Enforcement Action By NYAG Results In Termination of NY Dealer’s Franchise Agreement

While every business should take care to conduct its affairs in ways that do not violate state or federal law, dealers franchised to sell new vehicles must take particular care.  As a recent case demonstrates, manufacturers may terminate franchise agreements, without an opportunity for the dealer to cure the condition precedent, when the dealer has been found to have violated state consumer protection laws.

The New York Attorney General initiated an enforcement action against a New York new vehicle dealer, alleging, among other charges, that the dealer violated the New York Consumer Protection Act, which bars New York businesses from using deceptive or unfair trade practices to sell products.  The parties litigated the matter in the Supreme Court of Kings County, and the court found in favor of the Attorney General.  In particular, the court found several of the Attorney General’s allegations to be persuasive.  The court noted that the owner of the dealership was active in the day-to-day operations of the dealership, as well as other dealerships he owned.  Also, the Attorney General demonstrated that the dealership had a history of defrauding customers, particularly the elderly and those who did not speak english.  The alleged unfair practices the dealer conducted included bait and switch advertising, having consumers sign blank contracts, and payment packing.

Relying upon the finding by the Supreme Court, the manufacturer issued a termination notice pursuant to the  New York Franchised Motor Vehicle Dealer Act.  The manufacturer asserted that the dealer’s conduct constituted a material breach of the franchise agreement, triggering default and termination when “any finding or adjudication by any court of competent jurisdiction or government agency that [the dealer] has engaged in any misrepresentations or unfair or deceptive trade practices.”  When the dealer challenged the termination notice in federal court, the judge dismissed the dealer’s suit, allowing the manufacturer to terminate the franchise agreement, stating that the dealer’s “actions were a flagrant violation of a provision going to the root of [the franchise agreement]” and that, in such cases involving material breach of the franchise agreement, the manufacturer is not required to provide an opportunity to cure prior to termination.

Practices that violate the law may result in fines, awards for consumers, and damage to the business’s reputation.  When the Attorney General or another governmental agency intervenes, a ruling against a dealer may lead to the manufacturer alleging a breach of the franchise agreement under the circumstances described above.  Most franchise agreements contain provisions similar to the one cited by the manufacturer in this case and all states have consumer protection laws that forbid deceptive and unfair trade practices.  Therefore, even if your dealership is not in New York, your franchise may be at risk if you violate your state’s law.  It is imperative that you monitor your sales practices to make sure that they do not involve conduct that may be deceptive or unfair.  This includes promptly answering complaints filed by consumers with state or federal regulators.  As this case demonstrates, an enforcement action by the Attorney General of your state may be the beginning of the end of your new vehicle dealership.

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