The opinion of the court was delivered by: KAPLAN
LEWIS A. KAPLAN, District Judge.
Plaintiff Bronx Auto Mall, Inc. d/b/a Bronx Acura ("Bronx Acura"), seeks to enjoin defendant American Honda Motor Co. ("AHMC"), U.S. distributor of Acura automobiles, from terminating Bronx Acura's dealership. Bronx Acura claims that AHMC decided that it established too many dealerships when it first introduced the Acura into the U.S. market, that it no longer wishes to have a dealer in the Bronx, and that it made unreasonable demands on Bronx Acura in order to establish a pretext for terminating its franchise. AHMC responds that Harold Schlanger, the principal of Bronx Acura, has decided to leave the business in the foreseeable future, that he stubbornly refused to comply with reasonable requests for facilities maintenance and improvement in order to maximize his cash flow, that Bronx Acura's facilities no longer remotely approach standards reasonably set by AHMC for its Acura dealers, and that AHMC therefore was entirely justified in terminating the franchise. Perhaps not surprisingly, there is a certain amount of truth on both sides. This is the Court's decision after an expedited bench trial.
Introduction of Acura into the United States
AHMC introduced its Acura line of automobiles into the United States market in 1986 in an effort to open a "second channel," i.e., a line of luxury automobiles. In order to do so, it was necessary to establish a nationwide network of dealers to sell and service Acuras. It entrusted the task of developing this network to Daniel G. Crowe, who remained in charge of AHMC's Acura market representation activities through the time of trial and who previously had similar responsibilities in AHMC's Honda division. (Tr. 105-06; DX 1, P 1)
Hondas and Acuras are priced differently. The former is targeted at cost-conscious consumers while the latter is in the luxury or near-luxury segment of the market. In consequence, the locations in which one might wish to have Honda dealerships do not necessarily correspond to those one might regard as appropriate for Acura dealerships. AHMC, however, did not have market data pertinent to selecting locations for Acura dealerships. Nevertheless, it was in a hurry to establish a market presence for Acura. Mr. Crowe was given a target of opening 600 dealerships. (Tr. 113) In view of the time pressure under which he was operating, he used the data that AHMC had used in making market representation decisions for Honda automobiles to determine where to locate Acura dealerships. He adopted as a rule of thumb the goal of locating six Acura dealers in each area in which AHMC had nine Honda dealers. (Id. 107-12) As Mr. Crowe admitted at trial, this resulted in opening Acura dealers in markets that were less than ideal for that product. (Id. 113) Moreover, although AHMC had a facility planning guide for assessing proposed dealer facilities, those guidelines were ignored, at least on occasion, in AHMC's haste to penetrate the market. In addition, its haste led it to give preference in awarding franchises to known quantities -- dealers who, like Mr. Schlanger, already had Honda franchises. (Id. 107)
AHMC's Decision to Franchise Mr. Schlanger
The Schlanger family has been in the automobile business in the Bronx for almost 50 years. Mr. Schlanger's father began selling used cars in the Bronx after the Second World War. In time, Mr. Schlanger and his brother, Martin, went into the family business. In 1963, Martin Schlanger obtained Volvo and Saab new car franchises while Harold Schlanger ran the used car business. Harold obtained a Mazda franchise in 1973 at about the same time that Martin obtained a Honda franchise in Manhattan, at which point it appears that the two brothers went their separate ways. In 1975, Harold obtained a Honda franchise in the Bronx. In time, he acquired Hyundai, Volvo, Buick, Chevrolet, and Suzuki franchises as well.
Shortly after AHMC introduced the Acura into the U.S. market, Mr. Schlanger decided to add an Acura dealership to his collection and applied for a franchise. In order to understand the present controversy, it is important to focus on what Mr. Schlanger's facilities were at the time he opened discussions with AHMC and what he proposed to do in order to obtain an Acura franchise. Particularly salient is the arrangement of the parts and service areas in relation both to one another and to the Acura showroom.
At the time Mr. Schlanger approached AHMC with regard to Acura, many of his operations were located in premises at 2633 through 2641 East Tremont Avenue in the Bronx, which are the buildings at the heart of this case. As the following diagram shows, all of the Honda facilities were in 2641, which were leased premises. The Hyundai sales and service facilities were in 2633 and 2637. The Mazda, Volvo and Buick service departments were in 2639. There was a large parking lot, with frontage on East Tremont Avenue and facing Silver Street, adjacent to 2633.
