Opinion
No. 99-76065
December 17, 2002
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiffs Fred Lavery Company d/b/a Fred Lavery Infiniti Company ("Lavery Infiniti") and Frederick A. Lavery, Jr. (collectively "Plaintiffs") filed a complaint alleging that the proposed termination of the Infiniti Dealer Sales and Service Agreement ("Dealer Agreement") dated September 10, 1991, between defendant Nissan North America, Inc., Infiniti Division ("Defendant" or "Infiniti") and Lavery Infiniti would breach that agreement; breach the implied covenant of good faith and fair dealing; violate the Michigan Dealer Act, Mich. Comp. Laws Ann. § 445.1565 ("Michigan Act"); and violate the Automobile Dealers Day in Court Act, 15 U.S.C. § 1221 ("ADDCA").
This court conducted a bench trial of these claims June 4-7, and June 12-13, 2002. After consideration of the evidence presented during that trial, the court enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. Lavery Infiniti is a Michigan corporation that sells and services Infiniti vehicles from a facility located in Birmingham, Michigan, a suburb of Detroit.
2. U.S. Auto Group Limited owns 100% of Lavery Infiniti's stock, and Mr. Lavery owns 100% of U.S. Auto Group Limited's stock.
3. Lavery Infiniti was one of the original Infiniti franchised dealers, the first located in the Detroit metropolitan market.
4. The first obligation Lavery Infiniti undertook for the Infiniti franchise was to build a facility approved to Infiniti brand standards and capacity requirements at an Infiniti-approved site,
5. Lavery Infiniti constructed an exclusive, Infiniti brand facility at an initial capital investment of approximately $2,400,000 on land appraised at $500,000; additional improvements to the facility in 1998-1999 cost approximately $500,000.
6. The facility has showroom space for a few Infinitis, outside display space for six more, and additional space across the street from the building in an area used by all Fred Lavery Company's franchises.
Mr. Lavery has franchise agreements with Audi, Land Rover, and Porsche. A showroom for sales of those automobiles is located across a side street from the building used for Infiniti sales.
7. Infiniti is a division of Nissan North America, Inc., a California corporation, that distributes Infiniti products in the United States.
8. Lavery Infiniti is an authorized Infiniti dealer pursuant to the terms of the Dealer Agreement. Lavery Infiniti is located in Infiniti's Central Region, which occupies the central portion of the United States.
9. The Dealer Agreement, executed September 10, 1991, governs the relationship between the Infiniti and Lavery Infiniti.
10. The Dealer Agreement provides for the application of California law. The laws of both California and Michigan are similar with respect to the contract interpretation issues before the court.
11. The Dealer Agreement requires Lavery Infiniti to "actively and effectively promot[e] the sale at retail" of Infiniti vehicles within its Primary Market Area. Dealer Agreement at Article Second.
12. Section 3.A of the Standard Provisions of the Dealer Agreement requires Lavery Infiniti to accomplish those responsibilities "through its own advertising and sales promotion activities." Dealer Agreement Standard Provisions ("DASP") at § 3-A.
13. Lavery Infiniti's Primary Market Area ("PMA") is "the geographic area which is designated from time to time as the area of [its] sales and service responsibility for Infiniti Products in a Notice of Primary Market Area issued by [Infiniti] to [Lavery Infiniti]." DASP at § 1.K.
14. Infiniti uses the PMA as a tool to evaluate a dealer's performance of its sales and service obligations. DASP at § 3.A.
15. In connection with the execution of the Dealer Agreement, Infiniti assigned Lavery Infiniti a PMA that consists of territory surrounding its dealership facility in Birmingham, Michigan, and northern portions of the Detroit metropolitan market.
16. Section 3.B of the Standard Provisions provides that Lavery Infiniti's sales performance "will be evaluated by [Infiniti] on the basis of such reasonable criteria as [Infiniti] may develop from time to time, including for example . . . (2) [Lavery Infiniti's] sales of Infiniti vehicles in [its] Primary Market Area . . . or [Lavery Infiniti's] sales as a percentage of: (i) registrations of Infiniti Vehicles; (ii) registrations of Competitive Vehicles; (iii) registrations of Industry Vehicles. . . ." DASP at § 3.B.
17. Specifically, Section 3.13 permits Infiniti to evaluate Lavery Infiniti's sales performance by "[a] comparison of [Lavery Infiniti's] sales and/or registrations to sales and/or registrations of all other Authorized Infiniti Dealers combined in [Infiniti's] Sales Region . . . which [Lavery Infiniti] is located. . . ." DASP at § 3.13(3).
18. Infiniti was obligated to take into account, as a commitment to the Dealer in the Dealer Agreement, reasonable factors affecting the Dealer's market:
In evaluating Dealer's sales performance, Seller will take into account such reasonable criteria as Seller may determine from time to time, including, for example, the following: the Dealership Location; the general shopping habits of the public in such market area; the availability of Infiniti Vehicles to Dealer and to other Authorized Infiniti Dealers; any special local marketing conditions that would affect Dealer's sales performance differently from the sales performance of other Authorized Infiniti Dealers; the recent and long term trends in Dealer's sales performance; the manner in which Dealer has conducted its sales operations (including advertising, sales promotion, and treatment of customers); and the other factors, if any, directly affecting Dealer's sales opportunities and performance.
