By Leonard A. Bellavia, Esq., Bellavia Blatt & Crossett, PC
With Cadillac’s impending implementation of its controversial Pinnacle Program (hereinafter “Pinnacle” or “the program”), there is legitimate concern about the viability of many smaller and rural dealers, and even larger urban dealers with real estate limitations.
Much has been recently written about the way that Pinnacle seemingly violates the Cadillac Dealer Sales and Service Agreement (DSSA), as well as dealer franchise laws in states across the country. There’s another side to Pinnacle that needs to be considered, however, and that is the impact it will have on the blue sky values of Cadillac dealerships. That is the focus of this article.
Labeled or characterized as a “brand” or “image” program, Pinnacle places Cadillac dealers into five (5) tiers. In doing so, it affords dealers in the lower tiers (i.e. Tiers 1 and 2), with a substantial vehicle pricing or cost advantage. Those dealers can reap rewards based upon a percentage of MSRP, which in some instances can be the equivalent of 8% of the effective cost of a vehicle between a Tier 1 dealers and a Tier 5 dealer.
As a result, Pinnacle acts like an illegal incentive program, implementing an impermissible and discriminatory pricing scheme. In turn, that scheme severely prejudices small, rural Cadillac dealers and urban dealers who cannot expand their real estate footprint, both of whom will inevitably be placed in the higher and more disadvantageous tiers because they will not be able to justify the substantial investment in personnel and equipment needed for placement into the lower and more advantageous tiers.
They will struggle to stay competitive against their lower-tiered counterparts, invariably sell fewer cars, and may find themselves wondering if maintaining a Cadillac franchise is still viable. Could this be GM’s new strategy to thin their dealer ranks? We certainly think so, and for those dealers who attempt to hang on, we believe that the blue sky value of their franchise will diminish.
Our opinion is that Pinnacle’s core design is flawed. The incentives available under the program, while facially or apparently neutral in their availability to all Cadillac dealers, are not, as a practical or financial matter, available to each dealer on a proportionally equal basis.
Instead, certain high volume dealers, such as those located in high income suburban centers, will be treated more favorably than those low volume dealers located in rural areas and those high volume Cadillac dealers in urban centers who cannot grow due to real estate limitations – thus creating a discriminatory pricing scheme. Stated otherwise, certain Cadillac dealers will be able to effectively purchase and sell new Cadillac vehicles at substantially lower prices than those purchased and sold by other Cadillac dealers.
This price discrimination will equip those dealers favored under the program with a substantial and unfair competitive price advantage, allowing lower-tiered dealers receiving higher rewards to undercut new Cadillac vehicle prices with no impact to their bottom line, to simply pocket the difference as additional profit, or do a little of both.
The questionable legality of the program is highlighted when analyzing it against state law. Using one state statute as an example, Section 463(2)(g) of the New York Franchised Motor Vehicle Dealer Act (the “NY Dealer Act”) provides that, “It shall be unlawful for any franchisor to sell or offer to sell any new motor vehicle to any franchised motor vehicle dealer at a lower actual price therefore than the actual price offered to any other franchised motor vehicle dealer for the same model vehicle similarly equipped or to utilize any device including, but not limited to, sales promotion plans or programs which result in such lesser actual price.” (Emphasis Added).
Likewise, Section 463(2)(aa) of the NY Dealer Act similarly provides that it shall be unlawful for any franchisor “[t]o sell directly to a franchised motor vehicle dealer . . . motor vehicles . . . at a price that is lower than the price which the franchisor charges to all other franchised motor vehicle dealers . . .”
It seems self-evident that Pinnacle violates both of these statutes since, based upon the differing rewards received by NY Cadillac dealers under the program, certain dealers will be able to effectively purchase and sell new vehicles at substantially lower prices than those purchased and sold by other dealers. Of course, the protections afforded to dealers varies by state, but we have little doubt that Pinnacle will fail under the scrutiny of statutes across the country.
While Cadillac will surely characterize Pinnacle as voluntary, a substantial portion of the dealer body may simply not be able to justify the expense of the equipment, personnel, technology, training and other costs associated with qualifying into the higher tiers.
