Representatives from AADA’s equivalent body in the United States, the National Automobile Dealers Association (NADA), have testified before the Senate Standing Committees on Education and Employment into the relationship between Australian Dealers and OEMs, providing insight into the rights and protections afforded to Dealers in that country, as a guide to drafting potential legislation in Australia.
Andy Koblenz, NADA’s Executive Vice President, Legal and Regulatory Affairs, and Lauren Bailey, Director, Franchising and State Law at NADA, appeared before the Senate Committee via video link on 19 November.
Mr Koblenz began by pointing out that in the US, franchise laws are the responsibility of the states, and thus there exist 50 variations of franchise law. In the US, automotive franchise laws are separate and distinct from general franchise law.
“As a historical matter, state franchise laws in United States arose in response to Manufacturer overreach. After entering into contracts with Dealers to create an independently funded outsourced distribution channel, OEMs took steps to undermine those very relationships. Some examples include terminating Dealers arbitrarily and without good cause, forcing Dealers to take unwanted inventory, unfairly setting up competing factory-owned stores in the immediate proximity of franchise Dealers, and imposing unreasonable terms and rules on Dealers,” he said.
“You might ask why the US Dealers did not respond by simply negotiating better contracts with their OEMs. The answer is that the OEMs were much larger and therefore had more economic power. So why didn’t the Dealers get together like a labour union and bargain collectively? The federal antitrust laws in the United States prohibit that. They prevent the exercise of collective economic power by groups such as Dealers. Labour unions have an express exemption from the US antitrust laws that allows them to collectively bargain but Dealers do not.
“But the United States constitution does protect the Dealer’s right to collectively petition their government to address their grievances. So the Dealers did just that, and the state legislators responded by enacting the variety of franchise laws that we have today.”
Mr Koblenz said virtually every US state had unfair competition protections that prevented a Manufacturer from competing unfairly with its franchise Dealers.
“Some of the OEMs, or at least one OEM, has said one of the reasons they want to sell direct is to avoid putting itself in that conflict where its own economic interest is to not do the warranty work when it’s in the consumer’s economic interest to have it done. By aligning with the Dealers, the states have said, ‘We want the person doing that warranty work to have the same economic interest as the consumer,’ so it is a very consumer-friendly model to ensure there is a non-vertically integrated distribution channel. I think that is why the legislatures and the states that have adopted it have done so,” he said.
Mrs Bailey said laws regulating the situation where a Manufacturer seeks to terminate a Dealer are found in all 50 states. No state prohibits a Manufacturer from lawfully terminating the contract of a Dealer in breach of their Dealer agreement. Termination laws generally require notice and opportunity to protest or appeal the requirement of good cause for the termination and the opportunity to procure and repurchase obligations of the inventory from the Manufacturer.
“The second provision found in all 50 states deals with prohibited actions by the Manufacturers. These prohibited acts generally deal with coercion of Dealers to do something, whether it be invest in economically unreasonable facility programs or accepting delivery of vehicles not specifically ordered by the Dealers,” she said.
“Many states also prohibit the unfair competition of the Manufacturer with the Dealer by operating a dealership themselves or attempting to set the final price of the vehicle.
“The final section of the franchise laws that I would like to highlight deals with Dealer compensation for warranty repairs. Nearly every state has passed a law guaranteeing that Dealers are compensated for both parts and labour on warranty repairs at their customer pay rates. Manufacturers mandate facilities, special tools, equipment and training to carry out warranty repairs for the Manufacturers, and all of this costs Dealers a lot of money. But that investment benefits consumers, as Dealers are the ones who fill the warranty made by the Manufacturers.”
Mrs Bailey said the American market had thrived under the US franchise laws, and doubted any company would not invest in America because of franchise laws.
Mr Koblenz added that in the US, Manufacturers have thrived under automotive-specific franchise laws, enjoying “a very healthy symbiotic relationship” with Dealers.
“They allow the responsible parties to compete very well, and the Manufacturers generally do. So I don’t see any reason why protections that say you can only terminate someone when there is legitimate cause or imposing an economically unjustifiable level of inventory or facility requirement should cause someone to pull out of the market. That simply hasn’t happened in the United States,” he said.
Mrs Bailey said that in the US, a Manufacturer can generally only terminate an agreement, or not renew an agreement, if they show good cause to do so.
“That goes to the massive investment Dealers are making for their business, so they need a certainty that they will not be terminated by the Manufacturer for just any reason at all—that their business will be continued,” she said.
Mr Koblenz added that that most Dealer agreements in the US are perpetual – of indefinite term, with no limit. The one exception is General Motors, which has a five-year term but the expiration of the contract is not good cause to terminate. There’s a required renewal. But GM can change its terms each five years.
The US model is often cited as best practice for regulating OEM/Dealer relations. While there are slight differences between the various state laws, they generally cover the following elements:
- Prevent dealership terminations or non-renewal except for “good cause”.
- In the event of termination, the laws specify the kind of compensation required.
- Upon non-renewal buy back of vehicles, parts, accessories, special tools and equipment.
- Relevant Market Areas (RMAs) grant a Dealer or group of Dealers exclusive territorial rights by preventing the Manufacturer from establishing additional dealerships within a given geographical area.
- Outlaws price discrimination by OEMs to Dealers.
- Make it illegal for OEMs to force Dealers to take vehicles they have not ordered.
- Stipulates payment required for parts and labour associated with warranty.
- Restrict Manufacturers from selling directly to the public.
- A process for resolving disputes that often includes determination or binding arbitration.