April 20, 2014 — Six New Jersey dealerships owned by Bob Ciasulli last week filed lawsuits against Toyota Motor Sales USA and American Honda Motor Corp. claiming dealer incentive programs created by manufacturers are illegal according to New Jersey state franchise law.

The implications of this case could be far reaching because there is little if any case law dealing with the controversial manufacturer-to-dealer incentives – often called stair step programs in the automotive retail industry.

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Essential Facts

Historically, legal recourse for dealers pushing back against manufacturer stair step programs has failed.

• The Robinson-Patman Act of 1936 prohibits manufacturers from pricing discrimination practices.
• Dealers periodically have tried to use this law to force manufacturers away from stair step incentives.
• The problem is, the Federal courts have not allowed any of the cases to be certified for class action status. Not being able to obtain class action status makes it cost prohibitive for single dealers to follow through on their lawsuits.
• In 2011, New Jersey appears to have strengthened parts of its New Jersey Franchise Practices Act in an attempt to curtail stair step programs in the state and possibly to provide an alternative legal approach for dealers in the state. (We assume the Jim Appleton-led New Jersey Coalition of Automotive Retailers led the charge on this.)
• The amended law — N.J.S.A. 56:10-74(h) – requires automotive manufacturers to sell comparably equipped vehicles to their franchisees (dealers) at the same price, on the same terms with no difference in discount, allowances, bonuses or credits.
• Late last week, six dealerships in the Ciasulli family became the first dealers to file a lawsuit under the amended franchise laws.
• The dealerships filed the suit in New Jersey Superior Court’s Chancery Division in Passaic, NJ.
• The case was moved to New Jersey’s Federal District court, based on a request by Honda. Attorneys we’ve talked to expected that move and do not believe it weakens Ciasulli’s case.
• If Ciasulli has the financial resources and fortitude to see this lawsuit through and wins, other states could follow suit and put an end to stair step programs.
• Marvin J. Brauth with the firm Wilentz, Goldman & Spitzer, is representing the dealerships. The six dealerships are:  1. BCT Imports Inc. dba Toyota Universe 2. MT Imports Inc. dba Galaxy Toyota 3. United Galaxy Inc. dba Tri-County Lexus 4. Route 88 Vehicle Corp. dba Honda Universe 5. Mack Auto Imports Inc. dba Honda of Toms River 6. Universal Global Inc. dba Metro Honda.

The Complaint

According to the complaint, Toyota, Lexus and Honda offer programs that include discounts, allowances, credits or bonuses for dealers that meet certain sales requirements established by the manufacturer.

Examples listed in the complaint include Toyota’s “Cash Bash,” President’s Challenge,” or Lexus’ LDMC – a program that provides 2% discount off the MSRP if the dealer has not violated Lexus’ advertising covenant more than twice.

Honda’s programs include its “Flex Cash,” or the “HP-E61” in which dealers have access to a pool of money based on the previous year’s sales to put toward a customer’s purchase.

Stair Step Controversy

The incentives can amount to thousands of dollars per vehicle. The problem is the incentives are alleged by critics (including many dealers) to typically create a two-tiered pricing system making it harder for smaller dealers to compete against larger, volume-based dealerships.

Depending on the program, dealers can risk a lot of money. The incentives are designed to give the dealer flexibility in how they price their vehicles. Often dealers will discount their prices to drive sales in an attempt to meet the sales quota established by their manufacturer. But if the dealership misses out on the sales quota (and often the manufacturer sets overly ambitious targets) it likely will lose a lot of money. This creates a disadvantage for smaller dealers.

But the programs often don’t help large dealers either. When Honda launched an aggressive stair step program late last winter, dealers some of Honda’s largest dealers privately complained to TBR that the incentives wouldn’t help them because the quotas were too ambitious.

Other times, dealers may determine that trying to meet a certain sales quota is not worth the effort or the money and, thus miss out on potentially lucrative bonuses.

The National Automobile Dealers Assn. in fall of 2012 came out hard against stair step programs and also pushed back against manufacturers for overly aggressive facility upgrade demands which often are tied to significant bonus money.

AutoNation Chairman and CEO Mike Jackson often decries the reliance on stair step programs by automakers. Such programs work against the customer and make it nearly impossible for dealers to provide transparency to their customers, he told attendees at the Automotive News World Congress in January of this year.

Automakers also tie incentive programs to facility upgrade demands. Norman Braman, owner of the Braman Automotive Group with stores in Miami and Colorado, sued General Motors two years. He claimed the manufacturer violated both Florida state law and the federal Robinson-Patman Act when it stopped making bonus payments to Braman when his Cadillac store refused to cover its showroom walls in limestone as required by GM’s Essential Brand Elements facility upgrade program.

At the time, it appeared Braman might see the lawsuit all the way through trial, which could have had changed how manufacturers design their incentive programs.

Braman and GM instead settled a year ago. When TBR spent several hours with Braman earlier this year, he declined to talk about the settlement, only saying he believed both sides walked away happy.

New Hampshire

Last fall, GM stopped offering stair step programs to dealers in New Hampshire because of revisions to the state’s Dealer Bill of Rights law. The revisions require manufacturers to provide an advance and written explanation to its dealers how it calculated each dealer’s sales targets for each specific program.

GM likely won’t lose out on many sales making this move in New Hampshire. The state is small and has only 24 dealers. If not having stair step programs puts dealers in the state at a pricing disadvantage, it’s possible customers could go to surrounding states

Nissan

Earlier this month, Nissan executives announced in its earnings call it is backing away from monthly stair step programs and instead will tie bonuses to annual performance.

It’s part of a philosophy change for Nissan, which is launching 10 new vehicles over the next several months. Last year, Nissan took advantage of a favorable yen to discount prices significantly while offering ambitious stair step programs along with aggressive customer incentives to help move old products off the lots to make room for newly launched vehicles.

Nissan now is making its customer incentives along with pricing to be comparable with other brands. Its move to move away from stair step programs should help dealers maintain a more consistent and long term view of the market.