In early May, the New York Court of Appeals ruled in Beck Chevrolet v. General Motors that GM’s Retail Sales Index (RSI) was unlawful according to New York’s Motor Vehicle Dealer Act. This ruling is the culmination of a dispute between Beck Chevrolet and GM over the terms of their franchise agreement, which would have resulted in Beck losing his GM franchise if he failed to reach 100 RSI.
New York Statute and Outcome
The language of the New York statute makes it “…unlawful for any franchisor, notwithstanding the terms of any franchise contract… to use an unreasonable, arbitrary or unfair sales or other performance standard in determining a franchised motor vehicle dealer’s compliance with a franchise agreement.” Motor Vehicle Dealer Act § 463(2)(gg). The Court found that GM’s RSI standard was unreasonable and unfair because the standard failed to include local brand popularity or import bias. The Court goes on to say that “at a minimum, [the Act] forbids the use of standards not based in fact or responsive to market forces because performance benchmarks that reflect a market different from the dealer’s sales area cannot be reasonable or fair.” As a result, GM can no longer terminate Beck’s franchise for failure to reach 100 RSI.
Termination Based on RSI in Iowa
In Iowa, the franchisor first initiates a hearing with the Department of Inspections and Appeals by filing an application for permission to terminate. These hearings are no small matter, having similar evidentiary and procedural rules as full-fledged court actions. To succeed at this hearing, the burden is on the franchisor to show good cause for termination. The general rule is that a dealer’s failure to meet RSI is not a fact considered by the Department when determining good cause termination. However, under an exception, the franchisor can use a dealer’s failure to meet RSI if they also prove that the failure “will be substantially detrimental to the distribution of franchis[o]r’s motor vehicles in the community.” Although a potential factor, this failure to meet RSI is typically not sufficient, on its own, to result in termination – the franchisor still needs to show additional factors for good cause termination. These factors include the dealer’s total transactions, infrastructure investments, adequacy of facilities, honoring of warranties, potential injury to the public, and failure or bad faith by dealer to comply with other reasonable requirements. Iowa Code § 322A.15. Good cause does not include a realignment, relocation, or reduction of dealerships.
Takeaways for Iowa Dealers
At the very least, the Beck case provides guidance to Iowa authorities when they determine the reasonableness of a manufacturer’s requirements. Further, it would be very difficult for a franchisor to terminate an Iowa dealership by simply pointing to a low RSI. On balance, this decision should assist Iowa dealers and their counsel to argue that GM’s standards are arbitrary. GM North America President, Alan Batey, has indicated that GM will be looking at this opinion and how they might make some uniform adjustments to the metric. Whether GM will actually adjust their RSI in response to the Beck case remains to be seen.