Pinnacle may also violate state law in this respect. Again, using NY law as an example, Section 463(2)(w) of the NY Dealer Act provides that “a franchisor may impose reasonable facility, capital, training, tools and parts inventory requirements as a condition to the franchised motor vehicle dealer being permitted to sell such new motor vehicle products. Conditions imposed by the franchisor shall be reasonably applied to all of its franchised motor vehicle dealers.”
In turn, Pinnacle then violates many of the terms of the Cadillac DSSA, which limits General Motors to establishing “reasonable” requirements upon its Cadillac dealers in terms of equipment, technology, tools and training. Here, it can be viewed that General Motors is acting in bad faith because it is implementing a rewards program that pressures or compels many Cadillac dealers into unnecessarily expending substantial funds solely for the purpose of being characterized in a lower tier so that they can simply compete and operate on an equal playing field with their competing dealers. This clearly violates the implied duty of good faith and fair dealing that is present in every Cadillac DSSA.
The inevitable result for certain Cadillac dealers being unable to justify the substantial investment necessary for placement in the lower tiers of the program is that they will suffer a substantial decline in income. This will then lead to a severe economic impact on their business simply because they are unable to operate on playing field level with those Cadillac dealers operating in those lower tiers.
Here, it can be argued that GM’s implementation of Pinnacle can be considered a “constructive termination” of certain existing franchised Cadillac dealers. Stated otherwise, to the extent that a dealer is suffering a severe economic impact due to the manufacturer’s activity, a manufacturer’s conduct may also amount to a constructive termination of such dealer’s franchise in violation state law.
While in the ordinary course, a dealer receives a notice of termination from the manufacturer and then files a lawsuit claiming that the manufacturer is wrongfully seeking to terminate its franchise without due cause, some Courts have recognized a dealer’s claim of constructive termination of its dealer agreement without due cause. In this respect, a dealer does not need to rely upon a formal termination notice from a manufacturer if the actions of the manufacturer have the effect of destroying the dealer’s business.
Finally, it should be understood that Cadillac dealers who are placed in Tier 5 under Pinnacle are not even required to have a traditional physical showroom, carry stock, or display new vehicles. Instead, these dealers are only required to provide customers with a “virtual showroom experience” through which they need to invest in and utilize certain Cadillac Virtual Showroom technology.
This portion of the program seems to have the purpose – and certainly the effect – of eradicating a substantial segment of Cadillac dealers who neither have the means nor the customer base necessary to justify placement into the lower and more advantageous tiers of the program. As a result, Pinnacle will surely act as a means to terminate many dealers without compensation, thus completely negating the current blue sky value of their Cadillac franchise.
In summary, Project Pinnacle, while “voluntary” and neutral on its face, will have more than just a materially disparate impact on smaller and rural Cadillac dealers and urban dealers with real estate limitations. The fact is that its terms and conditions violate state franchise laws as well as the express and implied terms of the DSSA. In doing so, it will work to eliminate certain dealers and extinguish the Blue Sky value of their Cadillac franchise. We therefore urge Cadillac dealers to contact their state dealer association regarding this matter.
 Article 17A, NY Vehicle and Traffic Law; § 460 et seq.
 Project Pinnacle also requires that dealers provide, without any reimbursement or compensation from General Motors, customers, in certain circumstances, with loaner vehicles. Section 463(2)(ee) of the NY Dealer Act, however, makes it illegal for a manufacturer “[t]o fail to reimburse a dealer in full for the actual cost of providing a loaner vehicle to any customer who is having a vehicle serviced at the dealership if the provision of such a loaner vehicle is required by the franchisor.”
 For example, Section 463(o) of the NY Dealer Act requires a manufacturer, upon termination of a franchise to accept a return of new and unused current model motor vehicle inventory which has been acquired from the franchisor, new and unused noncurrent model motor vehicle inventory which has been acquired from the franchisor within one hundred twenty days of the effective date of the termination; supplies, parts, equipment and furnishings purchased from the franchisor or its approved sources and special tools.