Dealers Plan to Test Strength of Franchise Laws
Legal action is already planned against Chrysler and GM dealer reductions
By Brendan Moore
Chrysler dealers are unhappy about Chrysler’s plan to eliminate dealers while in bankruptcy and are banding together to fight the closures. State dealer organizations and the NADA (National Automobile Dealers Association) have kicked off a strong PR and lobbying campaign to fight the closures.
Right behind the Chrysler dealers are the GM dealers who are nervous about GM’s announcement that the company has a goal of reducing dealer count at GM from 6,246 dealers to 3,605 dealers by 2010.
The NADA launched ads in select publications two days ago that stated, among other things, that, “Cutting dealers at this time would do absolutely nothing to make either GM or Chrysler more viable. So why is your automotive task force demanding drastic cuts in the number of dealers?”
According to NADA figures, the GM and Chrysler plans mean the elimination of more than 3,000 Chrysler and General Motors dealerships employing at least 150,000 people.
The NADA has also asked all their dealer members to lobby their elected officials against the dealership closings.
I will tell you right up front that I am an interested party as to how this all gets resolved. I am interested because I want changes in the dealer franchise laws and I am interested because I want to see how the federal bankruptcy court Chrysler is in at this moment treats the state dealer franchise laws. My guess is that it will void Chrysler’s dealer agreements, and hold the company harmless against dealer suits brought under state law, but that is conjecture on my part.
Dealers, probably in class-action suits, will try to have state laws enforced against Chrysler, a defendant that is in federal bankruptcy court.
Scott Silverman, one of the attorneys at McCarter & English, a legal firm that specializes in dealer contract law, stated, “This is going to be the biggest week in the history of the U.S. auto industry as far as dealers are concerned”, in an article in the The Los Angeles Times earlier this week.
The outcome of this upcoming legal struggle is important, and I’ll tell you why.
GM is not in bankruptcy court yet, but if the bankruptcy court rebuffs Chrysler’s dealers, you can bet that will get GM’s attention. It is yet another compelling reason, on top of all the other reasons, for GM to file for bankruptcy protection. The closing of Oldsmobile cost GM over a billion dollars USD just in settlement fees to dealers and the price tag for closing all of the dealers GM wants to close now would easily exceed that number. But, not if bankruptcy indemnifies GM against the dealer suits brought under state franchise law.
And if GM and Chrysler get new dealer agreements that are less onerous for them, the other manufacturers will also want the same.
It also may open the way for different types of retailers to sell new cars, retailers that perhaps are not stuck in the same retailing construct as dealers currently. This certainly wouldn’t happen right away, but perhaps further down the road.
In the past, dealer groups have been quite effective in having it their own way. Auto dealers in every state have, through campaign contributions and ceaseless lobbying of state politicians, made it impossible for anyone except a dealer to sell new cars. In fact, in many states, it is a criminal act for any manufacturer to sell a new vehicle to anyone other than one of the state’s new-car dealers. And they have also been able to shape the legal language around just what constitutes a dealership and a new-car dealer, thereby ensuring that a “dealer” will look just like what a dealer looks like today. Lastly, they have also been extremely successful in making it very difficult for manufacturers to terminate franchises and brands.
In effect, the dealers have their own monopoly on new-car sales, supported by state statute.
From my point of view, it is time for this retail system to be restructured in a way that will be beneficial to both the consumer and the manufacturer. As it stands now, the franchise new-car dealer system has obvious benefits for only one constituency – the dealer.
I’ve heard all the arguments for decades about why dealers need protection, why they require all these laws regarding their business, why the manufacturer owes them everything, etc. I am unmoved for the most part.
It’s not that I want dealers to go away, but rather, I want to expand the type of businesses that are eligible to sell new cars. I see these future suits as a potential door to that change. Against new competitors, the good dealers will survive, just as all good business owners survive when they are faced with new competition.
So, as dealers file suit against Chrysler and GM, it is going to be very interesting to see how the state courts, and then the federal courts, treat these suits. These legal machinations may have far-reaching implications for the retail auto business for years to come.
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