Valley Stream Foreign Cars, Inc. v. American Honda Motor Co.

Citations: 209 F. Supp. 3d 547; 2016 U.S. Dist. LEXIS 130376; 2016 WL 5239645Docket: No. 15-CV-5314 (JFB)(GRB)

Court: District Court, E.D. New York; September 22, 2016; Federal District Court

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Plaintiff Valley Stream Foreign Cars, Inc. (doing business as South Shore Honda) has initiated legal action against defendant American Honda Motor Co., Inc., asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the New York Franchised Motor Vehicle Dealer Act. American Honda has filed a motion to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Court has partially granted and partially denied this motion, ruling that while the claims for breach of contract and for violation of the New York Franchised Motor Vehicle Dealer Act lack sufficient plausibility, the claim for breach of the implied covenant of good faith and fair dealing is plausible.

The factual background indicates that American Honda is the authorized distributor of Honda vehicles and has a network of dealers for retail sales and service. South Shore Honda has been an authorized dealer since at least 2003, operating under a Dealer Agreement with American Honda that outlines the rights and obligations of both parties. The agreement provides South Shore Honda the non-exclusive right to sell and service Honda products. It also stipulates adherence to American Honda's Policies and Procedures, which can be modified by American Honda.

The dispute centers on wholesaling practices, governed by a separate Wholesaling Policy established by American Honda and revised in March 2004. This policy specifies that wholesaling involves selling or leasing new Honda vehicles to parties other than the ultimate end user, certain leasing companies, or other authorized Honda dealers.

American Honda asserts that wholesaling practices violate the Honda Automobile Dealer Sales and Service Agreement, which restricts authorized dealers to retail sales and leases from their premises and prohibits additional dealership locations. The Wholesaling Policy outlines two examples of wholesaling: (1) transfers to third-party resellers who sell or lease new Honda vehicles, and (2) transfers to third-party leasing companies that engage in activities typical of authorized dealers, such as displaying or advertising new vehicles. However, it clarifies that wholesaling does not include used vehicle transfers, direct transfers to end users, or transfers to leasing companies not involved in sales or service activities. 

Effective November 1, 1995, American Honda commits to strictly enforce this policy, detailing procedures for reporting and auditing suspected wholesaling activities. Violations may result in measures such as adjusting vehicle allocations, rescinding incentives, and barring dealers from new locations for five years. The policy emphasizes that any wholesaling is inconsistent with the Dealer Agreement, allowing American Honda to take necessary actions against it.

The plaintiff alleges that authorized Honda dealers outside its Area of Statistical Analysis (ASA) are wholesaling to customers within the ASA using intermediaries. Despite being informed, American Honda has not audited these dealers or mitigated the wholesaling, allegedly leading to skewed evaluations of the plaintiff's sales performance and losses exceeding $12 million.

In procedural history, the plaintiff filed the action on August 17, 2015, which was removed by American Honda on September 15, 2015. Subsequent motion and opposition filings occurred throughout late 2015 and early 2016, with oral arguments held on March 16, 2016. The court is tasked with accepting the complaint's factual allegations as true while reviewing the motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).

To survive a motion to dismiss under Rule 12(b)(6), a complaint must present a plausible set of facts that elevates the right to relief above mere speculation, as established in *Twombly* and clarified in *Iqbal*. The standard does not demand detailed fact pleading but requires enough factual content to make the claim plausible on its face. Courts must first disregard conclusory statements that lack factual support before assuming the truth of well-pleaded factual allegations, which must then demonstrate a reasonable inference of the defendant's liability. The plausibility standard is not equivalent to a probability requirement but necessitates more than a mere possibility of unlawful action.

In the context of the current case, the plaintiff requests the court to determine if American Honda’s Wholesaling Policy is incorporated by reference into the Dealer Agreement. If the court finds this incorporation valid, the plaintiff will pursue a breach of contract claim and withdraw the claim for breach of the implied covenant of good faith and fair dealing. Conversely, if the court rules against incorporation, the plaintiff will drop the breach of contract claim and continue with the implied covenant claim. The plaintiff does not take a definitive stance on the incorporation issue but provides case law suggesting it is not incorporated. The defendant argues that the incorporation by reference is not crucial, asserting that obligations can arise from other means, emphasizing the binding nature of a franchisee’s compliance with franchisor policies under New York law.