Mr. Schlanger proposed to build an entirely new showroom for Acuras on the site of the parking lot adjacent to the Hyundai showroom and to dedicate the service and parts facility at 2637 East Tremont Avenue, previously used for Hyundai service, exclusively to the service and parts departments of the proposed Acura dealership.
Thus, as the diagram shows, Mr. Schlanger proposed an arrangement in which an Acura customer seeking service would have to drive through a narrow passageway squeezed between two other buildings to reach the service area. The parts department would be accessible only by walking through the repair shop.
AHMC inspected the proposed parts and service facilities in or about January 1987. Tom Daly, then an Acura district sales manager, completed a form entitled "site plan summary" which is notable for several reasons. First, Mr. Daly wrote on the form that parts would "have to be delivered into [the] service dept." Second, he circled the word "none" next to an item that reads "influence of Facility Planning Guide." Third, he wrote that the area of the proposed parts department, which already was in existence and has not changed during the relevant period, was 3,797 square feet -- a figure above the AHMC guideline area, but which far exceeds the actual area of the parts department.
(PX 1 at AH 0542; see Tr. 60)
Mr. Daly's report was not the only source of AHMC's knowledge of the proposed service and parts facilities. The file contains also a proposed site evaluation, dated June 22, 1987, which was filled out by William Lundy, then a district sales manager and now the Acura zone sales manager for the northeast region, which includes the Bronx,
and approved by Mr. Crowe on July 21, 1987. (PX 2 at AH0606-27) The evaluation explicitly stated that parts and service would be at the then-existing Hyundai parts and service location at 2637 East Tremont Avenue. The document, moreover, contained a number of photographs of the building, its interior, the neighborhood, and other points of interest. Among the photographs was a picture of the service area and the parts counter with the label "parts department behind this wall and counter window." (Id. AH0618) Thus, it was perfectly obvious from Mr. Lundy's site evaluation that the only access to the parts counter would be through the service area. (See Tr. 60-67, 94-95) As Mr. Lundy indicated at trial, he left Mr. Schlanger with the clear impression that the facility was entirely acceptable to Acura subject to some purely cosmetic work.
(Tr. 320-21; see also id. 94-95)
The application file contains also a brief evaluation of the market dated July 19, 1987. It stated, among other things:
"It is unlikely that the income levels in the Bronx will increase greatly, which would force the dealer to attract more consumers from the surrounding market areas. People are not willing to travel to the Bronx because of its reputation for crime and drugs. There should be enough people working their [sic] however to purchase the upscale model lines. But to say people from the surrounding markets would travel to the Bronx to buy $ 25,000 to $ 30,000 automobiles would be stretching it." (PX 2 at AH0604)
Mr. Crowe noted his approval, subject to construction of the proposed new showroom, immediately below this typewritten paragraph.
AHMC definitively approved the issuance of the franchise to Mr. Schlanger in August 1987. As the foregoing shows, it granted the franchise despite its knowledge that the service and parts facilities would be substandard and that the dealership would be located in an area of dubious attractiveness. The Court finds that it did so in order to meet the 600 dealer goal that Mr. Crowe's superiors imposed upon him.
The New and Modified Bronx Acura Facilities
Following AHMC's approval, Mr. Schlanger built the promised Acura showroom, relocated certain of his other car lines to make way for Acura, and made the promised cosmetic changes to the service and parts departments at an overall cost in excess of $ 500,000. (Tr. 72, 96) Upon completion, the layout of the East Tremont Avenue location was as shown below:
The Change in Acura's Strategy
Mr. Crowe never came close to signing up 600 Acura dealers. In February 1988, AHMC evidently reached the conclusion that its strategy for adding dealers had been a mistake. It imposed a moratorium on issuing new franchises. (Tr. 114) It peaked with 301 Acura dealers in 1989,
just when its nationwide unit sales also peaked at 142,100 vehicles. (PX 76) For years thereafter, car sales by the Acura division were in a steady downward trend, with unit volume falling to 108,200 in 1993, a 23.9 percent decline.