DASP at § 3.D.
19. As described in the foregoing provisions of the Dealer Agreement, Infiniti traditionally evaluates the performance of each Infiniti dealer by comparing its sales with the number of competitive vehicle registrations in its PMA, referred to as "sales penetration." Infiniti then compares that percentage to the average sales penetration rate achieved by all of the dealers comprising that region.
20. Section 3.13 further provides that Lavery Infiniti's sales performance may be evaluated by reference to its "[a]chievement of reasonable sales objectives which may be established from time to time by [Infiniti] for [Lavery Infiniti] as standards for performance." DASP at § 3.B(1).
21. The Dealer Agreement also obligates Lavery Infiniti to maintain a quality service organization that provides prompt, efficient, and courteous service to owners of Infiniti vehicles. DASP at § 4.A.
22. In Section 4.E of the Standard Provisions, Lavery Infiniti agreed that its customer service performance would be evaluated by Infiniti on the basis of reasonable criteria developed by Infiniti, including "[Lavery Infiniti's] performance in building and maintaining consumer confidence in [Lavery Infiniti] and in Infiniti Products as measured by surveys or indices of consumer satisfaction as compared with performance levels achieved by other Authorized Infiniti Dealers" in the region. DASP at § 4.E.
23. By surveying sales and service customers, Infiniti generates feedback on the perceptions of customers regarding the quality of service provided by a dealer to those customers; by assigning numerical values to those responses, Infiniti compares a dealer's performance with that of other dealers. Most, if not all, manufacturers use such a "Customer Satisfaction Index" or "CSI" as a method for evaluating the service performance of dealers.
24. From 1995 through 1999, Infiniti periodically evaluated Lavery Infiniti's sales and service performance and communicated its evaluations to Lavery Infiniti's management. DASP at §§ 3.F 4.E.
25. Lavery Infiniti promised to "promptly take such action as may be required to correct any deficiencies in [the] performance of its [sales and service] responsibilities." DASP at §§ 3.F 4.E.
26. Infiniti agreed that if it determined that Lavery Infiniti had failed to substantially fulfill those responsibilities, it would "notify [Lavery Infiniti] of such failure and the reasons which, in [Infiniti's] or [Lavery Infiniti's] opinion, account for such failure." DASP at § I 1.B.
27. Section I 1.B of the Standard Provisions provides as follows:
Thereafter, [Infiniti] will provide [Lavery Infiniti] with a reasonable opportunity to correct the failure. If [Lavery Infiniti] fails to make substantial progress towards remedying such failure before the expiration of such period, [Infiniti] may terminate this Agreement by giving [Lavery Infiniti] notice of termination, such termination to be effective at least ninety (90) days after such notice is given.
28. For calendar year 1995, Lavery Infiniti had the lowest sales and market penetration percentages of any dealer in the Central Region and was one of the Central Region's "Bottom Ten" in CSI.
29. During 1995, Lavery Infiniti sold fewer than half of the Infiniti vehicles registered in its PMA, meaning that the competing Infiniti dealer in the Detroit metropolitan market, Suburban Infiniti (f/k/a Infiniti of Farmington Hills), sold more vehicles than Lavery Infiniti in Lavery Infiniti's own PMA.
30. Throughout 1996, Lavery Infiniti's sales and service performance steadily deteriorated from the levels it had achieved during 1995.
31. As Lavery Infiniti's performance deteriorated, Infiniti's concerns over that performance and the survival of the dealership intensified.
32. In December 1996, in an effort to assist Lavery Infiniti to improve its sales and CSI performance, Infiniti placed Lavery Infiniti on a Dealer Improvement Program ("DIP"), an organized attempt by Infiniti to improve Lavery Infiniti's performance by providing support to the dealership "from Central Region management and staff.
33. For example, as part of the DIP, Infiniti increased the number of vehicles allocated to the dealership and fulfilled specific requests from Lavery Infiniti for particular vehicle specifications, colors, and options.
34. Infiniti's DIP assistance also took the form of cooperative advertising funds.
35. Although Infiniti typically does not provide co-op funds to dealers with below-average CSI, Infiniti waived the "CSI qualifier" for Lavery Infiniti to maximize its support of the dealership.
36. In an effort to redress Lavery Infiniti's inadequate CSI performance, Infiniti performed a Customer Service Operations Review, in which various members of the Central Region staff dedicated several days of time to reviewing Lavery Infiniti's customer service operations.
37. As a result of this operations review, Infiniti presented over thirty recommendations to Lavery Infiniti to improve its service CSI scores.
