Mercedes Benz has announced the details of its holdback incentive program which will apply to all dealers. The program involves payment of a 3.5% performance bonus where 1% is tied to a facility component. Of course, not all Mercedes Benz dealers are in a position to upgrade their facilities to the Autohaus image desired by Mercedes Benz. So, the question becomes when is a factory incentive program illegal?
Almost all manufacturers from time to time utilize some type of a performance incentive program in order to force dealers to take certain actions or behave a certain way. Those actions involve certain new car sales performance, used car sales performance, customer satisfaction scoring, as well as image and facility image upgrades. Some dealers, due to circumstances out of their control, are not able to meet one or more of the criteria under the incentive program. Without the incentive money, those dealers are placed at a competitive disadvantage when competing against other same linemake dealers.
In determining whether an incentive program is a violation of the law dealers must first look to their state franchise laws. More and more states are adopting franchise protections directed at unfair incentive programs. Generally, those franchise laws require that the incentive payment be reasonably available to all dealers within the state. An incentive is not “reasonably” available to a dealer if that dealer is unable to qualify for the incentive due to circumstances out of his or her control.
Some examples of circumstances out of a dealer’s control include:
-A sales performance criteria being applied to the dealer that does not take into account certain unique circumstances occurring in his or her market.
-A sales performance requirement based upon an improperly drawn market territory.
-A dealer’s inability to finance the construction of a facility upgrade.
It is common that when the manufacturer creates a new incentive program which includes a facility component that a number of dealers have recently upgraded their facility and now cannot afford to meet the “new” image requirements. Even for dealers who have not recently upgraded their facilities, in many cases dealers are unable to obtain financing even from the manufacturer’s own captive finance company to fund the construction.
Therefore, an incentive program is potentially illegal if (i) the state franchise laws require the incentive to be reasonably available to all dealers and (ii) a dealer within that state cannot reasonably meet the requirements of that incentive program.
Some state laws have taken the prohibition against unfair incentive programs a step further by specifically requiring that some portion of the incentive be paid to the dealer even if the dealer does not, for any reason, meet all of the performance criteria of the incentive program.
In Florida, for example, the state franchise law was recently amended to require that a manufacturer which includes a facility component in its incentive program pay dealers at least 80% of the bonus monies where a dealer does not meet the facility requirement under the program.
Looking specifically at the new Mercedes Benz program, dealers need to determine whether it is practical and reasonable for them to meet each of the components contained within the performance criteria. If it is not practical to meet one or more of those criteria, then the program may be in violation of that dealer’s state franchise laws. In Florida, Mercedes Benz dealers not meeting the facility image component but meeting all other performance criteria will be entitled to 80% of the incentive monies.
Will Ford be successful in eliminating Lincoln dealers?
We have known for sometime that Ford plans to reduce the number of Lincoln dealers around the country. Ford representatives have met with Lincoln dealers and informed them of whether or not they fall within a preferred market. Ford has stated that preferred markets will be generally metropolitan markets that include other high line brands such as BMW, Mercedes Benz and Lexus. We also know that Ford has begun to discuss with dealers buying their franchise from them. We have not talked to a Lincoln dealer yet that believes the Ford offer to be a fair representation of the value of their Lincoln store. So if dealers decline the buyout offer, how will Ford accomplish its goal of reducing the number of Lincoln dealers?
It has been reported that Ford intends to allocate up to 80% of its available product to its preferred dealers leaving only 20% for its non-preferred dealers. It appears as though Ford intends to use allocation as at least one tool to push its non-preferred dealers into giving up their Lincoln franchises. The non-preferred dealers we have spoken to are very concerned that they will not receive a sufficient supply of product to cover their overhead which could cause them to go out of business.
The good news is that almost every state’s franchise laws require the manufacturer to allocate a reasonable mix and quantity of vehicles to its dealers. Many states allow dealers who are concerned about their allocation to make a request to the manufacturer for the details of its allocation formula and an accounting of vehicles allocated to dealers within the state.
The bad news is that these franchise law protections are not self-executing. Lincoln dealers who are concerned that they are not receiving a fair allocation of products will have to affirmatively make a demand under their state franchise law for allocation information and ultimately challenge Ford’s allocation as a violation of the requirements of the franchise laws. Franchise law allocation provisions are written such that the dealer must wait to see how product will be allocated in reality (not relying on rumor or press releases) before challenging the manufacturer’s actions as a violation of the franchise law.
