Dealers Plan to Test Strength of Franchise Laws

Legal action is already planned against Chrysler and GM dealer reductions

By Brendan Moore

05.08.2009

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.

COPYRIGHT Autosavant – All Rights Resrved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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6 Comments

  1. I think I’m on your side, but I don’t know a lot about this subject. It seems complicated from a legal standpoint, but as far I can tell, Chrysler dealers are going to sue Chrysler under the state laws for closing their dealerships, but Chrysler is in bankruptcy court, so the judge may tell the dealers to get lost.

    I can see if Chrysler wins against the dealers, then GM would want to go bankrupt too.

    Does that mean the Chrysler after bankruptcy can do a new agreement with their dealers that is better for Chrysler? I don’t know how bankruptcy works exactly. Can the dealers say no? What about the state laws, will they change then? Or do the dealers have to change them?

  2. I agree, but this is what will actually happen:

    The FEDERAL bankruptcy court will throw out the STATE dealer agreements between Chrysler and the dealers.

    GM will jump for joy and follow Chrysler’s lead.

    But the states will bow down to their dealers and change nothing, consumers and auto companies be damned. Chrysler and GM will get out of their current dealer agreements, but the ones that replace those will be exactly like the ones before.

    GM and Chrysler will save billions now, but the state franchise laws will not change at all and the surviving dealers will still have it the just the way they want it. And that isn’t the way that the manufacturers and consumers want it, but I think you underestimate the vast political power of the dealer groups and their desire to protect their sweet, legally protected deal.

  3. So how is it that places like Costco now sell new cars? Do you see the business moving this way? Why not a direct-to-consumer business model? that would cut a lot of costs.

  4. They do not sell the cars . Adealer actually sells the car and they charge dealers a fee to be on the program

  5. I spent 53 years in the car business. Everything from detail person to Dealer. The relationship between the manufacturer and the dealer is the only one I know of where there is a constant battle between the factory and the dealer. The factory thinks the dealers are ignorant and they lie a lot. The dealer is lost in the morass of terms and conditions. (and the lies) It is really a question of who can screw who to gain the most.

  6. No Acumen should try being an oil company dealer/franchisee. Never being a new car dealer/franchisee I wouldn’t bet the farm on it, but would bet a considerable sum that new car manufacturing executives wear haloes as compared to the head gear worn by oil company executives.

    This is what I bet will happen. The car manufactures will cut their dealer/franchisees by one-third to one-half. The remaining dealer/franchisees will have visions of (sugar plums)all the additional new car sells dancing through their heads. The additional sells will come as the profit margin per unit drop.

    Soon the dealership will have to move two to three times as many new units as it does today. The car manufactures might even open a few company operated dealerships, just to control the market.

    With a little luck, the dealer/franchisee should be able to make the same net profit then as he or she does today.

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