This decline had a dramatic impact on Acura dealers. The average number of vehicles sold per dealer fell from 506 in 1987 to 375 in 1993. The proportion of dealers who were losing money rose to almost 60 percent before falling back into the 40 to 50 percent range. The number engaged in "dualing" -- handling other new car lines -- rose, to AHMC's distress. (PX 76; Tr. 137, 160) Acura dropped to 25th among U.S. car lines in the level of dealer satisfaction.
(Tr. 152-54) The message to AHMC was clear -- there were too many dealers chasing too few customers. Hence, although the moratorium on issuing new franchises formally was lifted in 1991, AHMC has issued only two since then. (Tr. 114-15) The trend has been in the other direction, with the dealer count dropping to 291 in 1992 and 283 in 1994. (PX 76)
In 1993, AHMC appointed Richard Thomas as the new head of the Acura division in an effort to turn it around. (Tr. 274) Although the date at which the process began is not clear, AHMC concedes detailed analysis of cutting the number of dealers, already a foregone conclusion, got into full swing on Thomas' watch. In the second half of 1994, the Acura division began Project 99, which specifically looked at reducing the number of dealers. (E.g., Tr. 255, 276) Project 99 in turn gave way to an outside study, called the Fast Track Program, which still is underway and which is looking at ways to reduce the number of dealers and eliminate dualed franchises, among other means of improving Acura's performance. (E.g., Tr. 154-62, 257; PX 101)
AHMC argues that neither Project 99 nor the Fast Track Program had reached any conclusions by the time Bronx Acura was terminated and that the decision to terminate Bronx Acura was unrelated to dealer cutbacks. The Court accepts that no definitive conclusions had been reached by the time of trial as to the optimum number or locations of Acura dealers. Nevertheless, the Court does not fully credit the testimony of the AHMC witnesses on this point. It finds that the Acura division stopped adding new dealers and, by the time of the events in question here, had decided to eliminate dealers, especially dual dealers and dealers in less desirable locations, whenever possible. (See, e.g., Tr. 161-62, 175-76) AHMC, moreover, was very conscious of the potential limitations imposed by state franchise laws on its ability to eliminate dealers. (Id. 157) Hence, the mindset was an opportunistic one: if a less than desirable dealer could be portrayed as having given grounds for termination unrelated to a naked desire to cut the number of Acura dealers, AHMC was very much interested in taking advantage of the situation.
Bronx Acura's Relationship with Acura -- 1987 to 1994
Bronx Acura's history with AHMC paralleled the Acura division's performance. Initially, it was very successful. In 1989, AHMC renewed the franchise to run until January 31, 1994. AHMC did not request any facilities upgrades at the time of the renewal. But amity was not to prevail. As time went by, Bronx Acura's initial success turned into a declining sales trend, a decline even steeper than that experienced by the Acura division. (DX 12, at 51; DX 2, P 5) Other irritants came to the fore as well.
Perhaps spurred by Acura's declining popularity and its own less than ideal location, Bronx Acura competed aggressively. As Mr. Lundy foresaw before the franchise was issued, it sought to attract customers from outside the Bronx. In 1991 and 1992, Acura division zone personnel admonished it for "distress" pricing and advertising -- i.e., price cutting or making price a focus of competition -- on several occasions. (PX 21, PX 23, PX 29, DX 50, DX 55; see also Tr. 307-11; PX B, PP 26-27) The dealership was known to be selling a majority of its new vehicles to customers outside its primary market area (Tr. 311-12) -- in other words, it was competing hard with surrounding Acura dealers, a matter that the Acura division watches closely. (Id. 182-83)
Initial Facilities Issues
In view of the current controversy, one might expect that Bronx Acura's facilities, never ideal from AHMC's point of view, would have been an issue as well. But they were not, at least to any substantial extent. To be sure, Acura division personnel, who visited the facility regularly, complained on a number of occasions about the cleanliness of the showroom and restrooms. (PX 28 at AH1428, PX 29, DX 39, DX 51, DX 53, DX 55) A majority of the contact reports that they routinely prepared following such visits, however, made no adverse comments about the facilities. (PX 15, PX 23, PX 24, PX 31, PX 37, DX 36, DX 50, DX 52, DX 63). Indeed, a facility audit conducted ...