Earlier this month, on February 3, 2015, Mazda North American Operations (MNAO) issued a new marketing compliance program labeled the Ad Standards Compliance Program. The Program contains many of the requirements we see in typical advertising rules issued by other manufacturers. The Program sets out in great detail exactly how the Mazda, Mazda Certified Pre-owned and SkyActiv logos are, and are not, to be used in dealer advertising and exactly how certain Mazda catch phrases (i.e., “zoom zoom”) are to be used in such advertising. It also painstakingly describes how each Mazda model line is to be advertised down to the spaces used between various words and symbols and what color schemes are to be used with the use of various types of advertising. As is customary, the Program prohibits the use of distressed pricing in all advertisements by using terms like “blowout”, “clearance” and “overstocked.” Then the Program moves into a much more problematic area – minimum advertised price requirements.
MNAO’s Ad Standards Compliance Program establishes a “Minimum Allowable Advertised Price” (MAAP) which prohibits dealers from advertising a vehicle’s price below invoice plus destination and delivery charges. The Program expressly states that unless a customer discount is completely unrestricted, those discounts may not be used to reduce the advertised price. Thus, disclosing in the advertised price that the price includes a $500 military discount, for example, is prohibited. The MAAP applies to all dealer advertising including print, internet, television, radio and email blasts. It, of course, does not apply to the price negotiated individually with a dealership customer. That price is always in the discretion of the dealer.
To enforce the MAAP, MNAO provides a series of increasingly more harsh penalties for each violation of the Program. A dealership’s first violation (“first strike”) generates a warning letter from MNAO and starts a 365 day clock within which the penalties for additional violations are measured. A second strike within the 365 day time frame, will cause MNAO to charge the dealer back market allowances equal to 1% of base MSRP for all vehicles “wholesaled” to the dealer during the month of the violation and the two prior months. A third strike will result in a chargeback for all vehicles invoiced during a six month period and for any additional strikes the dealer will be charged back for all vehicles invoiced during an additional three month period. As we understand the Program, each strike starts a new, independent 365 day clock such that the dealer must be free of any violation for one year in order to avoid a penalty.
“[T]he state franchise protections are a dealership’s only real line of defense against continuing manufacturer initiatives.”
The chargebacks proposed by MNAO can be significant averaging between $200 and $300 per vehicle. For a high volume dealer, these chargebacks could quickly amount to hundreds of thousands of dollars. So, the question is can MNAO dictate what price an independent franchisee can use in advertising the sale of Mazda vehicles? As so often is the case, the answer depends largely on what the dealership’s state motor vehicle franchise laws provide.
Generally, courts have found that manufacturers can require minimum product pricing if it can be tied to preventing the retailer from harming the value/public perception of the product in the marketplace and from threatening the investment made by the retail network in selling the product. In other words, if the retail network is investing substantial amounts of money in the stores (i.e., car dealerships) then the manufacturer can require minimum pricing in order to assist the retail network in reaching transaction prices which help them obtain a return on their investment. Here, Mazda may have gone too far by not allowing dealers to factor in customer incentives (other than those available to all customers with no restriction) into the advertised price. Disclosed properly, incentives which apply to a certain group of customers are not likely to negatively impact the dealer body’s return on investment. If a set of incentives did have that impact then MNAO would be in a position to alter or discontinue the incentive accordingly.
With regard to state motor vehicle dealer franchise laws, there are several potential protections against a manufacturer like Mazda which is enforcing advertising restrictions with marketing allowance chargebacks or other penalties. First, most state franchise protections provide dealerships with a right to protest incentive chargebacks paid by the manufacturer to the dealership. The standard in these protests is generally some variation on whether the alleged violation triggering the chargeback is reasonable. In the case of MNAO advertising chargebacks, the dealership would argue that the MAAP penalties are anything but reasonable. The Mazda dealership would argue both that the MAAP itself is an unreasonable standard and that the penalties associated with a violation are not in proportion to the violation. Keep in mind that a dealership taking advantage of its right to protest a chargeback, with an associated stay of the chargeback pending resolution, will generally result in a compromise settlement between the dealer and the manufacturer. Such a settlement would not otherwise be available without the pressure a protest places on the manufacturer.
In some states, dealers may also have a right to protest a new advertising program as a modification of the franchise which substantially impairs the current obligations of the dealer. Based upon the penalties set out in the Mazda advertising program, a dealer could certainly argue that those amounts substantially impair their ability to sell vehicles as well as the investment in their franchise. Again, such a protest could very well create leverage in pushing Mazda to a resolution which is acceptable to the protesting dealer.
Let the Legislative Battles Begin
It is that time of year again – Dealer Associations versus the Alliance of Motor Vehicle Manufacturers. As most state legislative sessions begin, various state and metro dealer associations will be back slugging it out with the Alliance of Motor Vehicle Manufacturers in their fight to obtain franchise protections. As the attorneys at BSM assist our dealer association clients in this fight, we are seeing the following protections being sought:
Grandfather period following a manufacturer required facility upgrade within which the dealer is exempt from an additional upgrade;
Allowing dealers to use building materials, furniture and fixtures which are substantially the same as those recommended by the manufacturer in facility upgrades where the dealer is able to find those products at a lower cost;
Restricting manufacturers’ ability to access dealership customer and other data;
Restrictions on two-tier sales incentive programs;
Prohibition on vehicle manufacturers or their affiliates from selling vehicles directly to customers; and
Requirement that manufacturers apply reasonable financial, customer satisfaction and sales performance requirements to dealers.
If you have read my column in Dealer Magazine for any length of time, you know that the state franchise protections are a dealership’s only real line of defense against continuing manufacturer initiatives. The state and metro dealer associations pursuing these franchise protections cannot be successful without the involvement of their dealer members, through both the giving of time and money. The proposed franchise protections will be given more credibility when dealers are directly engaging their state legislators and explaining first-hand why the protections are needed. Likewise, the manufacturers have deep pockets to hire powerful lobbyist in attempting to stop the proposed franchise protections from becoming law. The dealer associations need their members’ monetary support to counter this effort by hiring their own lobbyist to assist in pushing the legislation through the system.