Pub. 12 2013-2014 Issue 3

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S F A L L 2 0 1 3 24 new jersey auto retailer BY MARVIN J. BRAUTH, ESQ. Is there a single dealer in the State who does not periodically receive reports from his or her franchisor evaluating the dealership’s sales performance or customer satisfaction and comparing that performance to the performance of other dealers? Likely not. In the same vein, it seems that every dealer who has sought to obtain an additional franchise in recent years has been asked to provide, if the franchisor did not already have it, sales performance and customer satisfaction data for existing dealerships. Some dealers have even been denied new dealerships based on allegedly “poor” statistics. Franchisors also regularly consider and rely on sales performance statistics for dealers and markets in making decisions on add points and relocations and in justifying those decisions when dealers protest. Sales performance and customer satisfaction statistics have even been used to justify de fi ciency and default notices and, in a few cases, terminations. But are the statistics relied on by the franchisors valid? The answer is: oftentimes not. Let’s look at a typical calculation of sales performance to seewhy. The calculation starts with the designation of a territory — often called an area of responsibility or area of geographic advantage — for the dealer. This is the territory in which the dealer’s performance will be measured. Using this territory, the franchisor calculates the number of competitivemake and franchisor vehicles registered in the territory during a period of time. The franchisor then applies its market share in the zone, state or region to the total of competitive make and fran- chisor registrations in the dealer’s territory, sometimes makingminor adjustments, and arrives at the number of sales the franchisor expects the dealer to have made. The franchisor then compares the dealer’s actual sales (within its territory or out) with the expected sales. If the dealer’s sales equal or exceed the expected sales, the franchisor deems the dealer satisfactory. If not, the dealer is deemed deficient. Consider an example. Let’s assume that there are 1000 competitive make and franchisor registrations in a dealer’s territory and that the franchisor’s market share is 10%. The expected sales would be 100. If the dealer’s sales total is 100 or more, the dealer is deemed to be satisfactory. If 99 or less, the dealer is deemed deficient. So, why is this seemingly simple calculation potentially invalid? First, the dealer’s territory may be an improper measure of performance. Most manufacturers assign territories to dealers by census tract, as- signing the census tracts closest to a dealer as the crow flies to that dealer. While many manufacturers claim to the contrary, census tract assignment for the most part does not take geographic barriers, highway routes, employment centers, shopping centers and other lo- cal factors into account. Any of these factors can direct customers to another dealer even though the registration is in the territory of the dealer being measured. As a result, territories can include customers that a dealer cannot reasonably be expected to serve, and, when that territory, with all of its registrations, is plugged into the sales perfor- mance formula, it produces expected sales greater thanwhat the dealer can reasonably achieve. The territory assigned to a dealer is therefore one respect in which the sales performance calculation canbe unreasonable. Another respect is use of the franchisor’s market share percentage to calculate expected sales and coupling that percentage with the expectation that every While Franchisors May Try, They Cannot Use Unreasonable Calculations Of Your Performance to Penalize You