Dealers sue Mazda over multi-tier bonus plan

A Florida dealership and New Jersey's state dealer association are suing Mazda Motor of America Inc. alleging that the automaker's revamped dealership bonus program illegally gives some stores a vehicle pricing advantage at the expense of others.

The two federal court lawsuits — one filed this month and the other in August — claim price discrimination and breach of state franchise laws by the Mazda Brand Experience Program 2.0, a tiered incentive program that launched in July and pays per-vehicle bonuses tied to dealership standards and customer experience metrics.

The Florida lawsuit, filed in August by Kuhn Mazda, a Tampa dealership, also accuses Mazda's program of violating the federal Robinson-Patman Act, which outlaws price discrimination. That claim makes it a case to watch for dealers nationwide, and other auto retailers and state dealer associations are keeping tabs on the lawsuits.

While it's too early to predict whether either case will reach trial, if they do and if the dealers win, the results would not only be significant for Mazda dealers but could set a precedent for all dealers, said Richard Sox, a partner in Bass Sox Mercer in Tallahassee, Fla., and a lawyer representing Kuhn Mazda. Mazda has about 600 dealerships in the U.S.

"The arguments that Mr. Kuhn is making would apply to dealers across the state to all brands as it relates to facility-related incentive programs that are put in place from time to time by manufacturers," Sox told Automotive News.

The New Jersey case, filed this month by the New Jersey Coalition of Automotive Retailers on behalf of its 16 Mazda dealer members, claims Mazda is violating the New Jersey Franchise Practices Act, designed to protect dealers from pricing discrimination and "financially unjustified" dealership requirements that can drive up operating costs.

"If Mazda wants a palace, Mazda can pay for a palace," the coalition's president, Jim Appleton, told Automotive News. "They just can't have a two-tier pricing program that forces the dealer to pay for it."

Mazda declined to comment directly on the lawsuits but defended its program in an emailed statement to Automotive News.

"As a matter of Mazda policy, we cannot comment on the specifics of either case as both are active litigation matters," the Mazda statement said. "Similar to other [automaker] programs, MBEP is a program that incentivizes dealer behavior, including among other things, the construction of Mazda's Retail Evolution Image facility, maintaining dedicated personnel and providing an excellent customer experience. It is available to all dealers in both states."

When Mazda rolled out its program in July, it included incentive payments called "Brand Commitment Element" and "Customer Experience Element," according to the Kuhn lawsuit. To qualify for either, according to the court filing, dealers have to earn satisfactory marks in six areas including facility image and inspection, training dealership employees, participating in the Mazda Service Scheduler online function, compiling complete customer information records on sales and service, participating in Mazda's courtesy vehicle program and spending advertising dollars on certain media and at required levels.

Brand Commitment payments are grouped by four dealership types: a dual store, exclusive showroom, exclusive dealership and retail evolution dealership. Dual stores, where the dealership is shared with another brand, earn nothing, according to the court filing. Dealerships deemed exclusive showroom earn 1 percent of sticker price on each new vehicle sold, while exclusive dealerships get 2.8 percent of sticker price, according to the suit. The retail evolution dealership must have an "exclusive dedicated general manager" to qualify, and those stores can then earn 4.5 percent of base sticker.

To get Customer Experience payments, dealers must score higher than 75 percent satisfaction on customer service to qualify for a 2 percent payment per new vehicle sold.

Dealerships qualifying at the top of Mazda's new program could earn a $1,600 bonus on a vehicle sold for $25,000, above the average total gross profit per vehicle nationally on new Mazdas, according to Kuhn's suit. That would give the retail evolution dealers "an extreme competitive edge over 'lower facility-type' dealers," according to the lawsuit.

"It immediately made our store just not competitive across the board," dealer Jason Kuhn, owner of Kuhn Automotive Group, told Automotive News. Kuhn Automotive includes the Mazda store, two Volkswagen dealerships and a Honda store in the Tampa area.

The month after the program rollout, Kuhn sued Mazda in U.S. District Court for the Middle District of Florida, seeking an injunction. The complaint claims the new program adversely modifies Kuhn Mazda's franchise agreement, is an illegal facility-related incentive program and uses an unfair sales and service performance metric. In the end, the program enables Mazda to sell like vehicles to Kuhn's competitors at lower prices, the complaint alleges.

