Don’t Fall For the Bluff
Car manufacturers have made a habit in recent years of using the expiration of a dealer’s sales and service agreement as a threat to non-renew the agreement unless the dealer agrees to certain things. Those “things” have involved potentially costly items such as a commitment to build an upgraded facility or to perform at a specific sales level. Under virtually every state’s franchise law protections, the manufacturer’s threat of non-renewal is a bluff.
High standard for non-renewal of dealer agreement
Franchise law protections generally provide that a dealer may not have their sales and service agreement terminated without “good cause” or “just cause.” This same protection also expressly applies to the non-renewal of a Dealer Agreement.
The definition of “good cause” or “just cause” is typically understood to involve a breach by the dealer of a material and reasonable term of the dealer agreement. Parsing out the definition of the “cause” needed by a manufacturer to non-renew a franchise, a “material” requirement of the franchise means that the term breached must be substantial and important to the essence of the dealer’s sales and service obligations. Likewise, a “reasonable” requirement of the franchise means that the term must be reasonable, not from the manufacturer’s point of view, but reasonable under the dealer’s specific circumstances as viewed by an independent third party. Thus, just because a manufacturer requires something in its policies and procedures for the franchise does NOT make it enforceable in terms of a threat of non-renewal.
In hoping a dealer is unaware of his or her rights under state law, the manufacturer presents its position as follows: “unless you [the dealer] agree to the terms of our replacement dealer agreement, your current dealer agreement will simply expire and you [the dealer] will lose your right to the franchise.” Not true! As part of the state franchise law protection against a non-renewal without cause, the franchise laws require that a manufacturer give advanced written notice to the dealer of its intent to non-renew the dealer agreement. If the manufacturer complies with the notice requirement then dealers have a right to protest the non-renewal and force the manufacturer to establish “cause.” If the manufacturer fails to give the proper notice in advance of the expiration date of the dealer agreement then the manufacturer has waived its right to non-renew the dealer agreement.
In our years of representing dealers in franchise disputes with the manufacturers, we have only seen a handful of official notices of non-renewal. This is likely because manufacturers know they will rarely be successful in establishing good or just cause for the non-renewal. For example, unless your facility is woefully deficient in space for the sales and service of the franchise or in utter disrepair, a manufacturer will have an extremely difficult time demonstrating that the dealer has violated a material and reasonable requirement of the franchise for failure to comply with a new facility image program. This is because a manufacturer’s latest, greatest facility image program is typically not a requirement within the Dealer Agreement but contained instead in a separate program document. These image programs generally involve structural and cosmetic requirements for the facility that are by definition beyond what are required to adequately sell and service the manufacturer’s vehicles. Likewise, when it comes to sales performance, merely being below the manufacturer’s required sales effectiveness measure will generally not suffice to establish cause for a non-renewal. Only a dealership which is (i) substantially deficient in new vehicles sales; (ii) over a long period of time; and (iii) without a reasonable explanation for that deficiency (and there are usually several) is at risk of being found to have violated a material and reasonable term of the franchise.
Results of falling for the non-renewal bluff
The worst thing a dealer can do is to fall prey to the non-renewal bluff and agree to specific performance terms under a new dealer agreement. These additional requirements are always written into the dealer agreement with the acknowledgement by the dealer that the requirements are reasonable and important to the franchise. Once those specific requirements are included within the four corners of the dealer agreement the dealer is at a distinct disadvantage. In that situation, if the dealer does not comply and the manufacturer threatens non-renewal at the next expiration, a third party decision-maker (hearing officer or judge) is going to look much more favorably upon the specific requirement of, say, a facility upgrade as material to the franchise and a reasonable term of the dealer agreement. This is simply because the dealer specifically agreed to be bound by that requirement. Judges generally don’t like to allow the party to a contract to avoid performance.
In playing this game of threatening to non-renew a dealer agreement upon expiration, the manufacturer’s count on the dealers’ ignorance of their legal protections under state law. Dealer’s who understand the legal protections and call the manufacturer’s bluff will avoid being forced to commit to a requirement with which the dealer does not want to, or cannot, comply.
Hyundai and Kia add points heat up
We have seen a major uptick in proposed new dealership points for both Kia and Hyundai around the country. This is certainly not a surprise considering the increased U.S. sales both companies have enjoyed this past year. However, these increased sales opportunities don’t always justify a new dealership into an area currently served by a Kia or Hyundai dealer.
It is critical that existing Kia and Hyundai dealers understand the rights provided to you under your state law, which give you the ability to challenge an additional dealership point into your area. Some of these provisions can be tricky in determining which dealer will have the right to protest.
Most states (but not all) have at a minimum some right to protest the addition of a same linemake dealer being proposed for a location within so many miles of your dealership. This mileage radius varies from state to state. No matter the size, it is not as simple as a mileage measurement from your dealership to the proposed new dealership. The question often arises as to what point at your dealership the measurement should begin and at what point at the proposed new dealership property the measurement should end. The answer to this question, which may require legal argument in front of a judge, can be the difference between your ability to protest and having no opportunity to protect the investment made in your dealership and your market.
Some states have different measurement schemes depending upon the size of the county in which you are located. Moreover, in states like Florida, in addition to a mileage radius dealers are provided a right to protest as a result of the amount of sales registered within a certain radius around the proposed new point of sale without regard to how far away the existing dealer is from the location of the new point. These types of provisions do more to protect dealers who have invested substantial amounts of resources into penetrating a nearby market where that market, which contains the proposed new dealership, is outside a simple mileage measurement from your existing dealership.
It is also very important to be clear on the timing of any protest you are permitted to file. Every state has a slightly different scheme for filing a protest against a new dealership. If deadlines are missed you potentially lose your right to challenge the new dealership.
There are very few scenarios where it does not make sense for an existing dealer to exercise its right to protest. In most states, the filing of the protest “stays” the manufacturer from proceeding with the new dealership point until a judge can determine whether the new dealerships is justified. If your manufacturer is prevented from opening the new dealership, you avoid competition and lost sales revenue. In representing protesting dealers, we have found that in many cases saving the protesting dealer this lost sales revenue makes the cost of the protest worthwhile whether or not the new point is ultimately prevented.
In addition to the benefit of at least temporarily preventing the new point from opening, we have found that in many cases a protest will cause the manufacturer to engage the protesting dealer in settlement discussions. These discussions center on the manufacturer providing the protesting dealer with some benefit to make up for the increased competition from the new point. Such a settlement can involve anything from a one-time cash payment to additional allocation to a letter of intent for the next open dealership point.
In order to protect the investment you have made in your franchise and your market, dealers should always consult an experienced motor vehicle franchise law attorney whenever you receive notice of a new point being added to your market area.