General Motors may have to reconsider the way it measures and enforces dealership sales effectiveness in the nation's largest vehicle market after a ruling that the company's system violates a state law.
California's New Motor Vehicle Board ruled Aug. 13 against GM's use of a benchmark called the retail sales index as grounds to terminate the franchise agreement of Folsom Chevrolet, a Sacramento-area dealership owned by Marshal Crossan.
The decision capped a long-running battle between Folsom and GM, which had concluded that Folsom failed to meet sales expectations and sought to revoke its franchise in late 2016.
Attorneys representing Folsom Chevrolet argued that GM's reliance on RSI was a violation because it failed to account for various market conditions, including brand preference, geography and demographics.
The decision follows a similar case in New York, where the state's highest court ruled in 2016, on similar grounds, that GM violated state law by trying to cancel a Chevy dealer's franchise for subpar RSI.
The California ruling could have implications for franchised dealerships across the country, according to California law firm Scali Rasmussen, which represented Folsom.
"This outcome provides not only a shield as used in this case, but potentially a sword for recovery of damages caused by GM's application of the faulty metric," said Christian Scali, managing partner of the firm, in a statement.
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The board's decision doesn't order GM to change its process, as its rulings are handled case by case. But Halbert Rasmussen, a partner of the Scali firm, noted that the board's decision cited GM's use of RSI as a violation of California law "not only in this case, but generally."
"That is going to cause GM to have to ask themselves, 'What are we going to do in California?' And I don't know the answer to that," he told Automotive News. "They may decide that they'll roll out some sort of modification. They might decide to appeal."
Jim Cain, a GM spokesman, said the company "strongly disagrees" with the board's decision and that it has no plans to revise its RSI calculation for California dealers.
"The Retail Sales Index as currently calculated in California and elsewhere is one of multiple metrics and other sources of information considered by GM in evaluating its dealers' compliance with their obligations," he said in an emailed statement.
Cain said a decision on whether to appeal would come later.
The 2016 New York case, involving Beck Chevrolet in Yonkers, prompted GM to review its policies in the state. While it continued to use RSI to measure dealer performance, it said at the time that it wouldn't use it to assess compliance with franchise agreements, a change that the regional dealer association called "a pivotal moment for New York dealers."
The New York case was cited in the California board's decision. Rasmussen said the case was "not critical but helpful in shaping the board's understanding."
Rasmussen said California's statute is more detailed than New York's, specifying the criteria for evaluating whether a performance standard is reasonable under the law.
Widely used metric
RSI measures dealers' retail sales performance against a statewide average. Other automakers use essentially the same metric to determine whether dealerships are in compliance with their franchise agreements.
GM sets the sales target for individual Chevy dealerships by applying the brand's market share in the state for each vehicle segment against competing brands registered in each dealership's territory.
A store's RSI is its retail sales as a percentage of that target. If GM expects a dealer to sell 100 vehicles, but it sells only 50, its RSI score is 50.
Folsom Chevrolet, according to the ruling, ranked near the bottom of the state's Chevrolet dealers in RSI before GM gave notice to terminate the franchise in November 2016.
In 2013, its RSI was 40.9 — ranking 129th of 133 Chevy dealers in California; in 2014, it was 44.4, No. 124 of 128. The store raised its RSI to 57.1 in 2015, and its rank climbed to 115th of 131. But the rating fell again during the first half of 2016 to 56.55.
Folsom argued that its retail sales were hurt by construction at the store during some of the period and that GM's RSI calculation didn't account for Folsom's successful fleet business, of which the state took note.
The fleet sales were "a big, big bone of contention," Rasmussen said.
GM also cited the dealership's customer satisfaction index scores as cause for termination. But the board said the below-par CSI score didn't constitute a violation of the dealership's contractual obligations.
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