D.N.Y. 2005), rev’d on other grounds, 460 F.3d 231 (2d Cir. 2006) (discussing federal ADDCA’s application to change in dealer’s area of responsibility). Here, the foundation of the district court’s holding that GM’s contractual discretion permits it to change Beck’s AGSSA without regard to the Dealer Act (an “add-point”), concluding that subsection (cc) (addressing franchisor relevant market area restrictions) is the exclusive means by which the dealer could challenge the add-point. Id. at 774. The present case does not involve an add-point challenge; rather GM simply redrew Beck’s AGSSA. Accordingly JJM Sunrise is inapposite. 52 cannot be reconciled with the holdings in Royal Nissan, Racine Harley-Davidson, Van Wie, Arciniaga, and the plain language of the Dealer Act. The second certified question should be answered in the affirmative.