The WHY? Issue

Oct. 13, 2022

By Michael G. Charapp
Charapp & Weiss LLP


I regularly suggest action dealers should or should not take. For some matters, the guidance is so established that we assume readers understand the reason it is emphasized and do not explain why it is important. This issue answers the question “WHY?” is certain guidance given to motor vehicle dealers on certain important issues.

Why should you consider pre-dispute arbitration provisions for consumer and employment disputes?

Some dealers have been questioning whether they wish to continue to use pre-dispute arbitration provisions, so consumer and employment disputes are determined in arbitration instead of litigation. They are concerned that arbitration is expensive. The dealer pays for administration and the work of a decision maker, expenses covered by the state if a matter goes to court. They also fear the disfavor of regulators, arguing that pre-dispute arbitration provisions have come under attack, especially for employment arbitrations limited recently by federal legislation. They are concerned that pre-dispute arbitration provisions will be generally outlawed.

One must acknowledge that pre-dispute arbitration provisions have been heavily criticized. But as long as they are legal, a dealer should consider whether to use pre-dispute arbitration provisions for consumer and employment matters. Why?

  1. Generally, the attacks on arbitration of claims are led by trial attorneys who lose money when a matter is arbitrated rather than litigated. The parade of horribles on which critics rely do not stand up to careful examination. Arbitration decisions do not result in less favorable results for consumers than litigation. The contrary is the case, where arbitration winds up yielding more money for plaintiffs.
  2. While there may be expenses of administration and for the hearing officer not borne in litigation, arbitration is cheaper for both the consumer/employee and the dealership. That is because the proceeding is speedier with contractual limits preventing endless discovery and motions practice, leading to substantial savings in attorneys’ fees.
  3. The parties have greater control over the identity of the decision maker through arbitration.
  4. If the parties are careful to designate a neutral with decision-making experience, such as a retired judge, the possibilities of a runaway jury verdict are minimized. Juries can be prejudiced against car dealers. A contractual requirement that the decision maker be a retired judge or lawyer well-versed in the law will help limit the problem of bias and eliminate a jury trial that can sometimes lead to a runaway verdict.
  5. Arbitration is confidential. A dealer need not worry about significant publicity arising from a trial that goes into its sales or employment processes in depth or an adverse verdict.
  6. A carefully written arbitration provision will prevent a dealer from being caught up in class action litigation. Even if the state does not permit state class actions, like Virginia, there can still be class actions in federal court for violations of federal statutes. An arbitration provision carefully written to prevent participation of a plaintiff in a class action will protect a dealer from becoming a party to those proceedings.
  7. An arbitration proceeding is final. While, theoretically, an arbitration decision can be challenged, there is a high bar for overturning a decision.

Why respond to every critical franchisor communication?

We regularly advise dealers to respond to every critical communication from a franchisor. Have you received a letter you are not meeting your sales obligations because you have achieved less than 100 on the franchisor’s scale? Have you received a certified letter that you are in breach of your dealer agreement? How about a report you have a capital or facility deficiency? Whatever the criticism, answer.

It may be a problem that can be remedied. For example, a capital deficiency may be resolved by recharacterization of some debt on your balance sheet. It may be something that cannot be remedied because your franchisor is using a measuring standard improper under your state law or for some other reason. Whatever the issue, respond to every point made by your franchisor in its critical communication. Why?

  1. If you wind up in litigation with your franchisor, your notification of your position will be critical. You do not want to be in court or before a state hearing officer with the franchisor contending you are fabricating a case since you never made the franchisor aware of your position previously. Engage a knowledgeable attorney early to help you structure your arguments against the franchisor’s position.
  2. You want to avoid winding up in litigation with your franchisor. It will probably seem to disregard your arguments (since that is the way of most franchisors). But if the arguments are strong and backed by your state law, they will have an effect. An attorney for the franchisor evaluating the case may be sufficiently concerned by your positions to avoid taking the matter before a court or administrative officer.
  3. Most important, a lawyer for your franchisor will recognize that a dealer who has taken the time and effort to respond to critical communications will likely challenge a franchisor in court or in an administrative hearing. That alone may prevent further action that will lead to litigation.

Why regularly review your transaction forms?

We often remind dealers to review their deal forms. We suggest they engage a knowledgeable attorney, provide the entire new and used vehicle sales packages to the attorney, and ask whether the forms are legal and based on best practices. Why?

In reviewing dealer files, we often find problems with the forms dealers use.

  1. We regularly see obsolete forms that the dealer has not discontinued even if it is using its replacement. An example is a spot delivery form. Detailed forms were developed before some state laws codifying spot delivery were enacted. The old forms are replaced by new forms consistent with the state’s law. Dealers will use both forms, with the danger that a court may not enforce either. When a form is replaced, it should be deleted from the deal package.
  2. We often see Forms repeatedly copied to the point they are difficult to read. A customer who complains to a judge he could not read the document because of its poor quality may be excused from complying with the document’s requirements.
  3. Sometimes we see forms created to satisfy the law of another state in a deal package. Only forms that comply with your state’s law should be in your form package.
  4. Most often we see forms used for over a decade that fail to provide the protections a dealer deserves.

