The Franchise Memorandum

Last month, another state appellate court in New York affirmed summary judgment in favor of two franchised Audi dealers who challenged as discriminatory Audi of America’s incentive programs designed to encourage dealers to purchase more Audi vehicles returned by customers at the expiration of their leases (so-called “lease-returns”). Audi of Smithtown, Inc. v. Volkswagen of America, Inc., d/b/a Audi of America, Inc., 2012 N.Y. App. Div. LEXIS 7586 (N.Y. App. Div. Nov. 14, 2012). The “CPO Purchase Bonus” was a payment by Audi to dealers. Existing dealers qualified for the bonus based on their volume of purchases of lease-returns, while newly franchised dealers, not having a portfolio of maturing lease-returns, qualified by meeting a sales objective for the sale of certified pre-owned vehicles. Under the “Keep It Audi” program, dealers received increasing discounts on the purchase of lease-returns based on achieving three qualification levels. Qualification levels for existing dealers were determined based on the volume of lease-returns purchased by the dealer, while newly franchised dealers were automatically placed in the highest qualification level for three years.

The plaintiffs, who were two established Audi dealers, alleged that the two incentive programs discriminated against existing dealers in favor of newly franchised dealers in violation of New York’s Franchised Motor Vehicle Dealer Act and New York’s Vehicle and Traffic Law, both of which make it unlawful for any franchisor to discriminate among franchised motor vehicle dealers. In affirming summary judgment on liability for the dealers, the appellate court agreed that the CPO Purchase Program was not “reasonably available to all dealers . . . on a proportionately equal basis.” Specifically, the court found that the dealers had established that they faced higher costs to qualify for the CPO Purchase Program than did new dealers. The court also agreed with the lower court’s grant of summary judgment in favor of the dealers on the Keep It Audi program in light of their submission of evidence of an actual sale by Audi of a lease-return to a newly franchised dealer at a price lower than that which the dealers were charged for similar vehicles.