38. To improve CSI during the DIP, Lavery Infiniti took, inter alia, the following actions: changed sales commission programs to add team and individual incentives; changed service hours by adding a second shift; invested over $2.5 million over three years to improve "quality, appearance, and user ability to the customer"; improved facility maintenance; hired salespeople with potential CSI increase as a major factor; improved methods of communicating CSI results to employees; incorporated individual performance counseling; and certified general manager, sales manager, and salespersons through manufacturer's training courses.
39. During the DIP, the dealership also increased training, changed its incentive programs to include CSI and increased the frequency of sales incentives, made direct efforts to find an experienced Infiniti sales manager, and participated in a dealer advertising association.
40. After implementing many of the recommendations, Lavery Infiniti's CSI performance began to improve. Mr. Lavery attributed Lavery Infiniti's improvement in service CSI scores during this time period to changes implemented as a result of Infiniti's Customer Service Operations Review.
41. At Mr. Lavery's request, Infiniti agreed as part of the Dealer Improvement Program to measure Lavery Infiniti's sales performance against an Adjusted Import Luxury subset of competitive vehicles.
42. Mr. Lavery had often raised concerns to Infiniti that in evaluating Lavery Infiniti under the DIP, the standard measurement did not account for the uniqueness of the Detroit market, including the following factors: the domestic car influence; the average number of new cars sold per household at twice national average; the average number of used cars sold per household at one-third to one-quarter of national average; the large size of Lavery Infiniti's PMA and inappropriate inclusion of certain areas; a low import penetration in Detroit historically; considerably higher cost of advertising per import unit sold than in other U.S. markets; and a more competitive market than most in the U.S. because of extremely competitive prices and availability of manufacturers' purchase plans for employees, retirees, and affiliated suppliers.
43. The Adjusted Import Luxury standard compared Lavery Infiniti's sales to the number of "import" luxury registrations in Lavery Infiniti's PMA.
44. In order to address Mr. Lavery's belief regarding the unique aspects of the Detroit metropolitan market, Infiniti agreed to eliminate from the competitive luxury registration base all Cadillac, Oldsmobile, and Lincoln vehicles.
45. In response to Mr. Lavery's suggestion that Jaguar should be treated like a domestic brand because of its affiliation with Ford, Infiniti also agreed to "normalize" Jaguar registrations in Lavery Infiniti's PMA.
46. To that end, Infiniti reduced the number of Jaguar registrations in Lavery Infiniti's PMA to match Jaguar's sales penetration rate in the Central Region as a whole.
47. At Mr. Lavery's request, Infiniti subsequently agreed to normalize Saab and Volvo registrations in the same manner due to their affiliation with General Motors and Ford, respectively.
48. In evaluating sales penetration, Infiniti typically compares an individual dealer's performance to regional average sales penetration for Infiniti-represented markets, i.e., only those markets in which Infiniti has a dealer.
49. For purposes of the Adjusted Import Luxury measure, however, Infiniti compared Lavery Infiniti's performance to regional average penetration for the entire Central Region, including markets without an Infiniti dealer,
50. Mr. Lavery acknowledged that it was a sign of good faith for Infiniti to change its sales penetration methodology to account for what he believed to be unique aspects of the Detroit market.
51. Mr. Lavery further described the Adjusted Import Luxury standard as "a fair and reasonable step" and a "better" and "more equitable" measure than Infiniti's standard methodology.
52. Mr. Baldwin confirmed the parties' agreement regarding their use of the Adjusted Import Luxury standard by letter dated December 20, 1996. ("As agreed upon, sales performance will be measured by dividing monthly retail sales by import luxury registrations in your PMA. Your performance will be compared to the regional average each month and targeted at a 10 percentage point improvement each month.")
53. U.S. Auto Group also operates a Land Rover franchise in Birmingham, Michigan. When Land Rover announced plans for adding several dealers to the Detroit market, Mr. Lavery proposed to Land Rover that it employ the Adjusted Import Luxury standard because it was the "best formula" he had seen for evaluating sales performance and market potential in Detroit.
54. During the first six months of the Dealer Improvement Program, Lavery Infiniti's sales increased from 54% to 89% of the adjusted regional average.
55. Thereafter, however, Lavery Infiniti's sales performance steadily declined; from July 1997 to September 1998, the dealership achieved its sales goal under the Adjusted Import Luxury standard in only two of fifteen months.
56. By September 1998, Lavery Infiniti's CYTD sales performance had declined to 60% of regional average under the Adjusted Import Luxury measure.
57. Lavery Infiniti's CSI performance also remained inconsistent. Through September 1998, Lavery Infiniti's overall CSI performance was consistently below its target of regional average. Thus, in six of the first nine months of 1998, Lavery Infiniti's overall CSI score was below regional average.
58. Although Infiniti extended the DIP program for two additional six-month periods (from July to December 1997 and from January to July 1998), Lavery Infiniti failed to perform consistently at regional average for either sales penetration or CSI.
