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Special Report: Franchise Law

Posted By: Holly Wagner
Post Date: 11/30/2016

Statutes and other rules from all 50 states create a complicated quilt of Dealer protections

By Holly J. Wagner, Senior Editor

Editor’s Note:
Dealernews recently completed a comparison of state laws governing on-road powersports dealers in an effort to help Dealers understand how their states handle relations with their respective vehicle manufacturers (OEMs). Information has been sourced from the statutes themselves, which are subject to updating and judicial interpretation. We will endeavor to update the information as it becomes available. Information presented by Dealernews is not intended as legal advice or a substitute for legal advice; rather it is meant to help Dealers understand the complexity of laws under which they operate, and seek the correct legal advice when necessary.

IN BUSINESS, there’s no substitute for a good lawyer, and one need only look at statutes governing Dealer-OEM relations for proof.

Of course, it all depends on where a Dealer does business. In many states, motorcycle Dealers are covered under “New Motor Vehicle Dealer” statutes that were written for automotive retail. Eight states have laws that specifically address powersports Dealers. Another 17 states have “Franchised Dealer” statutes that define a Dealer agreement as a franchise agreement, regardless of what an OEM wants to call it.

Dealer-OEM relations may also be covered by multiple laws within a state. Some Dealer statutes are the “final word” on motor vehicle retail matters. In other states, Dealers may be covered by additional state laws governing franchise or other business relationships. Clearly, when it comes to a dispute, a Dealer’s attorney may have multiple legal avenues with varying chances of success.

More states are adding powersports-specific laws. In 2013, just six states (Colorado, Maine, Montana, North Dakota, Utah and Washington) had powersports-specific laws. Since then, South Carolina and Virginia have added either separate laws or separate sections for powersports Dealers under their motor vehicle Dealer laws.

 

FRANCHISE LAWS, by state: Click HERE

States with powersports-specific laws may vary with regard to what types of vehicle markets are covered. Colorado’s powersports Dealer law, for example, covers most on- and off-road vehicles. A few states include just motorcycles and ATVs. Many states segment personal watercraft (PWC) sellers into the marine Dealer category. The more specialized the vehicle – PWC or snowmobile, for example – the more likely it will be regulated separately from motorcycles. (This may get even more complicated, attorneys note, as jurisdictions increasingly permit ATV riding on public paved roads – a practice that vehicle manufacturers still discourage.)

Powersports Dealer statutes can be a double-edged sword: On the one hand, they recognize the Dealer-OEM relationship in much the same way as laws that govern the automotive market. But the powersports laws may have lower caps on Dealer compensation requirements, based on the assumption (whether correct or incorrect) that a powersports Dealer’s investment in facilities and merchandise will be less than that of an auto dealer.

Models of protectionism
Dealer laws are, at their core, protectionist. They originated from a perception that Dealers are at an inherent disadvantage when dealing with their manufacturer suppliers. Motor vehicles are the only industry in the United States with laws that bar manufacturers from competing with Dealers by selling direct to consumers.

Dealer relationship laws fall into three main categories: Franchised Dealer, New Motor Vehicle Dealer and General Franchise. When lawyers talk about the various statutes being more or less “protectionist,” they’re commenting on whether the law is more favorable to Dealers or to OEMs. If you’re a Dealer, protectionism is good.

“States that are Dealer-friendly tend to have common attributes that make it difficult for a manufacturer to terminate them or engage in behavior the Dealer would want to resist,” said Randy Beighle, an attorney who represents primarily OEMs in disputes in Washington, Oregon and Alaska.

The regulations are intended to keep the playing field level: The OEM has rights to protect its brand and brand image, and the Dealers have rights to sell the products and use corporate trademarks and marketing schemes. Both sides have rights to protect their business interests.

In general, these laws protect Dealers from unreasonable actions by manufacturers, governing termination/non-renewal procedures and protecting against unequal treatment for allotments, pricing, promotions and other benefits. The laws forbid manufacturers from denying the sale or succession of a dealership without good cause, they lay out warranty repair compensation rules, and they prevent OEMs from raising prices between order and delivery, or sharing Dealer information with competitors. Laws also forbid manufacturers from coercing Dealers to buy bolt-ons, cede management or site control, sell extended warranties, or feed sales contracts to a designated finance company. In many cases, OEMs cannot prevent Dealers from carrying multiple vehicle lines, and in some states they can’t require the Dealer to maintain separate facilities for separate brands. Laws specify how close OEMs may locate competing Dealers, and set the rules if Dealers want to protest anything from new competitors in the same line-make to a contract termination.

A recent development is the rise of laws that prevent “substantial change of competitive circumstances” in a franchise agreement.

A recent development is the rise of laws that prevent “substantial change of competitive circumstances” in a franchise agreement. Where they exist, those laws forbid OEMs from refusing to renew a franchise at substantially the same terms under which the Dealer has been operating. This prevents OEMs from revising contracts in ways that may be unfavorable to Dealers and conditioning renewal on the Dealer accepting the new terms.

