The state motor vehicle franchise laws may have something to say about that
It was reported last week that Mercedes Benz USA is taking over the distribution of smart vehicles from Penske Automotive. The problem, of course, is that Mercedes Benz USA has announced that it does not intend to continue with the 21 smart dealerships, which do not have Mercedes products. Many of these dealerships have invested hundreds of thousands, if not in excess of a million dollars, to open and operate their smart franchises in an imaged facility. There has been no official discussion of what Penske Automotive or Mercedes Benz USA intends to do to compensate these dealers for the unilateral termination of their franchise.
The first question that must be asked is whether a distributor of vehicles in the United States can simply transfer its distribution rights to another entity with the effect of summarily, and without recourse, terminating the underlying franchise agreements. In most states, the answer can be found within the motor vehicle franchise laws.
In a number of states, a change in distributor may not adversely affect the rights of dealers to continue to sell and service the subject vehicles. Instead, in these states the new distributor is required to offer a franchise agreement to dealers, which is substantially similar to the franchise agreement entered into with the prior distributor. Non-Mercedes smart dealers must determine if they reside in a state with this protection and then must exercise their rights by placing both Penske and Mercedes Benz USA on notice of the dealer’s right to a continuing smart dealer agreement with Mercedes Benz USA.
If a dealer is not in a state that requires the smart franchise continue despite a change in distributor then there may be other powerful franchise protections available. Most states have beefed-up the benefits a dealer is entitled to receive if their franchise is terminated. In addition to the standard repurchase of vehicles, parts and tools, many states have added other benefits to the list. For example, current franchise laws in some states require the payment of the equivalent of 12 month’s rent to the dealer for the facility space associated with the smart franchise. In other states, upon termination a dealer is entitled to the fair market value of the smart franchise as of the day of the termination announcement or looking back for some period (i.e. 12 months) whichever results in a higher fair market value calculation. Lastly, some states have recently enacted franchise laws which require the dealer to be reimbursed for facility expenses incurred within recent years, say in the last five years. This provision alone could involve substantial monies to be paid by Penske to the terminated smart dealers in that the smart franchise was launched as recently as 2008. Again, dealers who enjoy enhanced termination benefits under their franchise laws must make a written demand to Penske for payment of these items.
For those non-Mercedes smart dealers who find themselves in a state that provides no enhanced termination benefits beyond the standard repurchase of vehicles, parts and tools do not despair, there is hope.
In virtually every state’s motor vehicle franchise laws there is prohibition against the termination of a franchise without the manufacturer/distributor showing “good cause.” The only question, which remains then is how your state law defines “good cause.” Most, but not all, states define “good cause” for termination of a franchise as some breach of the dealer agreement by the dealer. In the case of smart, of course, there has been no accusation that the non-Mercedes smart dealers have not performed under their dealer agreement.
Instead, the only reason that has been given for the elimination of this group of smart dealers is that they do not also have a Mercedes franchise. If a dealer is successful in arguing that his/her smart franchise was wrongfully terminated (i.e. without the requisite cause) then the result will be the dealer will be permitted to seek all damages which flow from the termination. This means that these dealers will be able then to pursue some of the same “termination benefits” as dealers with enhance benefits built into their franchise laws. smart dealers prevailing in a wrongful termination claim will be able to seek the fair market value of the franchise that has been lost, the unrealized portion of the investment made in the dealership and the cost of continuing obligations of the smart franchise such as rent payments under a facility lease that cannot otherwise be terminated.
As I have repeatedly shared with you, in situations where dealers are pitted against their more powerful distributor or manufacturer, knowledge is your best weapon. smart dealers need to be actively engaged in determining what rights they have under their franchise laws to either continue with the smart franchise or to obtain reimbursement for the cost of establishing the franchise and losing the going-forward value of the franchise.
It is our understanding that Roger Penske and his smart management team intend to meet with the non-Mercedes dealers to discuss their termination. It is critical that these smart dealers be fully informed as to their legal rights and be prepared to state their case to Mr. Penske in these meetings. I can assure you that Mr. Penske will be well-prepared to push his own agenda on the soon-to-be terminated smart dealers. It should not be lost on the non-Mercedes smart dealers that Mr. Penske’s visit is at least in part a way for him to gauge the level of push-back from dealers. These dealers need to be armed with talking points concerning their legal rights in order to make a strong impression! The stronger the impression Mr. Penske is left with, the more likely it is that dealers will be treated fairly in the termination process without the need for pursuing termination benefits and damages through the state franchise law procedures.
Make sure your federal compliance is up to standard
Lest you think that the attorneys at BSM are limited to motor vehicle franchise issues, we have several attorneys who specialize in dealership compliance matters. In recent months a number of federal regulations have gone into effect, or are now being enforced, which dealers must become intimately familiar. These regulations include:
- Red Flags Identity Theft Protection
- New Customer Information Privacy Notice
- Risk-Based Pricing Notice to Customers
- Federal Trade Commission Advertising Regulations
- Equal Employment Opportunity Commission Actions
Now that car buying activity is increasing, we expect to see enhanced enforcement of these regulations and, likewise, expect to see increased consumer lawyer activity against dealerships. Dealers should not lose sight of these compliance issues while focusing on getting their financial house in order. To the contrary, to protect the gains dealers are making in revenues and financial stability they must make sure that the dealership is not unnecessarily exposed to an attorney general or plaintiff’s lawyer action for failing to comply with the above-listed regulations.