Legal Update

May 7, 2020

Third Circuit Ruling Paves Way for Dealer Associations to Challenge Incentives Programs

Seyfarth's Future of Automotive Series
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      State dealer statutes commonly regulate the incentive programs manufacturers use to encourage dealers to improve performance or upgrade their dealership facilities to meet brand standards.  Individual dealers have challenged these programs under a variety of theories, including as unlawful modifications of dealer franchise agreements or illegal price discrimination.  The Third Circuit’s recent decision in New Jersey Coalition of Automotive Retailers, Inc. v. Mazda Motor of America, Inc., No. 19-2961, 2020 WL 2029256 (3d Cir. Apr. 28, 2020) now recognizes the right of state dealer associations -- which have historically faced obstacles related to their legal standing -- to bring such challenges on behalf of members, even where not all members are potentially aligned in the relief requested.

      In its suit, the New Jersey Coalition of Automotive Retailers (the “NJCAR”), challenged the Mazda Brand Experience Program (“MBEP”) program, which provides bonuses for each vehicle a Mazda dealer sells based on the dealer’s compliance with MBEP requirements.  Under the tiered program, dealers who maintain an exclusive Mazda imaged facility and general manager earn the highest level of per-vehicle incentives.  Dealers whose dedicated facilities do not conform to Mazda’s appearance requirements receive lower incentives, while “dual” dealers do not receive any incentives for brand commitment.  NJCAR’s suit claimed that the MBEP violated the New Jersey Franchise Practices Act, including by creating “vehicle price differentials” among dealers through the tiered incentives which allegedly “reduce[] the cost of the vehicle to the dealer in comparison to dealers who are unable to achieve the goal,”  creating unfair competitive advantages for dealers in different tiers.   See , N.J. Stat. §§ 56:10-7.4(h), (j) and (l).  At the time the complaint was filed, only three of the sixteen Mazda dealers in New Jersey qualified for the highest tier of incentives, while eight other dealers qualified for a lower tier.  NJCAR sought to enjoin Mazda from implementing the program in New Jersey. 

      The district court dismissed the complaint concluding NJCAR did not satisfy the Supreme Court’s associational standing requirements under Hunt v. Wash. State Apple Advertising Comm’n, 432 U.S. 333 (1977).   Specifically, the court held that NJCAR could not establish that “the interests it seeks to protect are germane to the organization’s purpose” because 11 of its 16 Mazda members had made facility-related investments and were receiving some MBEP incentives which would be lost if the program were enjoined.  The Court determined that “a majority of [NJCAR’s] Mazda dealer members have an interest directly contrary to its” goal of stopping the program in the state.

      The Third Circuit reversed, finding the district court viewed the complaint too narrowly in holding that the association was at odds with most of its Mazda dealer members.  According to the Third Circuit, that “impermissibly limit[ed] the [C]oalition’s lawsuit to a single theory of harm.”  Instead, because only three Mazda dealers earned the highest level of incentives, the appeals court  saw “no reason to dismiss the possibility that the eight dealers who enjoy lower tiers of incentives would forego such incentives in order to prevent the creation of three ‘super’ dealers who clearly have a competitive advantage over all other Mazda dealers.” (emphasis added).  The panel also cited the possibility that many Mazda dealers may regard the facility upgrade costs as “financially unjustified, but nevertheless feel pressured to participate due to the competitive disadvantages artificially created by the MBEP for non-participation or partial participation.”  The Third Circuit further recognized that NJCAR’s hundreds of non-Mazda members might have “an exceedingly strong interest in the success of such a lawsuit because, for example, they wish to prevent other manufacturers from implementing similar coercive programs against them.”  (emphasis added).  Concluding that the district court improperly dismissed these theories, the Court reversed the conclusion that the association was acting in conflict to the interests of its members, and remanded the case for further proceedings.

     The Court’s language referring to the MBEP and similar manufacturer incentive programs as “coercive” and endorsing the NJCAR’s assertion that these programs provide a “competitive advantage” to some dealers is troubling.  While the Third Circuit cautioned in a footnote that it was “express[ing] no opinions as to the merits of this case,” was limiting its holding to the conclusion that NJCAR has association standing to bring this case, and that its “opinion should not be understood as implying that the complaint sufficiently has stated a valid claim under the NJFPA” and there are a number of other grounds to challenge the complaint and underlying claims, the decision is significant.  First, notwithstanding the disclaimers, dealers and dealer associations will undoubtedly parrot this problematic language in future litigation concerning incentive programs.  Second, instead of individual dealers having to challenge a program as unlawful, dealer associations may take on that role.  At a minimum, dealer associations will now have more confidence in their legal standing to file litigation challenging manufacturer incentive programs on behalf of certain subsets of their dealer members.  Manufacturers should continue to monitor developments in this case and others as courts continue to address the merits of dealers’ incentive program challenges.


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