At Bass Sox Mercer, we are receiving more and more calls from dealer clients concerning manufacturer advertising programs. The questions range from asking whether a manufacturer can set minimum advertising prices, to whether a manufacturer can enforce requirements that no “distressed” or “discounted” pricing be used, to whether penalties can be enforced against dealers for relatively immaterial violations of the advertising program rules.
Almost universally, the penalty for failing to abide by the manufacturer’s advertising program rules is a chargeback and/or suspension of advertising assistance monies. The chargebacks can be significant and put dealers in financial distress considering that the advertising assistance funds have already been used as part of dealership advertising expenses.
The first thing that dealers must determine is whether their state motor vehicle franchise laws provide any protection in the area of manufacturer advertising requirements and associated penalties. It has only been recently that this issue has come to the front-burner for our dealer clients and, as a result, only a handful of states have expressly addressed manufacturer advertising requirements in the franchise laws.
For those dealers located in these states, the manufacturer will generally not be able to place any “unreasonable” advertising requirements upon its dealers. It will be a case-by-case analysis as to whether the manufacturer’s position that says the dealer’s advertising is a violation of the advertising program rules is reasonable under the circumstances. Factors to be considered in this analysis include the degree of discounting being advertised by the dealer, the advertised pricing by the dealer’s competitors in the market and the dealer’s vehicle inventory situation. Of course, the impact upon the manufacturer’s brand image will come into play as well.
States which have included restrictions on manufacturer advertising requirements typically prohibit the manufacturer from levying a chargeback against the dealer for recovery of previously paid advertising assistance monies. Dealers with these protections should absolutely take advantage of the right to obtain a stay of a proposed chargeback of advertising assistance monies by filing a protest with the state motor vehicle department. In such a case, the burden will almost always be on the manufacturer to demonstrate that the manufacturer’s position that says a violation of the advertising program rules has taken place is reasonable under the circumstances.
For dealers located in states that have not yet added protections related to manufacturer advertising requirements, there may nonetheless be relief under the “incentive and chargeback” provisions of the law. Most state franchise laws provide restrictions on a manufacturer’s ability to chargeback an incentive previously paid to the dealer.
In most cases, the incentive or bonus monies being referred to are associated with the sale of a vehicle. However, some franchise laws do not define the term “incentive” so narrowly which, in turn, gives dealers the opportunity to argue that advertising assistance funds qualify under the definition of “incentive.” Using this argument, a dealer can challenge a proposed chargeback of advertising assistance funds as unreasonable and in violation of the franchise laws.
The question as to whether manufacturers can require dealers to advertise at a price higher than some minimum price (known as “minimum price maintenance”) is a more difficult one. The answer to this question will depend upon how the manufacturer’s requirements measure up against state and federal anti-trust laws. Again, whether a manufacturer’s minimum price maintenance requirements violate the law will come down to the dealer’s business and market circumstances with the added analysis of the impact of the minimum price advertising requirements upon customers in the market. We do know that the higher the required price relative to the expected sale price of the vehicle the more likely there is a violation of the law. So, a manufacturer requiring that dealer’s not advertise below invoice cost is less likely to be violating the anti-trust laws than one requiring that dealer’s not advertise below, say, the Manufacturer’s Suggested Retail Price. Also important in the analysis is whether the manufacturer ties significant advertising funds to compliance with the minimum price rules. The greater the importance of the advertising assistance monies the less competitive a dealer can be if the manufacturer’s advertising rules are not followed. The more compelling the inducement to comply with the minimum price rules the less “voluntary” compliance with the advertising rules become. The voluntary nature of the minimum price advertising rules considering assistance monies tied to compliance with those rules is a critical factor in determining whether the manufacturer has overstepped the anti-trust laws in setting minimum price guidelines.
Ultimately, dealers should be very clear as to the manufacturer’s advertising requirements and insure that dealership personnel and the dealership’s advertising agency are accountable to following those rules. If a dealer believes that enforcement of a particular rule in a given situation is unreasonable, and particularly if a chargeback is associated with the alleged violation, the dealers should contact experienced motor vehicle franchise legal counsel to determine what protections may be offered by state franchise laws. Likewise, in the case of minimum price maintenance rules, whether the manufacturer’s requirement could be a violation of state or federal anti-trust laws should be reviewed with motor vehicle franchise legal counsel experienced with state and federal anti-trust laws.