59. On September 15, 1998, Infiniti issued a Notice of Default to Lavery Infiniti because its "[sales] performance was substantially below [Infiniti's] standards . . . very inconsistent and very low on the customer satisfaction indices."
60. Infiniti advised Lavery Infiniti that "[t]o correct this default, Infiniti will require you to bring and consistently maintain Lavery's vehicle sales penetration and CSI levels up to regional average within six (6) months of your receipt of this Notice of Default."
61. After the expiration of the initial six month period, Infiniti extended the cure period under the Notice of Default for an additional 90 days to afford Lavery Infiniti additional time to cure its purported breaches of the Dealer Agreement.
62. Lavery Infiniti failed to make substantial progress towards remedying its defaults.
63. By September 1999, Lavery Infiniti's year-to-date sales performance remained substantially below average — only 60% of regional average penetration under the Adjusted Import Luxury standard.
64. By way of contrast, Suburban Infiniti exceeded that same benchmark, at approximately 161% of adjusted regional average.
65. During four of the six months encompassed by the cure period under the Notice of Default, Lavery Infiniti's overall CSI scores were below regional average.
66. Lavery Infiniti's overall CSI scores likewise were below average for the entire 90-day extension period of the Notice of Default.
67. Despite the additional period of time afforded by Infiniti to correct the dealership's deficiencies, Lavery Infiniti failed to improve its sales or CSI performance "for any sustained period.
68. When Infiniti issued the Notice of Default in September 1998, Lavery Infiniti's year-to-date sales performance was at 60% of regional average; by October 1999, Lavery Infiniti's sales performance had fallen to 58% of regional average.
69. During the period of the Dealer Improvement Program and the Notice of Default, Infiniti communicated with Lavery Infiniti regarding a variety of operational deficiencies at the dealership, including the lack of dedicated sales management, insufficient sales consultant staffing, excessive sales staff turnover, and poor advertising.
70. For calendar year 1998, Lavery Infiniti's sales performance was only 64% of regional average penetration under the Adjusted Import Luxury standard.
71. The only change in the dealership's operations during the period was the demotion of Lavery Infiniti's sales manager, Mr. Leon Strauss. Lavery Infiniti did not thereafter employ a dedicated sales manager.
72. During that same period, the other Infiniti dealership in Detroit, Suburban Infiniti, achieved 200% of adjusted regional average.
73. Under Infiniti's standard sales penetration benchmark, Lavery Infiniti was last in the Central Region in 1998, ranked 49th out of 49 Central Region dealers.
74. During calendar year 1999, utilizing Infiniti's standard penetration benchmark, Lavery Infiniti again was last in the Central Region, ranked 52nd out of 52 Central Region dealers.
75. Using national average penetration, Lavery Infiniti was ranked 147th out of 148 Infiniti dealers in the entire United States in 1999.
76. On October 26, 1999, Infiniti gave written notice of franchise termination to Lavery Infiniti because of the dealership's failure to cure its sales penetration and customer satisfaction performance defaults under the Dealer Agreement.
77. Infiniti's method of tracking dealer sales performance generally comports with industry practice. Automobile manufacturers routinely compare the performance of their dealers with some "average" measurement, whether the average consists of dealers within a district, within a region, or nationally. The same is true of Infiniti's use of CSI scores to evaluate dealers' customer service performance.
78. The Dealer Agreement acknowledges Infiniti's right to compare Lavery Infiniti's sales performance to the performance "of all other Authorized Infiniti Dealers combined in [Infiniti's] Sales Region and District in which [Lavery Infiniti] is located." DASP at § 3.B(3).
79. The parties stipulated that such a comparison is one of the "reasonable criteria" that Infiniti may use to evaluate Lavery Infiniti's "performance of its sales responsibility for Infiniti Vehicles." DASP at § 3.B.
80. As noted, in setting the criteria for Lavery Infiniti's completion of the Dealer Improvement Program and in offering Lavery Infiniti a cure opportunity pursuant to the Notice of Default, Infiniti requested that Lavery Infiniti attain regional average penetration under the Adjusted Import Luxury measure.
81. During the time periods at issue, Lavery Infiniti needed to sell approximately forty vehicles per month, or about 480 per year, in order to reach regional average under the Adjusted Import Luxury standard.
82. The court finds that Infiniti's evaluation of Lavery Infiniti's sales performance and the forty-vehicles per month sales target were reasonable.
83. First, Infiniti adopted the Adjusted Import Luxury measure at Lavery Infiniti's suggestion and with Lavery Infiniti's agreement.
84. When Lavery Infiniti suggested that the measurement be altered with regard to Jaguar, Saab, and Volvo, Infiniti agreed to normalize registrations of those vehicles in Lavery Infiniti's PMA.
85. Second, in a meeting involving Lavery Infiniti management in September 1998, Mr. Lavery acknowledged that Infiniti's target of forty sales per month was "a reasonable objective."