Wisconsin’s Dealership Fairness Law is the model for many other states. It now says, “No grantor, directly or through any officer, agent or employee, may terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause. The burden of proving good cause is on the grantor.” It does lay out specific exceptions, but the law generally favors Dealers.

A number of states have revised their Dealer laws in the last decade, in some cases to provide updates but in others to create new protections for the motor vehicle retail industry. Tesla’s efforts to establish company-owned auto dealerships has triggered a new wave of Dealer protection laws.

Dealernews has researched powersports retail laws in all 50 states, and has provided a compendium of information searchable by state, and by such factors as franchise definition, market area, dispute recourse, warranty reimbursement, OEM records, vehicle allotments, relocation, renovation, purchasing and terminations.

Franchise Law by State

Franchise Law by Issue:

 

The Basics
Certain elements are common to many state Dealer laws. Most states license motor vehicle Dealers, and some even license a Dealer’s sales representatives. The laws set things like relevant market area (RMA), within which a Dealer may protest an OEM’s plan to add a competing dealership and in some cases measure sales performance, and lay out a list of items OEMs may not pressure or coerce Dealers to do.

To a large extent, the statutes reflect the states that pass them. Alaska is the least protectionist state, which isn’t surprising given that many Alaskans prefer a regulatory-free environment. Nevada specifically bars terminating a franchise due to an owner divorce. Iowa exempts motorcycle dealers from the requirement of being open “regular business hours.”

Many Dealer regulations reflect common sense: If you are convicted of a felony, the state can terminate your license and the OEM can terminate your franchise — no further discussion required. The same applies if your store is closed for an extended period of time – typically seven to 10 days – absent a disaster or circumstances beyond the dealer’s control.

Most state statutes also specify that disputes are to be resolved in the dealership’s home state. That can be a big deal if your store is in Florida or Nevada, and your OEM is headquartered in Wisconsin or Minnesota.

Most states set reimbursement rates for warranty service; that is, they establish formulae for setting reimbursement rates, and specify that it must at least match retail rates for parts and labor.

The statutes are designed to encourage the parties to resolve disputes without diving into the legal system, but once you’re there, the statutes set the rules. Texas requires mediation before proceeding to the state’s motor vehicle board. Other states require less formal attempts at dispute resolution before proceeding with legal protests.

Most state laws will make an involuntary termination or other forced action very expensive for the OEM, so it’s not something they undertake lightly.

Attorneys interviewed by Dealernews cited terminations, ownership transfers and facility upgrades as the most frequent pain points between Dealers and OEMs. Dealers should remember that most state laws will make an involuntary termination or other forced action very expensive for the OEM, so it’s not something they undertake lightly.

“OEMs come to us on the ones that are tricky or when they are getting more pushback from the dealers,” Beighle said. “The way the statutes are written, they want to make sure they are doing it right. They want to know if they are in good shape or if not, ‘how do we fix it?’”

Choice of venue
If a state has a motor vehicle board that reviews disputes with OEMs, that’s usually the best option for a Dealer, attorneys say.

“Most dealers choose the NMVB because it stops the action right away,” said attorney Chris DeVito, who represents Dealers in Ohio. The OEM has the burden of proof in a relocation or termination.

Also, he noted, “There is a shorter time frame for most administrative proceedings. Usually 30 or 90 days.”

In some states, laws allow Dealers to pursue civil court actions, but filing a protest with a motor vehicle board typically triggers an automatic stay on whatever penalty is looming – that means it’s business as usual until the dispute is resolved. Courts may also issue a stay, but a Dealer’s attorney will have to ask for it, and that may entail additional court time and fees.

What if your attorney is arguing in your state, but someone else had the same problem in another state? The law elsewhere isn’t binding, but it may help your case.

“The short answer is, it can be persuasive. It’s not binding or controlling,” DeVito said. “If you have a well respected appellate panel in New York or Texas, that is given weight. It’s even more persuasive if the statutes are similar.”

Termination rights
Protectionist laws mean that, in most cases, OEMs must have good cause to terminate or deny renewal of a franchise. Most statutes lay out elements to be weighed when deciding what “good cause” is, and nearly all statutes put the onus on the manufacturer to prove good cause. Some states will require OEMs to prove the validity of sales metrics or customer service measurement systems, if they are used as the basis for termination.

Typically, OEMs are required to notify Dealers six to 12 months in advance if a termination is due to a discontinued line-make; 60 to 90 days for contract disputes, and 15 days if the Dealer gets a felony conviction, becomes insolvent or goes into bankruptcy, or fails to open the store for several days (barring the previously mentioned disaster).

Many states also have “notice and cure” statutes that set a required amount of time (typically 180 days, but sometimes less) for OEMs to notify dealers of intent to terminate or not renew, and for the Dealer to fix (“cure”) the problem to prevent the termination. This occurs when the problem is related to sales numbers or other factors considered within the Dealer’s control.

If a Dealer is facing termination because of failure to meet sales quotas, it may be given a longer period to “cure” that problem than for another reason.

