James A. Byrne federal courthouse in Philadelphia. (Photo: Paul D'Annunzio/ALM)

A federal appeals court has revived a lawsuit over an incentive plan that gave some Mazda dealerships a discount on the cost of new cars.

The U.S. Court of Appeals for the Third Circuit found a lower court judge erred when he concluded that the New Jersey Coalition of Automotive Retailers lacked standing to sue on behalf of its members, the appeals court ruled Tuesday.

The suit concerns the Mazda Brand Experience Program, which provides dealers different levels of financial incentives depending on their level of capital investment in their dealership, whether they have exclusive Mazda facilities or a dedicated general manager for Mazda sales, among other things. The coalition's suit claimed the incentive program creates unfair competitive damages for certain dealers, in violation of the New Jersey Franchise Practices Act.

U.S. District Judge Brian Martinotti dismissed the case in July 2019, finding that because 11 of the 16 Mazda dealers that are members of the coalition receive incentives under the program, and because the suit seeks to enjoin implementation of the incentive program, the suit is in conflict with the dealers' interests.

Third Circuit Judges Kent Jordan, L. Felipe Restrepo and Morton Greenberg said Martinotti's reading of the case was too narrow. The panel said three Mazda dealers receive the highest tier of incentives and eight others receive lower levels of incentives.

"We see no reason to dismiss the possibility that the eight dealers who enjoy lower tiers of incentives would forgo such incentives in order to prevent the creation of three 'super' dealers who clearly have a competitive advantage over all other Mazda dealers," Greenberg wrote. "In fact, the very declarations on which the Court relied in granting the motion to dismiss suggest this view of the complaint. Indeed, one of the Mazda dealers declared that it qualifies for a lower tier of incentives under the [incentive program], but nevertheless supports the lawsuit."

Daniel Kluska of Wilentz, Goldman & Spitzer/courtesy photo

Daniel Kluska of Wilentz, Goldman & Spitzer in Woodbridge argued for the coalition. Jessica Ellsworth of Hogan Lovells in Washington, D.C., argued for Mazda. Neither responded to a request for comment about the ruling.

The panel said it's plausible that many of the Mazda dealers regard the capital investment requirement as financially unjustified but nonetheless feel pressured to participate in the program due to competitive disadvantages created for nonparticipants. Although Mazda points out that five dealers submitted declarations in opposition to the suit, five is not a majority of the 16 Mazda dealers, the panel said.

"Construing the complaint most favorably to the Coalition, we see little support for the court's conclusion that the Coalition is acting in conflict to the interests of its members," Greenberg wrote for the panel.

Jessica Ellsworth of Hogan Lovells/courtesy photo

The incentive plan, which went into effect in July 2018, gives dealers up to 6.5% off the cost of vehicles. A facility that sells only Mazdas, has a general manager who is exclusive to Mazda, and meets various design factors gets 4.5% off. Dealers that don't have a Mazda-only general manager but meet the other facility factors get a 2.8% incentive, though dealers that sell Mazdas and another brand forfeit the entire incentive. Dealers who comply with Mazda's "customer experience" criteria get a 2% incentive.

The suit claims that charging varying amounts to dealers for inventory and its less-favorable terms for dealers selling two or more brands of vehicles violate the state franchise law. The appeals court said it took no position on that question but limited its findings to the conclusion that the coalition has associational standing to bring the case.