86. Third, Mr. Lavery provided the Adjusted import Luxury measure to Land Rover and urged them to adopt a similar formula, calling it the "best formula" he had seen for evaluating sales performance and market potential in Detroit.
87. Fourth, Infiniti's forty-vehicles per month objective was reasonable because Lavery Infiniti was able to sell approximately forty vehicles in a month on a number of occasions in 1997, 1998, and 1999.
88. For instance, from May through September, 1997, Lavery Infiniti sold approximately forty vehicles in four of the five months.
89. Fifth, the other Infiniti dealer in Detroit, Suburban Infiniti, routinely sold forty vehicles per month, albeit in a PMA with less market opportunity as measured by competitive vehicle registrations.
90. Suburban Infiniti is a logical yardstick for evaluating the reasonability of Infiniti's sales requirement for Lavery Infiniti because Suburban encountered each of the factors that Mr. Lavery identified as influencing Infiniti sales performance in the Detroit market.
91. Suburban Infiniti sold 647 vehicles in calendar year 1997 and 465 vehicles in calendar year 1998, an average of 556 per year.
92. As shown on the Dealer Sales Performance Review for Suburban Infiniti, the dealership sold forty or more vehicles in nine of the ten months from July 1998 through April 1999. Suburban Infiniti thus routinely exceeded regional average under the Adjusted Import Luxury standard. For instance, in 1998, Suburban Infiniti's sales penetration was more than 200% of adjusted regional average.
93. Dr. Ernest Manuel, Lavery Infiniti's expert witness, testified that he had never before encountered a situation in which a manufacturer made a more extensive change to its sales performance measurement at the request of a dealer outside the context of litigation.
94. Successful Infiniti dealerships typically employ a sales manager dedicated to supervising the sales process and the dealership's sales staff.
95. Mr. Lavery acknowledged that having a dedicated sales manager, someone who could focus on supervising the sales stain would have improved Lavery Infiniti's sales performance.
96. Mr. Ali Haji-Sheikh previously had served as the dedicated sales manager for Lavery Infiniti from October 1993 to mid-1995.
97. His position as sales manager was a full-time job, including responsibilities for: ordering vehicles; hiring and firing sales people; helping salespeople close deals; making sure vehicles were prepared for delivery ensuring that vehicles were clean; supervising the new car detail order; timely reporting sales to Infiniti; making sure the finance and insurance managers submitted deals in a timely manner; ensuring that salespeople had up-to-date information for incentives; pricing vehicles; and creating an appropriate atmosphere for salespeople.
98. Nevertheless, for most of the relevant time period, Lavery Infiniti did not have a sales manager dedicated exclusively to the Infiniti sales operation.
99. After receiving the Notice of Default in September 1998, Lavery Infiniti relieved Mr. Strauss of his sales management responsibilities but did not replace him during the thirteen months that followed, which culminated in Infiniti's issuance of the Notice of Termination on October 26, 1999.
100. According to Mr. Lavery, the average salesperson sells roughly eight-and-a-half cars per month.
101. During the period at issue, Lavery Infiniti typically employed only three Infiniti sales consultants.
102. Lavery Infiniti also suffered from excessive sales consultant turnover. In November 1997, three of Lavery Infiniti's four sales consultants left the dealership.
103. At trial, Lavery Infiniti argued that its performance deficiencies were occasioned and/or excused by various factors, but the record established that none of those excuses is meritorious.
104. Lavery Infiniti argued that its sales performance suffered because it was not open for business on Saturdays; however, Lavery Infiniti was free to open for business on Saturday if it wished, as other dealerships in the Detroit area are open Saturdays.
105. Lavery Infiniti also argued that its sales performance suffered because its PMA is too large.
106. Lavery Infiniti's PMA, an area of 2,515 square miles, is slightly smaller than the average PMA in the Central Region, which has an area of approximately 2,526 square miles.
107. In any event, Infiniti was entitled to define Lavery Infiniti's PMA pursuant to Section 1.K of the Standard Provisions to the Dealer Agreement.
108. Mr. James Anderson, Infiniti's expert witness, analyzed the impact of Lavery Infiniti's PMA size by hypothetically constructing a 20-mile radius PMA for the dealership.
109. The results of his analysis demonstrated that even with a smaller PMA, Lavery Infiniti's sales performance would have been inadequate. Shrinking Lavery Infiniti's PMA improved its sales performance by only 1.1%.
110. Thus, even with such a hypothetical twenty-mile PMA, Lavery Infiniti still would have had a significant net sales loss and, for 1999, Lavery Infiniti still would have ranked 49th out of 49 Central Region dealers.
111. Despite the ample sales opportunity in the area surrounding Lavery Infiniti, Mr. Anderson's ring analysis demonstrated Lavery Infiniti's failure to effectively promote the sale of Infiniti vehicles within any distance (up to twenty miles) from the dealership.
112. Twenty-one Infiniti Central Region dealers have PMA's that are larger than Lavery Infiniti, with some having PMA's more than twice as large.