If a Dealer is facing termination because of failure to meet sales quotas, it may be given a longer period to “cure” that problem than for another reason, points out Jim Long, a Minnesota attorney who represents OEMs in disputes and has consulted on Dealer law and cases in other states.

If the worst happens and the Dealer loses a termination protest, the OEM will still have to buy back at least some merchandise and may have to pay for some of the Dealer’s other sunk costs in the business.

“If there is a termination, the mandatory buyback provisions of the vehicles and supplies, parts, signage can be very important, and you can have a lot of litigation over those,” said Long. “The first thing to try to figure out is whether the mandatory buyback applies, regardless of who terminates the agreement.”

 

Compensation requirements
With terminations come compensation requirements. In fact, some statutes that say little about when an OEM may terminate a franchise actually have extensive requirements when it comes to compensation. Often, it’s a lot more expensive for the manufacturer.

Some states, like Michigan, say little about what constitutes good cause for a termination, but lay out, in painstaking detail, how a Dealer is to be compensated after termination. Generally, OEMs must compensate dealers for new, undamaged current inventory and sometimes other items (albeit at a lower rate) even when the Dealer terminates voluntarily.

OEMs will be required to buy back new, undamaged, current vehicles and parts in almost every case. But from there it varies.

OEMs will be required to buy back new, undamaged, current vehicles and parts in almost every case. But from there it varies. In states with powersports-specific statutes, accessories are usually also included. Some states require repurchase only of current-year vehicles and current-catalog parts, while others go back two or three years – with elaborate formulae that require compensation for signs, DMS investments and facility upgrades going back as much as five years, and facility rent as far forward as three years (although the terminated Dealer will be required to make and cooperate in efforts to get the facility rented to remove the burden from the OEM). The statutes may lay out specific depreciation schedules for items to be compensated.

A few states even have business replacement clauses requiring that an OEM terminating a franchise must replace it in the market or prove the market cannot support that business. Legislators know how their bread is buttered, and they are not eager to lose the jobs and tax revenue that a powersports Dealer may generate.

Dealership succession, sale
Dealer statutes forbid OEMs from interfering with the sale of a dealership to a qualified buyer. However, a statute may provide the OEM with first right of refusal, whether the contract does or not.

The statutes also let Dealers designate successors, often among family members, so the business can continue if the original franchisee falls ill or dies. Those designees must meet the same business requirements, but as long as they do, the franchise can transfer to them when the original Dealer is unable to continue.

Absent family members who want to continue the business, Dealers may look for buyers when they are ready (or forced) to retire. Again, the buyer will have to meet the same business requirements as the Dealer, but statutes forbid the OEM interfering with a sale as long as the buyer is properly capitalized and meets other franchise requirements.

Renovations, relocation
Most Dealers want their stores to be state-of-the-art showrooms and service operations. They recognize the value of current technology, both in service and in enticing customers to buy. That’s not always easy to afford, but it’s more likely to be a dispute with foot-draggers, Beighle said.

“Typically, where there is a problem, there is a Dealer that is not performing as well as the manufacturer wants. And the OEM sees the opportunity to bring facilities up to standard,” Beighle noted. “Dealers’ perception, typically, is, ‘If it ain’t broke, I’m not gonna fix it.’ OEMs think, ‘You’re dragging my brand down, and we need to fix it. You need to get with the program.’”

The balance can be tricky, and new and revised dealer laws are addressing it. New Hampshire’s Dealer Bill of Rights, updated in in 2013, is the most protective on renovations and many other matters. It says OEMs cannot force a facility upgrade more frequently than every 15 years unless it is for technology required to support the brand or to meet health and safety standards.

The New Hampshire statute covers auto and powersports Dealers, because the New Hampshire Auto Dealer Association has a powersports Dealer membership division.
That’s also true of the Illinois and Ohio auto dealer groups, so powersports Dealers there might consider aligning with them.

Our accompanying data report includes links to state powersports Dealer groups, where they exist. Only a few states have active powersports Dealer associations. The easiest way to find one is to check out the National Council of Motorcycle Dealer Associations (http://nationalcouncilmotorcycledealerassociation.com) to find the nearest one, or request help starting a Dealer association in your state.

FRANCHISE LAWS, by state: Click HERE


Dealernews thanks the following sources:

 James J. Long (jlong@briggs.com) is a shareholder at the Minneapolis firm of Briggs and Morgan P.A., where he chairs the firm’s franchise, antitrust, and distribution practice.

Chris DeVito is a partner in the Cleveland law firm of Morganstern, MacAdams & DeVito Co. L.P.A. DeVito has extensive experience and concentrates half his practice to the representation of dealerships and their relationship with the manufacturer, other dealership, lender liability, employment, buy-sell agreements, and the day-to-day operations within the franchise operation.

 Randy Beighle is based in Seattle at Lane Powell, and focuses on business and commercial litigation, where he has handled matters ranging from franchising, dealership and sales contracts to energy and software disputes. 

 

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