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Latest Trends in Motor Vehicle Franchise Legislation

By Richard N. Sox

Latest Trends in Motor Vehicle Franchise Legislation

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State motor vehicle franchise laws continue to be the primary source of protection for motor vehicle dealers against abusive tactics by their manufacturer/distributors.  In that regard, it is critical that motor vehicle dealers support their State and metro dealer associations with their time and money in continuing to update the franchise laws.  With new challenges seemingly arising at every turn, let’s look at some recent legislative changes made by states to address those issues.

Vehicle Recalls

For decades, Federal law has required new vehicle manufacturers to reimburse dealers for the carrying costs on vehicles which must be held in inventory due to an outstanding recall.  The reimbursement rate is the equivalent of one percent (1%) of the vehicle’s MSRP to be paid monthly. However, Federal law never has addressed a dealer’s carrying costs on preowned vehicles required to be held in inventory due to an outstanding recall.  

Over the last several years the number of preowned vehicles subject to a stop-sale recall has increased dramatically due to a combination of fraudulent behavior on the part of vehicle manufacturers and heightened regulatory scrutiny of defective parts used in vehicles.  This combination of events has resulted in many manufacturers being quicker to issue recall notices for certain vehicles while not having a replacement part or repair for the defective part available at all or, at a minimum, not available in the quantities necessary to get those vehicles back on the road.

A number of states of addressed this issue by passing franchise laws which provide that the manufacturer/distributor must pay dealers a percentage of the vehicle’s black book value on a monthly basis until such time as a repair is available to the dealer.  The reimbursement rate ranges from 1% to 2.5%.  In exchange for receiving reimbursement for the carrying costs of recalled preowned vehicles, some legislatures have gone further by requiring dealers to perform recall checks on preowned vehicles before selling that vehicle (unless it is a stop-sale recall in which case the vehicle must remain in inventory) and on any vehicle brought in for service.   The dealership must then provide notice to the customer of any outstanding recalls on the vehicle.

Dealership Facilities

Manufacturer facility programs are certainly not a new problem for dealers.  Those programs which require an image upgrade, facility size expansion or both have been previously addressed by many states by way of a prohibition on any “unreasonable” facility requirement.  Of course, the manufacturers/distributors use per vehicle incentive programs as leverage to make it difficult for dealers to avoid the facility upgrade by arguing that it is unreasonable. To counter this leverage, some states have prohibited manufacturer/distributors from offering a per vehicle incentive associated with a facility requirement that is not reasonably and practically available to dealers.  Even with that protection, many dealers find it difficult to litigate with their manufacturer over the reasonableness of the incentives.

As a result, states are now adding a provision to the franchise laws which protects dealers from being forced to upgrade their dealership within some period of time, typically 7-10 years, from the last manufacturer required upgrade.  Most importantly, under this provision the manufacturer must continue to pay the dealer all facility incentives that other dealers may be eligible for during the length of the grandfather period.  In this way, the dealer is not placed at a competitive disadvantage by having new facility incentives withheld until a new upgrade is completed.

Sales Performance

Many dealers have heard of the Beck Chevrolet case heard in New York last year.  In that case, the Court found (and appellate courts upheld) that GM’s sales performance formula, known as Retail Sales Index, failed to take into account local market circumstances in gauging the sales performance of the dealership.  Dealers have known for a long time that most manufacturers’ sales performance formulas are simply based upon average market share in the State, Region or Nation and do not take into account a dealer’s local market circumstances such as demographics, income levels, shopping patterns, etc.

Accordingly, several states have adopted specific franchise law provisions governing performance criteria – in some cases criteria beyond sales performance.  Those provisions in essence adopt the findings of the Beck court by prohibiting any performance criteria which does not take into account the dealer’s local market circumstances.

Subscription Programs

One of the most recent challenges to dealers is the manufacturers’ development of “subscription programs” through which retail consumers can pay a monthly fee in exchange for use of a select group of vehicles.  These subscription programs clearly take the place of a sale or lease of a vehicle which would have otherwise been made by a franchised dealer. However, because these programs most closely resemble a rental program as versus a sale or lease, the vast majority of state franchise laws prohibiting a manufacturer from selling or leasing vehicles direct to retail consumers do not apply.

A handful of states are proposing new franchise legislation that would prohibit a manufacturer or related entity from not only selling and leasing directly to the consuming public but also from providing vehicles at retail through a subscription like program.  The only state to successfully pass such legislation thus far is Indiana which phrased the provision as prohibiting a manufacturer or distributor from being the “retail contact through which the right of use for a new or used vehicle is obtained.”