Overview
In April 2024, the Ohio Court of Appeals (“Court”) affirmed American Honda Motor Co.’s (“Honda”) rejection of Sunrise Honda’s (“Sunrise”) purchase of Jack Matia Honda (“Matia”), largely based on Sunrise’s poor performance as measured by Honda’s sales effectiveness metric.[1]
Honda’s sales performance metric is called Retail Sales Effectiveness (“RSE”). According to the Court, Honda calculates RSE as follows:
A dealer’s RSE is determined by comparing the dealer’s ‘Expected Retail Sales to its Retail Sales.’ To determine a dealer’s expected retail sales, Honda initially determines the market share it achieves in various competitive segments in the dealer’s state. A competitive segment is a grouping of vehicle models that includes at least one Honda model as well as other similar vehicle models. Honda then multiplies the total number of retail industry registrations in a particular competitive segment that are registered to addresses within the dealer’s Area of Statistical Analysis (“ASA”) by Honda’s statewide market share in that segment to determine the dealer’s expected sales in that segment. The dealer’s expected retail sales in each segment are combined to determine the dealer’s total expected retail sales. The dealer’s total expected retail sales are compared to the dealer’s actual retail sales to determine the dealer’s sales effectiveness. If a dealer sells the exact number of vehicles expected, it will have an RSE of 0 percent. If the dealer sells more vehicles than expected, it will have a positive RSE, and if the dealer sells fewer vehicles than expected, it will have a negative RSE.
(Op. ¶4). Honda’s RSE is not unlike sales effectiveness measures used by other vehicle manufacturers.
On May 22, 2019, Sunrise sent notice of the proposed purchase of Matia to Honda. On June 3, 2019, Sunrise sent another letter to Honda challenging its use of a statewide metric for a few reasons. First, Sunrise claimed that domestic manufacturing plants in northern Ohio for Ford, GM, and Chrysler skewed preferences in that part of the state for domestic brands. Second, Sunrise claimed that Honda’s manufacturing plant in central Ohio increased preferences for Honda in central Ohio. Third, Sunrise noted that Honda did not have a full-sized pickup truck, which was popular in northern Ohio. Fourth, Sunrise asserted that the Cleveland airport’s rental agency presence caused an increase in registrations in its market. (Op. ¶11).
On June 20, 2019, Honda sent Sunrise and Matia a letter rejecting the proposed purchase. Honda noted in the letter that Sunrise’s RSE, based on state averages, was ranked 46th out of 47 Ohio dealers in 2017 and 2018. Honda also addressed each of the concerns that Sunrise asserted regarding Honda’s RSE. To address Sunrise’s concerns about the use of a statewide metric, Honda noted that Sunrise’s sales performance was similarly poor when it was compared to dealers in northeast Ohio and the Cleveland market. (Op. ¶¶12-13). By isolating on dealers in northeast Ohio and Cleveland, this seemingly addressed Sunrise’s concern about the location of a Honda plant in central Ohio. To address Sunrise’s concern about the domestic manufacturing plants in northern Ohio, Honda also calculated RSE, removing all “domestic brands” from the calculation, and Sunrise still ranked last in Ohio.
Sunrise filed a protest before the Ohio Motor Vehicle Dealers Board (“Board”). During the protest hearing, a Honda witness dispatched Sunrise’s third and fourth points by explaining that neither full-sized pickup trucks nor rental car fleet registrations are included in Honda’s RSE. (Op. ¶15).
Ultimately, the hearing examiner found that Honda had good cause to reject Sunrise’s purchase, and the Board adopted the hearing examiner’s decision. The Ohio Court of Common Pleas affirmed the Board.
Sunrise then appealed to the Court of Appeals and asserted essentially two errors[2]: (1) that the Board failed to consider all good cause factors, including Sunrise’s proposed management team for the new dealership; and (2) that Honda’s turndown was based on Sunrise’s failure to achieve aspirational goals and that RSE did not fairly and objectively measure Sunrise’s performance. Sunrise also asserted that Honda failed to consider local factors, as other courts have done, referencing the Beck decision.[3] (Op. ¶¶28, 40).
The Court rejected all of Sunrise’s errors and affirmed the Board’s decision. The Court rejected Sunrise’s first claimed error because it had not provided Honda with any information about the proposed management team. The Court rejected the second error because “Honda’s adjusted RSE metrics, which accounted for local market conditions, constituted reliable, probative, and substantial evidence demonstrating that Honda had good cause to turn down the proposed transfer to Sunnyside.” (Op. ¶52).
The Court’s decision confirms the importance of a motor vehicle manufacturer’s performance metrics in managing issues in its dealer network, including with respect to determining whether to approve a buy-sell. Similarly, this decision reinforces the importance of defending these performance metrics.
BFKN’s Motor Vehicle Group will continue to monitor significant decisions affecting the industry.
[1] Kirtlund C. Frye et al. v. American Honda Motor Co., Inc. et al., No. 23AP-490 (Ohio Ct. App. Apr. 23, 2024) (“Op.”).
[2] Sunrise asserted three errors, but the Court consolidated its consideration of the second and third errors regarding sales effectiveness.
[3] Beck Chevrolet Co. v. Gen. Motors, LLC, 27 N.Y.3d 379 (Ct. App. NY 2016).