113. Over 80% of the dealers having a larger PMA than Lavery Infiniti exceeded adjusted regional average sales penetration in 1999.
114. Lavery Infiniti also attempted to show at trial that its sales performance suffered because of Infiniti's lack of advertising and marketing support.
115. The Dealer Agreement, however, required Lavery Infiniti to "actively and effectively promote" the sale of Infiniti vehicles "through its own advertising and sales promotion activities." DASP at § 3.A.
116. Although it is not obligated to do so, Infiniti periodically provides co-op advertising funds to its dealers. These co-op funds are designed to supplement a dealer's advertising efforts.
117. During the period of the DIP, Infiniti provided Lavery Infiniti with co-op funds despite the fact that the dealership did not have adequate CSI scores to qualify for such funding.
118. In September 1997, Infiniti's Mr. Muzzarelli decided not to provide co-op advertising funds to the dealership for the month of October because he believed that an advertised monthly lease payment was too low to generate an adequate profit (and hence sales staff commission) and reflected badly on the Infiniti brand.
119. Even though he agreed with Mr. Muzzarelli's conclusions, Mr. Baldwin reinstated co-op assistance for Lavery Infiniti the next month (November 1997) as an additional demonstration of support for the dealership.
120. After Infiniti reinstated co-op funding, Lavery Infiniti continued to advertise at prices of its choosing, including monthly lease payments that were lower than those advertised during September 1997.
121. Mr. Muzzarelli confirmed in a March 15, 1999 letter to Mr. Lavery that although Infiniti asked Lavery Infiniti to honor prices advertised in direct mail pieces funded by Infiniti to avoid consumer confusion, Lavery Infiniti remained free to advertise at any price point in its own newspaper advertisements and to decline to participate in Infiniti-funded advertising.
122. The amount of spot TV advertising in Detroit from 1995 through 1999 had no correlation with Lavery Infiniti's sales performance.
123. During 1996 and 1997, two years in which Infiniti provided the highest levels of spot TV advertising in Detroit, Lavery Infiniti had both its best and worst years of sales penetration versus regional average.
124. Lavery Infiniti and Suburban Infiniti were equally affected by Infiniti's spot TV and other advertising support in the Detroit market, yet Suburban Infiniti routinely exceeded adjusted regional average sales penetration while Lavery Infiniti fell well below that benchmark.
125. Insofar as the Conclusions of Law below are dependant upon facts, the court finds facts consistent with those conclusions.
CONCLUSIONS OF LAW
1. The relevant provision of the Michigan Dealer Act, Mich. Comp. Laws Ann. § 445.1567, reads as follows:
(1) Notwithstanding any agreement, a manufacturer or distributor shall not cancel, terminate, fail to renew, or refuse to continue any dealer agreement with a new motor vehicle dealer unless the manufacturer or distributor has complied with all of the following:
(a) Satisfied the notice requirement of Section 10.
(b) Acted in good faith.
(c) Has good cause for the cancellation, termination, nonrenewal, or discontinuance. . . .
(3) If the failure by the new motor vehicle dealer to comply with a provision of the dealer agreement relates to the performance of the new motor vehicle dealer in sales or service, good cause shall exist for the purposes of a termination . . . under subsection (1) when the new motor vehicle dealer fails to effectively carry out the performance provisions of the dealer agreement if all of the following have occurred:
(a) The new motor vehicle dealer was given written notice by the manufacturer or distributor of the failure.
(b) The notification stated that the notice of failure of performance was provided pursuant to this act.
(c) The new motor vehicle dealer was afforded a reasonable opportunity to exert good faith efforts to carry out the dealer agreement.
(d) The failure continued for more than 180 days after the date notification was given pursuant to subdivision (a).
2. Under the Michigan Dealer Act, "good faith" is defined as honesty in fact and the observation of reasonable commercial standards of fair dealing in the trade. Mich. Comp. Laws Ann. § 445.1564.
3. There is no evidence that Infiniti acted dishonestly; and for the reasons set forth above, the court concludes that Infiniti observed reasonable commercial standards of fair dealing in connection with the issuance of the Notices of Default and Termination.
4. As set forth in the Act, "good cause" exists for the termination of a dealer agreement if the dealer fails to perform its sales or service obligations under the dealer agreement, the dealer was given written notice by the manufacturer of the breach, the dealer was afforded a reasonable opportunity to exert good faith efforts to carry out the dealer agreement, and the performance failure continued for more than six months (180 days) after the notice of breach. Mich. Comp. Laws Ann. § 445.1567(3).
5. For the reasons detailed supra, the court concludes that Lavery Infiniti "fail[ed] to effectively carry out the performance provisions of the Dealer Agreement" relating to sales and service. Mich. Comp. Laws Ann. § 445.1567(3).
6. In short, Lavery Infiniti's sales penetration was inadequate under both the standard penetration formula and the Adjusted Import Luxury measure.
