Two recent decisions in New York and Ohio, respectively, should – but likely will not – motivate auto manufacturers to abandon their reliance upon provably undependable “metrics” to evaluate dealers’ retail sales performance. For many years, America’s auto manufacturers/franchisors have deployed what they describe as “performance metrics” to assess how well their franchised dealerships measure up against minimum standards in retail sales of new vehicles. The minimum passing grade is often “average” per factory calculations, or close to it. By citing numbers under a guise of science, they mask the reality that such metrics lack a true factual and statistical basis.
Yet the importance of such assessments to dealers cannot be understated. They may determine eligibility levels for bonuses or incentive payments, and they can be benchmarks for approvals of dealership acquisitions or buy-sells. Occasionally, a low sales performance score might trigger a termination threat or notice.
These metrics, however, fail to account for a host of unascertainable variables, the lack of which makes problematic any determination of so-called “expected” retail sales numbers. Among other things, these variables include unique dealership locations, areas of responsibility, demographics, etc. As courts have observed, the factory methodology may be “easy” for franchisors to calculate by use of simple arithmetic. The trouble for the factories, though, is that they cannot statistically control for the numerous variables that render the metric calculations meaningless. The invocation of “simple arithmetic”, therefore, is foreseeably and consistently wrong.
Worse still, the prevailing factory methodology is a form of “zero sum game,” because the calculations depend on how dealers rank against each other. There are always “winners” and “losers” in this metric-based methodology. As the two recent decisions suggest, courts wisely reject auto manufacturers’ references to “ease” of calculation as an excuse to dispense with accuracy, reliability, fairness and reasonableness. It’s about time.
On May 15, 2017, my article, “Carmakers must scrap metrics for dealers,” appeared in Automotive News. The article’s opening premise was the following:
Auto manufacturers routinely assess dealer sales performance relying on metrics with no established or demonstrated statistical reliability or accuracy to gauge the minimum number of new cars dealers should expect to retail.
I quoted from the 2016 landmark case, Beck v. General Motors, wherein the United States Court of Appeals for the Second Circuit, interpreting New York law, held that “it is unlawful…to ‘use’ [the average] standard – alone or in conjunction with other metrics – to assess an automobile dealers’ compliance with its franchise agreement.”
I then urged auto manufacturers to heed Beck’s lessons to jettison their obsession with skewed and flawed metrics and to adopt a sensible, fair and reasonable approach to assessing their dealers:
They [auto manufacturers] need a methodology that contemplates and encourages compliance with reasonable standards by 100 percent of the dealer body. They should jettison the “industry standard” of zero-sum metrics that make it a certainty that “lower performing” dealers are unsatisfactory and in breach. They should assess each dealer on the outcome of specific on-site reviews and inspections to assure that dealers comply with reasonable requirements to, for example, hire and train sales personnel, technicians, and capable managers.
The two recent legal wins for auto dealers in New York and Ohio against their franchisors further buttress arguments that judges will not excuse or ignore the statistical flaws of factories/franchisors in purporting to apply sales performance metrics. First, under New York law, in Alfredo’s Foreign Cars, Inc. d/b/a Larchmont Chrysler, Jeep, Dodge v. FCA US, LLC, a dealer located about ten miles northeast of New York City, challenged the fairness and reasonableness of the calculation and application of FCA’s Minimum Sales Responsibility (MSR) performance metric. At the hearing level, an Administrative Law Judge held that the MSR violated the state’s Franchised Motor Vehicle Dealer Act, as it was arbitrary, unreasonable, or unfair as a standard for determining sales performance. The ALJ enjoined FCA from using MSR as a metric for determining Larchmont’s compliance with the dealer agreement. On June 29, 2021, on FCA’s appeal to the NYS Department of Motor Vehicles Administrative Appeals Board, the Board affirmed the ALJ’s decision in all respects.
Second, on July 13, 2021, in BMW of North America v. MacLean the Ohio Court of Appeals affirmed the trial court and agency decisions in favor of a BMW dealer who successfully challenged BMW’s rejection of a buy-sell. The owner had sought “to transfer his ‘MINI of Cleveland’ BMW dealership to… [the] general manager”. Relying on its own calculation of BMW’s sales performance metric, BMW rejected the buy-sell purportedly because of poor sales performance during the months of MacLean’s tenure as general manager. The owner, proposed transferee (MacLean), and their corporate entities filed a protest with the Ohio Motor Vehicle Dealers Board. A hearing officer found that BMW had not shown good cause to deny the transfer. After the Board adopted the ALJ’s decision, two BMW appeals followed. After the Court of Common Pleas affirmed, the Court of Appeals followed suit.
Thus, MacLean was considered by four levels of decision makers. All four agreed that “[a] metric that consistently fails the majority of…dealerships is not a reasonable or objective metric [and] a metric that relies on incomplete data to evaluate the performance of a dealership or is confusing to the point of being unusable, is not a reasonable or objective metric.” In essence, the MacLean series of decisions demolishes the rationale of all the metric-based performance standards of all auto manufacturers.
These new cases add to the growing trend of judicial rejection of flawed factory metric calculations to determine whether franchised auto dealers meet or surpass their contractual retail sales duties. It is high time for auto franchisors to transition to the fair and sensible conclusion that all dealers should be able to maintain satisfactory sales levels at the same time. The metrical approach cannot achieve that goal, because it infuses an “average” standard that makes under-average a breach of the dealer agreement. A bedrock aspiration for all auto franchisors should be that all dealers can satisfy reasonable standards. Otherwise, dealers must challenge the continuing, ill-advised metric standards currently in force.
*Mr. Chase leads the Dealer/Franchise practice area of Bressler, Amery & Ross, P.C., as he has done for 28 years. He may be reached at the firm’s Florham Park, New Jersey office at 973-514-1200, or on his cell at 973-919-9445, or by email, firstname.lastname@example.org. The views set forth in this article are his own and do not necessarily reflect the views of his firm or any of its clients. Nothing in this article is intended to constitute legal, financial or tax advice. Each reader should consult with his or her professional advisor regarding any such advice.