Dealers more frequently finding themselves on the receiving end of a surprise lawsuit
In the past 18 months, there has been a clear trend of manufacturers going on the offensive against dealers. In a number of unrelated matters, manufacturers have brought claims for declaratory judgment against dealers in federal court. Most recently, General Motors has filed no less than six lawsuits against dealers across the country seeking an order that the subject dealers failed to meet their obligations under agreements entered into to settle their arbitration actions to obtain the return of their franchises canceled as part of General Motors’ bankruptcy filings in 2009. Other matters filed by manufacturers include a declaratory judgment action by Nissan North America in response to a dealer’s request for additional reimbursement for warranty work pursuant to the dealer’s state franchise laws requiring reimbursement at a parts markup and labor rate equivalent to the dealer’s retail rates charged to non-warranty customers. Similarly, Bentley Motors, Inc. filed a declaratory judgment action against a dealer who had objected to a change in the dealership’s assigned Area of Responsibility. Bentley sought an order from the Court allowing Bentley to make the proposed change in lieu of negotiating a resolution with the dealer.
Why are manufacturers going on the offensive against dealers for the first time? We don’t know for sure but attorneys at BSM have been involved in many of these matters and can tell you that the dealers had no warning that the lawsuits were coming. Instead, the dealers had written letters and were in discussion with their manufacturers on the very issues that the manufacturer raised in their declaratory judgment actions. One of our dealers had been called by the manufacturer to meet with his regional manager to discuss resolving the outstanding issue. Our dealer reported that the meeting went well and his regional manager told him that the manufacturer would be getting back to him with a proposed resolution. When our dealer didn’t hear anything from the manufacturer, he repeatedly contacted his regional manager only to be told that a response would be coming shortly. That response was a surprise call from a reporter looking for comment on a lawsuit that the manufacturer had filed against the dealer seeking an order that the dealer’s claim should be rejected.
Most certainly, part of the manufacturers’ strategies in taking the offensive in court is to threaten the dealer with having to spend the money to defend the lawsuit. This potential expense gives the manufacturer leverage in any further negotiations that will take place over the claim being made by the dealer. For dealers that weren’t determined to pursue the claim beyond an informal demand, this strategy will likely cause the dealer to substantially reduce their claim or back off altogether. However, for many other dealers, the filing of a declaratory judgment action only steels the dealers to fight for what he or she claims they are owed by the manufacturer. Instead of continuing with amicable negotiations, a full frontal offensive by the manufacturer only forces these dealers to pursue the full amount of the claim.
The lesson we take away from this new manufacturer strategy is that dealers must be sure of their legal position before making any kind of claim against their manufacturer. A dealer who goes off half-cocked in making a claim for some benefit may find himself defending a legal action seeking a ruling from the Judge that the dealer’s claim is one that should fail under the law. The manufacturers’ new strategy should not scare dealers away from seeking what is rightfully owed to them under the law, but instead, should cause them to seek out experienced legal counsel to review the matter before making a demand on the manufacturer.
Dealers go on the offensive on manufacturer facility upgrade programs
In at least two separate lawsuits, dealers have gone on the offensive against manufacturer facility image upgrade requirements. In both cases, the dealers – Braman Cadillac and Fitzgerald Auto Mall – are leveling their fire against General Motors and its Essential Brand Elements Program.
In the Braman matter, Braman Cadillac was willing to comply with all aspects of the required upgrades under the Essential Brand Elements program. However, after meeting with its architects and engineers, Braman discovered that the limestone exterior required on the new building was too heavy for the existing dealership structure. In order to use the limestone required by General Motors, Braman would have to raze the dealership facility and start from scratch. Instead of incurring such a large expense, Braman identified a lightweight synthetic limestone which very similar to the required limestone but which could be held by the existing dealership structure. Braman brought a proposal to General Motors to allow the dealership to substitute the synthetic limestone in place of the real thing and General Motors ultimately rejected the proposal. Braman cited to Florida motor vehicle franchise law prohibitions against a manufacturer requiring an upgrade which is not “reasonable” under the dealer’s circumstances but to no avail. Instead, General Motors simply responded that the program was “voluntary” and Braman either was required to comply with every single product designation to meet the Essential Brand Elements image or it would not qualify for the lucrative per vehicle incentives General Motors had tied to the EBE program.
Dealers who do not comply, or are unable to comply, with the EBE requirements are placed at a competitive disadvantage with dealers who are able to comply with the program. Specifically, the per vehicle incentive significantly increases the built-in profit margin on the vehicle for the complying dealer, which in turn places significant downward pressure on the profit margin on the sale of a vehicle by the dealer not receiving the incentive. In the situation where a non-EBE and EBE certified dealer are competing for the same customer, the non-EBE dealer cannot compete for the sale head-to-head with the EBE dealer applying the additional incentive to his margin.
Florida law requires a manufacturer to pay a reasonable portion of any per car incentive associated with a manufacturer incentive program to a dealer that complies with all aspects of the program other than the facility portion of the program. Thus, if the incentive program involves certain threshold sales or customer satisfaction performance requirements along with a facility requirement then any dealer meeting the non-facility performance requirements is entitled to a reasonable portion of the per car incentive. Florida law goes on to say that it shall be presumed that a “reasonable” portion shall be eighty percent (80%) of the incentive.
In response to General Motors’ refusal to find the proposed use of the synthetic limestone as compliant with the EBE program or to find that the dealership was in compliance with the non-facility aspects of the EBE program, Braman has filed suit against General Motors seeking payment of one hundred percent (100%) of the EBE per car incentives or, at a minimum, eighty percent (80%) of those incentives which the Cadillac store has failed to receive during the time period since it sought approval of the modified design. As a result of the unique requirements of the Florida motor vehicle franchise laws, Braman is also seeking an order from the Court to triple the amount of money owed to the Cadillac store, which could result in damages exceeding one million dollars ($1,000,000). The case is in the earliest stages of litigation and General Motors’ has not provided a substantive response other than to deny all of Braman allegations.
In a similar matter, Fitzgerald Auto Mall has brought suit against General Motors seeking a declaration by the Court that the EBE program violates Maryland’s motor vehicle franchise laws. In particular, Fitzgerald cites to a prohibition in Maryland law which states that a manufacturer may not offer a vehicle at a lower price to a dealer in exchange for an agreement to make changes to the dealer’s facility. Fitzgerald is arguing that the EBE per vehicle incentive to be paid to dealers that comply with the facility image requirements of the program squarely violates Maryland law in that the incentive effectively reduces the price of the vehicle to the dealer receiving the incentive.
Unlike the Braman matter, General Motors response to the Fitzgerald matter was to immediately ask the dealership to suspend the lawsuit and enter into confidential settlement negotiations. Those negotiations continue.
In order to reign in the manufacturer’s evermore intrusive and costly facility programs, it will require that dealers take advantage of the hard-fought franchise protections in their state law and to insist that the manufacturers be held accountable to abide by those laws.