The Court evaluates whether the Wholesaling Agreement is incorporated by reference into the Dealer Agreement, a legal determination. Under New York law, incorporation by reference requires that the referenced document be clearly identified in the written instrument, allowing for identification beyond reasonable doubt. It is essential that the parties had knowledge of and agreed to the incorporated terms. In this case, the Wholesaling Policy was not sufficiently identified in the Dealer Agreement. The Dealer Agreement explicitly states that only its attachments and certain policies and procedures are incorporated by reference, clearly excluding the Wholesaling Policy. Furthermore, the Dealer Agreement was executed in late 2003, while the Wholesaling Policy was adopted in March 2004, indicating that it could not have been referenced in the Dealer Agreement as it did not exist at that time. The Court finds that the reference to "policies and procedures" in the Dealer Agreement constitutes a vague allusion, which does not meet the specificity required for incorporation by reference, as established in relevant case law.

In Sea Trade Co. v. FleetBoston Fin. Corp., the court ruled that a document with additional terms was not incorporated into the contract, as the contract only referenced general regulations and did not explicitly identify the document containing the relevant terms. Consequently, the Wholesaling Policy was not considered part of the Dealer Agreement. The plaintiff indicated that if the court determined the Wholesaling Policy was not incorporated, it would only pursue a claim for breach of the implied covenant of good faith and fair dealing. 

The defendant sought to dismiss this claim, asserting there was no obligation to enforce the Wholesaling Policy. Under New York law, the covenant of good faith and fair dealing is inherent in all contracts and requires that neither party undermines the other's right to benefit from the contract. However, this covenant does not add new substantive provisions not agreed upon by the parties. 

In assessing a breach of this covenant, courts consider both the express terms of the contract and the parties' course of performance. Ultimately, whether a party's conduct breaches the covenant is fact-specific and typically a jury question. The court found that the plaintiff presented a plausible claim for breach of the implied covenant, alleging that American Honda's refusal to enforce the Wholesaling Policy hindered the plaintiff's ability to profit from selling Honda vehicles. The Wholesaling Policy, as noted by American Honda, acknowledges the detrimental impact of wholesaling on its authorized dealer network and overall customer satisfaction.

American Honda has reportedly received information about wholesaling practices but has opted not to enforce its Wholesaling Policy, which may support a claim that it is acting arbitrarily or irrationally, breaching the implied covenant of good faith and fair dealing in its Dealer Agreement. The court references Dalton v. Educational Testing Serv. to underscore that this implied obligation includes avoiding arbitrary actions. American Honda contends that the Wholesaling Policy does not obligate it to enforce compliance strictly and that its discretion in enforcement is valid. However, the court concludes that the plaintiff has sufficiently alleged that American Honda has neglected its enforcement duties, thus acting against both its interests and those of its dealers, creating a plausible claim for breach of the covenant. The court distinguishes between a lack of strict enforcement and a total failure to enforce the policy, emphasizing the significant economic and reputational risks posed by wholesaling.

Additionally, the plaintiff claims a violation of New York’s Franchised Motor Vehicle Dealer Act (VTL), arguing that American Honda's actions allowed for unauthorized dealership locations within the plaintiff's market area. The defendant counters that the claim fails since there is no allegation of statutory notice or a written agreement for establishing new dealerships, as mandated by the statute. The VTL specifically prohibits franchisors from creating new dealerships in existing franchise areas without proper notice.

A dealer can sue to contest the establishment of a new franchised dealership after receiving notice. A "franchise" involves a written agreement allowing a dealer to use a manufacturer's trade name, with a mutual interest in marketing vehicles. The relevant marketing area, referred to as the RMA, is defined as a radius of six miles from the proposed dealership site. The plaintiff did not allege that American Honda has created or plans to create another authorized dealership within this radius, and acknowledges that none exists. The court dismisses the plaintiff's claim that allowing other dealers to use intermediaries for vehicle sales in the RMA constitutes a violation of the Vehicle and Traffic Law (VTL), noting that the statute requires written notice, which was not alleged.

The court denies the motion to dismiss the claim for breach of the implied covenant of good faith and fair dealing but grants dismissal regarding other claims. The Wholesaling Policy pertains to Honda and Acura vehicles, with irrelevant references to Acura excluded. The Dealer Agreement defines the ASA as the evaluation area for dealer performance, which can be modified by American Honda. Although American Honda cites cases where courts did not find franchisors obligated to enforce franchise standards, the court finds these cases unpersuasive due to differences in agreement language and the lack of specific harm described in those cases.

American Honda also contends that the plaintiff has not adequately alleged violations of the Wholesaling Policy, as the use of intermediaries does not constitute prohibited wholesaling. The court determines that the complaint sufficiently references prohibited conduct under the Wholesaling Policy and survives the motion to dismiss. Additionally, the plaintiff has provided American Honda with the names of over 40 intermediaries allegedly violating the policy, and the court concludes that the complaint does not need to specify these intermediaries or their activities to establish a plausible claim.