The Power of Association: Auto Dealer Protection Laws

Date: August 16, 2012

Takeaway: Through effective trade associations and lobbying efforts, during the last century automobile dealer franchises in the United States convinced state governments to give them significant protection against commercial abuse or unfair dealing by the manufacturer or supplier franchisors. Franchisees in other industries could learn from that example.

The strength of the laws protecting dealer franchises was demonstrated by a recent New York court decision in Audi of Smithtown, Inc. v. Volkswagen Group of America, Inc.

The case was brought by one set of Audi dealers charging that Audi's wholly-owned subsidiary, VW Credit, Inc. discriminated in favor of new dealers to the detriment of the incumbents who brought the case. At issue were incentives that VW Credit put in place for dealerships to purchase vehicles returned by customers at the end of their leases. (For example, if Joe Brown leases an Audi Quattro for 3 years, the vehicle is owned by VW Credit during the lease, so at the end of 3 years, VW Credit has a “pre-owned vehicle” to sell.) The incentive programs were based on the proportion of returning off-lease vehicles that a dealership purchased. However, since incumbent dealerships had more leases, they had more opportunity than new dealers to benefit from the incentives.

To level the playing field, VW Credit automatically granted new dealers a more favorable level of available discounts and bonuses (known as “Champion Level”) for the first three years of the dealership. While this program seems to have a logical business justification – making it easier to open a new dealership, which increases Audi's presence in the local market -- the Court ruled instead that it constituted price discrimination against the incumbent dealers. New York's law provides: “It shall be unlawful for any franchisor . . . [t]o . . . sell directly to a franchised motor vehicle dealer . . . motor vehicles . . . at a price that is lower than the price which the franchisor charges to all other franchised motor vehicle dealers.” N.Y. Vehicle & Traffic Law § 463(2)(aa).

Audi argued that VW Credit is not a “franchisor” under the statute and therefore no violation could have occurred. The dealers had that covered, however, because in 2008 the New York legislature amended the statute to add references to “captive finance sources” so as to prohibit a motor vehicle franchisor from using “any subsidiary corporation, affiliated corporation, captive finance source, or any other controlled corporation, company partnership, association or person to accomplish what would otherwise be unlawful conduct under this article on the part of the franchisor.” N.Y. Vehicle & Traffic Law § 463(2)(u).

The New York laws prohibiting price discrimination and the use of shell entities to get around the law are similar to those in others states that protect car dealers in their relationships with their franchisors. In Maryland, for instance, the law requires manufacturers to act honestly and observe reasonable commercial standards of fair dealing in performance or enforcement of the franchise agreement. They are also not allowed to:

  1. Coerce dealers to do something not required by their franchise agreements, or make them agree to material modifications (for instance, changes to their purchasing or performance requirements), unless the changes apply to all other Maryland franchisees of the same manufacturer.
  2. Stop a dealer from offering other manufacturers' products at the same facility through a franchise agreement granted by another manufacturer.
  3. Require a material change to “the dealer's facilities or method of conducting business if the change would impose substantial financial hardship on the business of the dealer.”
  4. Require a franchisee to adhere to performance standards unless, as applied, they are “fair, reasonable, equitable and based on accurate information.”
  5. Refuse to permit an individual to be the responsible person of the dealer “unless the individual is unfit due to lack of good moral character or fails to meet reasonable general business experience requirements” -- and the manufacturer has burden of proving unfitness.
  6. Unreasonably withhold consent to a request to transfer a franchise, and an aggrieved franchisee has a right to an administrative remedy to contest a manufacturer's refusal to consent.
  7. Terminate the dealership for any reason without payment to the dealer of compensation for various types of assets and franchise-specific improvements.
  8. Require the dealer to reimburse it for attorneys' fees in any dispute involving the franchise.

Maryland Transp. Code Sections 15-206.1 through 15-212.2. In addition, aggrieved franchisees have a right to bring an action for damages and reasonable attorneys' fees incurred in vindicating their rights. Id. at Section 15.-213.

These statutes are not a cure-all for auto dealers who fail to properly execute their responsibilities. And, in any event, the 2009 bankruptcy proceedings of General Motors and Chrysler show that extreme economic circumstances can trump state statutory rights.

But overall, the various state laws protecting automobile dealers show the advantages of a century-old industry, widely dispersed, and generally liked in their local communities. The auto dealers have been able to put their case to their state representatives and win some good protections.

This is an example franchisees in other industries could learn from.