The major automobile manufacturers are active at levels not seen since the days of linemake discontinuances and dealership terminations during the General Motors and Chrysler bankruptcy proceedings. It seems almost weekly that the lawyers at BSM are presented with a new and more aggressive approach taken by the manufacturers against their dealers. Here are just some of the new ways we are seeing the manufacturers go on the offensive.
Sales Performance Notices of Default and Termination
General Motors, Chrysler and Nissan have become extremely aggressive in their letter writing campaigns cautioning dealers that their new vehicle sales performance is not satisfactory. These warning letters have turned into official Notices of Default in which the dealer is given six months to cure the sales deficiency and, if there is not significant improvement, are followed by a Notice of Termination of the franchise.
We are involved in the largest number of franchise termination cases since the GM and Chrysler bankruptcies. Of course, both GM and Chrysler argued to the bankruptcy court that they were over-dealered and needed to trim back their dealer body to allow more sales and profit at the remaining dealerships. We see a much different story now. GM, Chrysler and Nissan are each pursuing terminations of the lowest performers pursuant to their new vehicle sales effectiveness with the intent of replacing those dealerships with a new operator.
The fundamental problem with the manufacturers’ pursuit of those dealers performing at the bottom of the rankings is that THERE WILL ALWAYS BE DEALERS PERFORMING AT THE BOTTOM OF ANY RANKING! By definition, if you are ranking 10 dealers, someone has to be number one and someone has to be number 10. The ranking, in and of itself, does not indicate that any of the dealers are poor performers. Likewise, when using an average market share as the basis for measuring dealers, by definition there is always going to be a large percentage of dealers performing above and below the average. Mathematically, not every dealer can be at or above the average – that is not the way an average works! In theory, every one of the dealers being measured could be considered a good performer if measured against an objective standard and not measured against one another.
The reality is that most of the dealers ranked at or near the bottom in their State or Region, or performing at significantly below average market share, have unique challenges in their market which the sales performance formula does NOT take into account. These challenges include very different customer demographics than other same line-make dealers in other parts of the State or Region, very different economic circumstances than those other same line-make dealers, an improperly drawn area of responsibility within which competitive sales are being measured, unattainable sales objectives preventing the dealership from receiving lucrative incentives resulting in a pricing disadvantage, very different competitive brand competition than other same line-make dealers in other parts of the State or Region, etc., etc.
Despite the fallacy of the sales performance measurement used by the manufacturers (they all use some variation of the market share average), the manufacturers are shuffling the deck as a result of the pressure being applied by their executive management to increase market share. By attempting to replace the supposed poor performers with new operators, management can say they are taking action to correct the perceived deficiency in the company’s market share even though increased performance at those dealerships will result in another dealer being considered a poor performer in comparison. Dealers receiving sales performance warnings should consult experienced motor vehicle franchise counsel to assist in responding to the faulty sales performance measurement.
Notice of Changes in Assigned Territory in Anticipation of an Add-Point
In the last few weeks, we have seen a new tactic by the manufacturers, Kia and VW specifically, whereby a dealer is given notice that a portion of its territory is being removed in “anticipation” of a new dealership point being added to the market. Historically, manufacturers would wait until the new dealership point was established before assigning that dealership territory previously assigned to other existing dealers in the area. Manufacturers need to know the exact address of the new dealership point before they can accurately measure the closest dealer to the particular census tract being reassigned.
Dealers receiving these new notices of a change in assigned territory in anticipation of a new dealership point are in a grey area under most state franchise laws. Those laws generally require a manufacturer to give notice of the specific location of a proposed new dealership point along with other information such as the proposed owner before triggering the notice period within which the dealer has to protest the proposed new dealership. Without a protest right being triggered, dealers receiving these notices are very concerned about appearing to acquiesce to the new dealership point as a result of accepting the change in territory.
In a few states, dealers receiving a notice of a change in territory have an express right to protest that change as an adverse modification of their franchise. A change in a dealer’s area of responsibility can be adverse if the manufacturer’s policies prohibit direct solicitation of residents outside of the dealer’s assigned territory, require recall notices be sent which direct the customer to the dealer assigned to that customer’s geography or direct customers to the dealer assigned to the customer’s geography when a potential customer signs onto the manufacturer’s dealer locator.
Whether or not there is an express right to protest a change in the area of responsibility, at a minimum, dealers receiving such a notice should consult with experienced motor vehicle franchise counsel to craft a response which objects to both the change in territory and anticipated add point arguing that the existing dealers more than adequately serve the residents in the market.
Manufacturer Lawsuits against Dealers Seeking Money Damages
In March of 2015, VW of America took the unprecedented step of suing one of its dealers for money damages resulting from alleged fraud in the dealership’s submission of warranty claims. The lawsuit alleged that Cardinale Way Volkswagen and its individual owners and certain individual repair technicians conspired to have the repair technicians record labor hours for different repairs on the same vehicle and/or on different vehicles at the same time. The lawsuit alleged that time punches were made showing that at the very same one-tenth of a minute the technician stopped one repair, he was simultaneously starting work on another repair as well as recording repair time during the technicians lunch breaks. VW’s complaint in California federal court seeks actual and exemplary damages against all defendants as well as an injunction preventing the dealership from submitting false claims in the future.
Historically, a manufacturer uncovering fraud in a warranty audit would put the dealer on notice of a hefty chargeback and if the dealer operator could be tied to the fraud, give the dealer operator notice of the manufacturer’s intent to terminate the franchise. Under either scenario the dealership would generally have a right to protest the chargeback and/or termination as unreasonable and not for good cause. In the Cardinale Way Volkswagen lawsuit, VW is taking a much more aggressive stance by seeking punitive damages against not only the dealership but the individual owners and repair technicians. If VW prevails in the lawsuit with the Court finding that the dealership engaged in fraud, it is highly likely that VW would then give notice of its intent to terminate the franchise. At that point, the dealer would be hit with a double-whammy – a huge damage award against him or her individually and the loss of the franchise.
It is critical that dealer operator/owners be aware of what is going on at the dealership with regard to both warranty and incentive claims being submitted to the factory. It is prudent for senior dealership management to conduct “self-audits” from time to time to insure that no pattern of fraud is taking place. If such false claims are found, the dealership should consult with experienced motor vehicle franchise counsel to discuss the appropriate way to give the manufacturer notice and to take action against the guilty employees.