Most Lincoln dealers are not likely to be in a position to finance a franchise law challenge against Ford particularly considering the loss of Mercury. However, because any misallocation by Ford appears to be planned by way of a broadly applied formula, dealers will have the opportunity to join together within a given state in bringing a group challenge under the franchise laws. Our experience with litigating on behalf of a similarly situated group of dealers is that there is certainly strength in numbers. Dealers in that situation have the opportunity to minimize the expense of litigation by sharing attorney fees and costs and also have the security of not being the only dealer challenging the manufacturer.
In summary, Lincoln dealers should closely monitor Ford’s allocation of product in the coming year and educate themselves on the specific provisions governing allocation within their state franchise laws. If Ford’s allocation of Lincoln products is ultimately unfair and discriminatory towards non-preferred dealers, then those dealers should consider joining forces to challenge Ford’s allocation system.
Reinstated Chrysler dealers continue to battle Chrysler, replacements
Some of the dealers who successfully arbitrated for reinstatement with Chrysler remain, as yet, unable to reopen. For some, the status results from Chrysler’s delay in implementing the terms of the letter of intent the automaker offered. While for others, they simply refuse to sign Chrysler’s onerous letter of intent.
Many of these dealers (eighteen total; approximately one-half reinstated and one-half appointed replacements) have been joined in a lawsuit Chrysler filed in Michigan. Chrysler seeks a ruling from the federal court there, declaring that the process Chrysler has followed is the only way to obtain reinstatement, and absolving Chrysler of any further responsibility with regard to the dealers who successfully arbitrated reinstatement. In particular, Chrysler seeks a ruling declaring that:
- The federal law providing for reinstatement (s.747) does not preempt the provisions of State Dealer Laws governing the establishment of additional like–line dealers in the relevant market areas or communities of existing dealers. Chrysler wants to allow dealers that Chrysler appointed after the bankruptcy rejection to be able to protest the addition of the reinstated dealers.
- The LOI provided by Chrysler Group to putative reinstated dealers is Chrysler Group’s customary and usual LOI in compliance with s.747. Most dealers have identified Chrysler’s LOI offered to reinstated dealers as plainly different and clearly onerous and unusual in its terms, such that its terms should not govern the reinstatement of successful arbitrating dealers.
- s.747 limits an arbitrator’s power to the written determination described therein and, in the event of a favorable determination by such arbitrator, provides for a sole and exclusive remedy in the form of a “customary and usual letter of intent to enter into a sales and service agreement.” Some successful arbitrating dealers seek to be reinstated without having to meet the terms of the LOI and some arbitrators’ decisions appear to allow that.
- s.747 does not provide for a remedy other than the provision of a customary and usual letter of intent to enter into a sales and service agreement, “including without limitation, the unconditional addition of a “covered dealership,” to Chrysler Group’s dealer network. Some successful arbitrating dealers seek to be reinstated without having to meet the terms of the LOI and have an arbitrators’ decision that appears to allow that.
- s.747 does not provide for a court confirmation process regarding the arbitrator’s determination, including the filing of an application in state court under state law. Some dealers have already sought to address Chrysler’s contentions in state court, asking a judge to address Chrysler’s LOI and confirm their reinstatement without opportunity to protest. Chrysler wants the federal court to tell the state judges they have no authority to do that or anything else.
- Chrysler Group has complied with all of its obligations under Section 747. Chrysler wants to be absolved of any further obligations.
Bass Sox Mercer represents one of the reinstated/successfully arbitrating dealers sued by Chrysler. Several of the dealers named in the lawsuit who were successful in arbitrations have filed motions to dismiss the case and also motions to transfer their part of the case back to their home state. No hearing has yet been held on the motions.
Chrysler’s lawsuit and related lawsuits in Florida and elsewhere, seek to close the book on Chrysler’s arbitrations and leave the dealers who successfully arbitrated reinstatement to battle dealers Chrysler appointed in the interim, as well as try to satisfy the onerous and sometimes punitive terms of the Chrysler Group LOI.
Dealers seeking reinstatement, as well as those seeking to assert protest rights, will unfortunately be litigating their respective rights in this matter well into 2011. This is certainly not what Congress intended when passing the Arbitration Legislation.