7. Lavery Infiniti's CSI scores were routinely below Central Region Average.
8. The court has previously determined that Subsection 3(b) has been satisfied with respect to the Notice of Default issued to Lavery Infiniti. See Order Denying Pltfs.' Mot. for Summ. Judg., Feb. 26, 2002, at 6-7.
9. Accordingly, Infiniti satisfied the notice requirements of the Michigan Dealer Act.
10. Infiniti afforded Lavery Infiniti a reasonable opportunity to exert good faith efforts to carry out its obligations under the Dealer Agreement, including over eighteen months of assistance pursuant to the Dealer Improvement Program and the thirteen-month period between the issuance of the Notice of Default (September 15, 1998) and the Notice of Termination (October 26, 1999).
11. Lavery Infiniti's failure to adequately perform its sales and service obligations continued for more than 180 days after the date it received the Notice of Default.
12. The court therefore concludes that Infiniti had good cause to terminate the Dealer Agreement pursuant to the Michigan Dealer Act.
13. At the outset of trial, Plaintiffs asserted two theories as to how Infiniti allegedly violated the ADDCA: (1) by requiring Lavery Infiniti to achieve adjusted regional average sales penetration (the cure offered the dealership in the Notice of Default); and (2) by withholding co-op funding for the month of October 1997.
14. To establish a claim under the ADDCA, Plaintiffs must establish the following elements: (a) Lavery Infiniti is an automobile dealer and Infiniti is an automobile manufacturer as those terms are defined in the statute; (b) Lavery Infiniti and Infiniti had a manufacturer-dealer relationship embodied in a written dealer agreement; (c) Infiniti failed to act in good faith in terminating the dealership; (d) Infiniti did not have valid reasons for terminating the Dealer Agreement; and (e) Lavery suffered damages as a result of the conduct of Infiniti. is U.S.C. § 1221-1222; Northview Motors, Inc. v. Chrysler Motors Corp., 227 F.3d 78, 93 (3d Cir. 2000).
15. "Good faith" under the ADDCA is narrowly defined and does not mean simply a lack of fairness. Northview Motors, 227 F.3d at 93; Autohaus Brugger, Inc. v. Saab Motors, Inc., 567 F.2d 901, 911 (9th Cir. 1978); Fray Chevrolet Sales, Inc. v. General Motors Corp., 536 F.2d 683, 685 (6th Cir. 1976).
16. Rather, it means that Infiniti may not coerce or intimidate Lavery or make a wrongful demand that would have resulted in a penalty or sanction if not complied with. Autohaus Brugger, 567 F.2d at 911; Fray Chevrolet, 536 F.2d at 685.
17. The alleged coercion or intimidation must be actual; that is, the mere fact that Lavery Infiniti felt coerced or intimidated is not sufficient. Fray Chevrolet, 536 F.2d at 685.
18. Because a demand must be "wrongful" to violate the statute, the exercise of a legal right cannot amount to coercion, intimidation, or an improper threat under the ADDCA. Golden Gate Acceptance Corp. v. General Motors Corp., 597 F.2d 676, 680 n. 8 (9th Cir. 1979).
19. Accordingly, a demand by a manufacturer that a dealer achieve a reasonable annual sales goal or quota does not violate the Dealers' Day in Court Act. Autohaus Brugger, 567 F.2d at 912.
20. Likewise, a recommendation, endorsement, persuasion, or request that a dealer engage in more efficient operations, or sell more cars, is not coercion or intimidation and does not violate the Automobile Dealers' Day in Court Act. 15 U.S.C. § 1221 (c); Cabriolet Porsche Audi, Inc. v. American Honda Motor Co., 773 F.2d 1193, 1210-1211 (11th Cir. 1985); Autohaus Brugger, 567 F.2d 901, 911 (9th Cir. 1978).
21. Infiniti did not make a "wrongful demand" in violation of the ADDCA by requiring Lavery Infiniti to achieve regional average under the Adjusted Import Luxury because it was entitled to do so under the Standard Provisions of the Dealer Agreement, which allow Infiniti to: (a) establish "reasonable sales objectives . . . from time to time . . . as standards for performance," (DASP at § 3.B.(1)); and (b) "provide Dealer with a reasonable opportunity to correct the failure [to meet its obligations under the Dealer Agreement]." DASP at § I LB(2)(ii).
22. Infiniti's decision not to subsidize Lavery Infiniti's advertising efforts with co-op funds for a single month in 1997 did not violate the ADDCA.
23. Infiniti had no contractual obligation to fund Lavery Infiniti's advertising, through co-op funds or otherwise; rather, Lavery Infiniti was required to "actively and effectively promote" the sale at retail of Infiniti vehicles "through its own advertising and sales promotion activities" and to "establish and maintain its own advertising and sales promotion programs." DASP at §§ 3.A 5.B(3).
24. Mr. Muzzarelli's decision to withdraw co-op funds for a single month based on his concern that Lavery Infiniti's advertising would cause sales consultants to leave the dealership and tarnish the Infiniti brand image does not constitute a "wrongful demand" within the meaning of the ADDCA.
