By Michael P. McMahan, Arent Fox LLP
Incentive programs have come to dominate franchise relationships, and compliance with those programs is crucial to dealer profitability. As a result, manufacturers have been able to exert a fine level of control over dealers and their operations. Until now.
Earlier this month, the New York Department of Motor Vehicles Appeals Board affirmed a win for Wide World Maserati in a precedent-setting 23-page opinion that will reshape the dealer law landscape for years to come. In its decision, the Appeals Board affirmed a November 2017 ruling by ALJ Walter Zulkoski that both Maserati’s new Dealer Agreement and its new Commercial Policy Bonus Program were part of the statutory franchise and that changes to them were regulated by the franchise modification provision of the New York Dealer Act.
By bringing incentive programs under the ambit of the New York Dealer Act’s regulatory scheme, this decision means that every incentive program must now be fair and reasonable, at least in the state of New York. Any major change to an incentive program can now be challenged by dealers in either an administrative hearing or state court.
In the earlier ruling, Judge Zulkoski held that changes to the dealer agreement and the incentive program were unfair and therefore prohibited. Among other things, Maserati’s new dealer agreement would have removed electric and hybrid vehicles from the franchise, imposed the sales effectiveness standard known as MSR, and required the dealer to release all claims that it currently has against Maserati.
Maserati’s new Commercial Policy Bonus Program would have reduced trading margins (and increased wholesale prices) by 2%, and replaced 4% guaranteed holdback with a 3.5% variable incentive program. Under the variable incentive component, dealers could only “earn back” up to 3.5% of MSRP by meeting various subjective and ever-changing objectives set unilaterally by Maserati, which would each cost the dealers a significant amount of money in order to qualify.
The criteria to earn back the 3.5% included image and facility requirements, training requirements, CPO sales and off-lease purchase objectives, and parts purchase objectives that would increase substantially each successive quarter.
In a lengthy and sweeping decision, the DMV Appeals Board found that “the pricing and payment structure, including terms and conditions upon which MNA sells vehicles to Wide World at wholesale and the policies and practices by which Wide World purchases and resells Maserati vehicles, including a dealer’s margin and wholesale pricing policy, may be deemed to be integral, constituent parts of the franchise arrangement, reflecting the parties shared interest in vehicle sales.”
With respect to the Dealer Agreement, the DMV Appeals Board found that the “changes in the New Agreement appear to have a common element in that they give MNA unilateral discretion to determine what actions the dealership may or may not take within the context of the relationship. These changes, taken separately and as a whole, appear to be adverse to the interest of the dealerships, and in several instances, violate the Dealer Act.”
Wide World Maserati was represented by Arent Fox Partner Russell P. McRory, Counsel James M Westerlind, and Associates Michael P. McMahan, and Charles Gallaer of Arent Fox LLP, together with co-counsel, Jonathan P. Harvey of the Jonathan P. Harvey Law Firm PLLC of Albany, New York.
Arent Fox LLP has offices in New York, Los Angeles, Washington, D.C., and San Francisco. Its clients include 10 of the top 20 dealership groups, based on Automotive News rankings. Michael P. McMahan is an associate in the New York office. He can be reached at email@example.com or 212.484.3982 .