Since the new program came out, Kuhn Mazda has been forced to take a loss on a vehicle sale, sometimes thousands of dollars below cost to stay competitive, or choose not to sell a vehicle, Kuhn said.

The new program is being used to "coerce dealers into expensive facility upgrades or otherwise to lose out to competitors who have already upgraded or will upgrade their facilities," the Kuhn complaint says.

Under the earlier iteration of the program, Kuhn Mazda said it could earn up to 4.25 percent of the manufacturer's suggested retail price on each new vehicle it sells. Under the new program, the store can only earn up to 3 percent of sticker price.

Mazda, in a court filing answering Kuhn's complaint, denied the allegations including violations of law, that Kuhn has incurred any damages, that its program reduces vehicle prices to dealers and that its program is coercing dealerships into store upgrades.

Mazda in court filings said Kuhn Mazda has not complied with program criteria unrelated to its facility.

Dealers have tried to fight similar automaker incentive programs in the past, spurring hope among retailers of undoing some of the complicated programs. In one high-profile case, billionaire megadealer Norman Braman in 2012 sued General Motors over alleged two- tier pricing related to GM's Essential Brand Elements program. Braman and GM reached an undisclosed settlement in 2013.

Other Mazda dealers and state associations are watching these two lawsuits closely.

Sox said a client in Oregon has asked his firm to look at what options it may have. And the California New Car Dealers Association is aware of dealer concerns about the program and is watching the lawsuits with interest, Brian Maas, president of the association, wrote in an email to Automotive News. Mazda has 55 dealers in California.

The Kuhn suit is also challenging the program under a Florida law covering dealership programs and saying that stores that comply with all other portions of an incentive program must receive a reasonable portion of the per-car incentive payment, or a minimum of 80 percent of the payment, Sox said. None of the three lower dealership tiers under Mazda's new program hit that threshold, the lawsuit argues.

Kuhn Mazda shares its location with Kuhn Volkswagen. While it has an exclusive Mazda showroom, Kuhn said to upgrade to Mazda's retail evolution dealership would cost "many millions of dollars" and is not cost effective given current sales volumes.

The average Mazda dealership sold 44 vehicles a month through September, according to the Automotive News Data Center. Kuhn, while not citing specifics, said his store's average is lower than that figure.

Kuhn, who said he has received many phone calls from Mazda dealers supporting his efforts, is asking Mazda to reimburse him all the money he has lost since the program began and to return Mazda dealerships to equal footing.

"We are fully committed to taking this all the way," Kuhn said of the lawsuit, adding that he's well capitalized and has resources to see it through.

It's not his first go-around with an automaker. After Volkswagen's diesel emissions scandal emerged, Kuhn led a six-member dealer committee that formed to pursue settlement talks with Volkswagen. Kuhn said he's not overly litigious.

Mazda has not yet answered the New Jersey lawsuit. The dealer coalition's Appleton said the association filed the suit in part because individual dealers are reticent to sue automakers for fear of retaliation.

But the new Mazda incentive structure creates a competitive imbalance for dealerships that don't have exclusive Mazda facilities and general managers, the New Jersey lawsuit argues. Stores that don't meet the requirements for the incentive payments are at a competitive disadvantage when competing for customers over pricing. This disadvantage affects a dealership's sales, ability to make a profit and overall viability, the complaint says.

Two-tier pricing programs can start off "somewhat innocently," Appleton said, but can grow into something that is unfair and intolerable.

Dealers would have to invest in exclusive dealerships to get on a level playing field with neighboring Mazda dealers who have standalone operations to fully benefit from the brand experience program.And the stores would face difficulties recovering those costs because Mazda isn't a high-volume automaker, Appleton said.

"If Mazda wants to manage their brand image in the New Jersey market, they can't do it with a two-tier pricing program," he said. "But they can take the money they would've put in a two-tier pricing program and start spending it on offering dealers money to achieve their brand image obligations."

Incentive protocols around the industry, Appleton said, are getting to the point where automakers won't let dealers make money on new-car sales unless they check every box on the programs. And those boxes, he said, are becoming more and more unreasonable.

"Two-tier pricing is making it impossible for dealers to manage their business. They don't know until the end of the month what their costs of goods is when they make a sale," Appleton said. "Dealers are selling cars for less than what they paid for them. Dealers have to take a stand and say this is no way to run our business."