25. In any event, the one-time withdrawal of co-op funds did not cause Lavery Infiniti to change its advertised prices, as Lavery Infiniti advertised lower monthly lease payments following the reinstatement of co-op funding in November 1997.
26. The court concludes that in these circumstances, Infiniti's withdrawal of co-op funds for one month did not constitute a wrongful demand or otherwise exhibit a lack of good faith within the meaning of the ADDCA.
27. For many of the same reasons recited supra, the court concludes that Plaintiffs cannot carry their burden of proof on their claim that Infiniti breached the Dealer Agreement by requiring that Lavery Infiniti achieve average regional sales penetration.
28. To prevail on their claim, Lavery Infiniti had to prove each of the following essential elements: (1) the existence of a valid contract between Lavery Infiniti and Infiniti; (2) that Lavery Infiniti fully performed its obligations under the Dealer Agreement; (3) that Infiniti breached the Dealer Agreement; and (4) that Lavery Infiniti was damaged by Infiniti's breach. Carcau Co. v. Security Pacific Business Credit, Inc., 272 Cal.Rptr. 387, 395 (Cal.Ct.App. 1990).
29. Lavery Infiniti failed to establish at least two of the foregoing elements.
30. First, Infiniti did not breach the Dealer Agreement by requiring that Lavery Infiniti attain adjusted average regional sales penetration because the Dealer Agreement explicitly provided that Infiniti could establish reasonable sales objectives for Lavery Infiniti.
31. The Adjusted Import Luxury standard, which was adopted by Infiniti at Mr. Lavery's request and applied with his consent, was reasonable.
32. Likewise, Infiniti acted within its contractual rights in requiring that Lavery Infiniti cure its sales and service CSI performance defaults in the manner set forth in the Notice of Default.
33. Second, the breach of contract claim fails because Lavery Infiniti did not fully perform its obligations under the terms of the Dealer Agreement.
34. As the Sixth Circuit has emphasized, "Michigan law is settled: `He who commits the "first substantial breach of a contract cannot maintain an action against the other contracting party for failure to perform.'" Chrysler Int'l Corp. v. Cherokee Exp. Co., 134 F.3d 738, 742 (6th Cir. 1998) (internal citation omitted).
35. The same precept is recognized under California law. See DePalma v. Westland Software House, 276 Cal.Rptr. 214, 221 (Cal.Ct.App. 1990).
36. A breach is "substantial" where it goes to "the essential purpose of the contract." Chrysler Int'l Corp., 134 F.3d at 742-743.
37. In 1995, Lavery Infiniti had the lowest sales and market penetration percentages of any dealer in the Central Region and also ranked in the bottom ten of the Central Region in CSI.
38. By the inception of the Dealer Improvement Program in December 1996, the dealership was performing at only 54% of regional average under the Adjusted Import Luxury measure.
39. Lavery Infiniti accordingly had committed a substantial breach of its obligation to "actively and effectively promot[e]" the sale at retail of Infiniti vehicles prior to the inception of the Dealer Improvement Program, when Infiniti first requested that the dealership attain regional average penetration under the Adjusted Import Luxury measure to cure its performance deficiencies.
40. Furthermore, the obligation breached by Lavery Infiniti — to "actively and effectively promote the sale of Infiniti vehicles" — was an "essential purpose" of the Dealer Agreement between Infiniti and Lavery Infiniti.
41. To prevail on the claim that Infiniti breached the implied covenant of good faith, Lavery Infiniti had to establish the following: (1) a valid contract between Lavery Infiniti and Infiniti; (2) that Lavery Infiniti fully performed its obligations under the contract; (3) that Infiniti either subjectively lacked belief in the validity of its actions or that its conduct was objectively unreasonable; and (4) damage. See Carma Developers, Inc. v. Marathon Dev. Cal., Inc., 826 P.2d 710, 726-728 (Cal. 1992).
42. Lavery Infiniti did not meet its burden of proof on this claim for at least two reasons.
43. First, Infiniti did not act in bad faith in executing its obligations under the Dealer Agreement.
44. Lavery Infiniti offered no evidence at trial that Infiniti subjectively lacked a belief in the validity of its actions.
45. The court also has determined that Infiniti's decision to issue the Notice of Termination was objectively reasonable.
46. Second, Lavery Infiniti did not fully perform its obligations under the Dealer Agreement; as set forth supra, Lavery Infiniti was in substantial breach of the Dealer Agreement by the end of 1996.
CONCLUSION
For the foregoing reasons, the court concludes that Infiniti did not violate the Michigan Dealer Act or the ADDCA and did not breach the Dealer Agreement or the implied covenant of good faith and fair dealing by issuing the Notice of Termination. The court, having concluded that Plaintiffs are not entitled to relief on any of their claims, hereby ORDERS that judgment be entered in favor of Infiniti and against Plaintiffs with respect to each of Plaintiffs' claims.