The deal paperwork signed by your customer and by you is what governs the terms of your transaction. Include deficient forms, and you might find yourself on the losing side of a case you should otherwise win. Regularly review your deal forms.

Why challenge an inappropriate PMA?

Franchisors regularly change the primary market areas for which their dealers are responsible. Sometimes this is done after census tract revisions by the government, usually after a census. Other changes may result from a regular review.

The PMA is supposed to represent the geographical area in which the dealer theoretically has a sales and service advantage over competing same line-make dealers. It is the most critical element in the measurement of the dealer’s sales performance. Under the theory used by every manufacturer, a dealer should match state average (or region average if that is used by the OEM) throughout its PMA. A dealer who fails to meet that standard will receive negative reports, penalties, threats, and may even face termination.

We advise dealers to review their PMA each time there is a change. If you do not agree with the revised PMA, challenge it. Why?

OEM assignments of PMA are often incorrect. There are many reasons for that, but here are some of the top reasons.

  1. Census tracts are assigned by geographic distance. This disregards important consumer considerations affecting their desire to visit a dealer – drive time advantages of competing dealers and natural barriers such as rivers or mountains that make travel difficult are examples.
  2. Census tract assignments never consider the demographics of buyers. Do city dwellers want to buy domestic brand vehicles that are often truck based? Do rural buyers want to purchase line makes popular with city dwellers? Do rural buyer want to visit cities to buy their vehicles?
  3. Some factories insist on assigning all census tracts, even those where their dealers have no sales advantage. The franchisors assume that consumers will travel to buy their line make vehicle, but consumers too far from the franchisor’s line make dealers may simply buy a different line make vehicle from a dealer that is more convenient.

Dealers often feel that a challenge will fall on deaf ears at the factory, and that is often the case. However, sometimes the challenge may lead to limited success through some changes.

Even when there are no changes, a dealer must register its objections. When the factory begins to assess penalties for performance deficiencies resulting from the misdefined PMA, a dealer may find the need to challenge the factory’s action judicially or through an administrative hearing. You will want to be on record with your objections to the franchisor’s assignment of your PMA.

Why should you review every OEM performance report?

We regularly advise dealers to review every performance report issued by your franchisor. We recognize there are many – sales efficiency, CSI performance, compliance with financial obligations, service penetration, and the like. But there are reasons to know what is in the reports. Why?

The reports are important management tools. If a report shows that a manager is doing well, kind words may be in order. If there is an issue that needs to be reviewed and addressed, the report will give you an early heads up.

Know what franchisor executives are saying about your dealership. What they say about you is often shaped by the reports they review and send to you. If you know what is in there, your staff can work to bring your performance up to standard.

What if you cannot meet the standard? That is a common problem. For example, the franchisor’s report may show you are sales ineffective, but the franchisor’s measuring standard may be flawed. The report will give you a reason to challenge the standard because it is based on a faulty understanding of the applicable law or for some other reason leading to mistaken results.

Why have a succession plan?

We repeatedly advise dealers they must have a succession plan. We do this even though we know dealers do not want to contemplate their own mortality.

But we advise dealers to think about the dealership after their death. Who will own the dealership? Who will operate the dealership? Who will engage the franchisor day to day? Come up with a written plan and make your franchisor and bank aware of it. Why?

You want to know that your employees and family will be well treated after your death. You cannot ensure that if your heirs are forced to sell the dealership.

Your franchisor wants to know that the dealership will be operated properly after your death. Will the owner make sound decisions? Is the operator capable of running the business? Is the operator someone who understands the franchise system and who can work with the franchisor to establish as smooth a relationship as possible.

Your bank wants to know who will pay it if something happens to you. Many dealers who finance their real estate, or who take working capital loans, allow the finance source to include “due on death” provisions in the loan papers, meaning the loans may be called if the dealer dies. Make sure your bank is comfortable with you succession plan to avoid it calling your obligations when you die.

Why should you challenge choice of law, jurisdiction, and venue issues in a supplier contract?

We write frequently about terms you should consider including or striking in a contract with a supplier. Terms about which we have been consistent concern litigation of disputes between the dealer and the supplier. Suppliers’ agreements generally set the law that will apply as the law of the supplier’s home state, with a requirement that any litigation take place in the supplier’s hometown.

We recommend that a dealer challenge this, proposing the application of law of the dealer’s home state with any litigation taking place in the dealer’s hometown. Why?

  1. The supplier comes to you in your state, in your hometown to sell you its products or services. If there is a problem, it should come to your hometown in your state to resolve it.
  2. If a dealer must litigate in a distant city, it will be prohibitively expensive. It must hire a lawyer. It will have repeated travel expenses for employees who will testify. There are substantial claims a dealer will not even challenge due to the expense.
  3. A hometown jury may favor a local supplier over a remote dealer.