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OEM Sales Quotas and the Dependable Dodge Decision

The owners of Dependable Dodge scored a judicial victory that further erodes manufacturers’ rights to ax franchises that don’t meet their sales quotas.

May 2017, Auto Dealer Today - WebXclusive

by Christian Scali and Monica Baumann

On March 15, the California New Motor Vehicle Board unanimously adopted a proposed decision sustaining the consolidated protests by Dependable Dodge to notices of termination of its franchises.

The administrative law judge found, among other findings, that Fiat Chrysler Automobiles (FCA)’s use of a generic minimum sales responsibility (MSR) standard was not “tailored and nuanced enough to measure how well a dealer is performing, given those unique aspects of the environment and market that are outside its control.”

This is the second of two recent cases challenging the OEM’s reliance on statewide standards to terminate California franchises, and part of what could be a bigger trend nationally.

Local and Regional Performance

Dependable Dodge is a family-owned Dodge and RAM dealership in Canoga Park, Calif. After a series of communications from FCA pushing for changes to sales activities and in the location of the dealership, FCA gave notices of termination for both franchises in November 2015. It alleged that both franchises had failed to “actively, effectively, energetically, and aggressively promote and sell at retail” Dodge and RAM vehicles. The petitioner timely protested.

FCA had the burden to show that the there was “good cause” to terminate the franchises. The heart of the dispute was whether failure to meet FCA’s MSR was an adequate basis for terminations. FCA determined the MSR by calculating each brand’s statewide penetration per product segment, and the actual number of vehicles sold in that segment. It then assigned a “fair share” to the dealership of those sales based on sales of vehicles within that segment in the dealership’s region. The petitioner had not met 100% of MSR for several years.

However, the administrative law judge concluded — and the board agreed — that the use of the MSR did not adequately establish that the petitioner had failed its sales obligations. The decision noted that the generic MSR failed to account for a wide variety of circumstances that were unique to Dependable Dodge’s operation. For example, while FCA adjusts the MSR based on local brand preference, FCA did not take into account factors such as local preference for luxury brands or for clean-energy vehicles, both of which Dependable Dodge was able to establish as significant factors in its market.

The case is especially significant because it is the second time in just a few years in which the NMVB has sustained a protest to a termination based on a generic statewide sales standard. The board reached a similar conclusion in a termination protest brought by Santa Cruz Nissan, finding that its measure of “regional sales effectiveness” was too generic to sustain the termination.

More Ammunition for Dealers

These cases may be part of a wider national trend. In the New York federal case Beck Chevrolet Co. Inc. v. General Motors LLC, the Second District Court of Appeal held that the use of a franchisor sales performance standard that relies on statewide data and some local variances but fails to account for local brand popularity to determine compliance with a franchise agreement is unlawful under New York’s Dealer Act.

Cases such as Beck have already begun to impact the way that manufacturers evaluate dealers. In the wake of the Beck decision, GM began basing performance measures for New York dealers, in part, on a “designated market area” informed by Nielsen, the company most known for evaluating American television viewing. GM has also publicly stated that it may expand its sales performance measures to include “additional factors” in the future. These include facility renovations, local road constructions, presence of competing manufacturer facilities, and other localized factors.

Based on these cases and GM’s reaction to the Beck decision, it appears that dealers across the country now have more ammunition to push back against manufacturer demands. Nearly every dealership has a local story that accounts, at least in part, for its sales successes and challenges.

As courts and administrative agencies recognize the importance of weighing these local factors, dealerships will be able to better resist manufacturer demands that do not make sense under local conditions. In the constant battle for control between dealers and manufacturers, this new emphasis on local conditions is the new frontier.

Christian Scali and Monica Baumann are attorneys with The Scali Law Firm, recognized by the Daily Journal as California’s top boutique automotive law firm. Reach them at christian.scali@bobit.com and monica.baumann@bobit.com.

 

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