Don’t be Forced to Sign a Renewal Franchise Agreement

Posted on September 6th, 2013 by Richard Sox from Dealer Magazine

Some things never change. The factories keep telling dealers that when the expiration date in their franchise agreement arrives the dealers must agree to the terms of the renewal agreement the factory puts in front of them and, unfortunately, some dealer continue to believe the lie! DON’T SIGN A RENEWAL FRANCHISE AGREEMENT UNLESS YOU ARE SATISFIED WITH ITS TERMS.

As I have written in this column on several occasions, virtually every state motor vehicle franchise law provides dealers with significant protections against being forced to sign a renewal franchise agreement containing new and onerous terms. Those protections are most often not couched in terms of a prohibition on an adverse change to your franchise but, instead, in terms of a prohibition on failing to non-renew a franchise agreement without providing the dealer with notice and having “good cause” to do so.

The restrictions on franchise agreement renewal are most often found in the franchise termination section of your state law. In practice, those provisions mean that a manufacturer cannot simply rely on the expiration date of your franchise agreement as a way of saying “either you sign our [the manufacturer’s] new agreement or you no longer have a franchise.” Instead, the manufacturer must first give you notice of its intent to non-renew and then must demonstrate good cause in doing so. “Good cause” is generally understood to be a material breach of an otherwise reasonable provision of your franchise agreement. I am not aware of any franchise agreement which contains a provision requiring you to execute any renewal agreement presented to a dealer no matter how onerous the new provisions. I would further guess that any such provision in a franchise agreement would not meet the threshold test of being reasonable. Without good cause to non-renew, the practical effect is that your “expired” franchise agreement continues in full force and effect unless and until a new agreement is reached.

We have a number of dealer clients who have refused to sign a renewal agreement containing new and burdensome provisions (i.e. facility construction deadlines or specific sales performance goals). Instead of receiving a notice from the factory that their franchise agreement will not be renewed for failure to agree to the proposed new agreement, those dealers have either received a letter extending the expiration date of the franchise agreement from the manufacturer or received no notice at all in which case the franchise agreement is “extended” by operation of law.

Before signing a renewal franchise agreement, be sure to have an experienced motor vehicle franchise lawyer review the agreement and provide advice on any new terms. In many instances, the factory is willing to negotiate over the proposed new terms if they know that the dealer is aware of their right under the franchise laws to refuse to sign the renewal agreement as presented.

MANUFACTURER FACILITY AND IMAGE PROGRAM UPDATES

The area of manufacturer facility expansion and image upgrade requirements has been extremely active so far this year. Large, well-heeled dealers like Jack Fitzgerald and Norman Braman have pushed back against their manufacturers’ unreasonable facility requirements by bringing lawsuits in federal court. Several state legislatures have passed new and significant protections against manufacturer facility requirements. And NADA completed its study on the practical impact image upgrades have upon dealership sales and service revenue.

Unfortunately for many dealers, just days ago Braman settled his lawsuit with General Motors before the court had an opportunity to provide any ruling on his claims that General Motors’ refusal to pay his Cadillac store facility program incentives violated Florida’s franchise laws regarding payment of facility-related incentives as well as federal price discrimination laws. The settlement agreement between Braman and General Motors was, as all settlements between manufacturers and dealers, strictly confidential. It is fair to say, however, that a settlement in the very earliest stages of the case indicates that General Motors believed it had exposure under Braman’s claims. As a result, we suspect General Motors agreed to compensate Braman for unpaid per vehicle bonus monies and arrived at some mechanism for paying future facility bonus monies.

Fitzgerald’s lawsuit has been in limbo since shortly after its filing due to General Motors desire to negotiate a resolution there as well. As in the Braman matter, we suspect that General Motors sees significant exposure under Fitzgerald’s claims of a violation of Maryland’s franchise law which prohibits withholding per vehicle incentives from any dealer no matter whether or not facility requirements are met. Thus, we expect it will only be a matter of time before a confidential settlement is announced in the Fitzgerald case.

Recently concluded legislative sessions saw significant facility renovation protections added to state franchise laws. These protections have included prohibitions against (i) a manufacturer requiring a dealer to renovate his or her facility if the facility was renovated pursuant to manufacturer requirements within the past several years; (ii) unreasonable construction requirements; (iii) the use of sole-sourced construction materials if a less expensive equivalent is found and (iv) withholding per vehicle facility incentives where the dealer has substantially complied with the manufacturer’s facility program.

Amidst the court and legislative battles over manufacturer facility expansion and image upgrade requirements, NADA completed the second phase of its study on the practical impact to the dealership’s bottom-line of manufacturer-mandated facility renovations. Not surprisingly, the study concluded that where a facility size expansion was necessary to meet the growing demands of a dealership’s market such an expansion provided the dealer a return on that investment BUT where a manufacturer was requiring new imaging in effort to make all dealerships look identical, no positive return on investment resulted.

So with all that has gone on with dealership facilities so far this year what can we expect for the remainder of the year and into 2014. Keeping in mind that several of the manufacturer’s image programs have been around for quite some time without any change (i.e. Nissan’s NREDI, Infiniti’s IREDI and Toyota’s Image II), combined with improving dealership finances, we believe several manufacturers will be introducing new image programs by no later than the NADA convention in early 2014. Moreover, due to the substantial increase in vehicle sales the past two years and expectations for continued growth; we expect manufacturers to revise dealership’s size requirements to meet the additional sales and service customer demand. The projected growth in sales and service business is almost always inflated by the manufacturer and does not take into consideration the dealership’s ability to handle growth within the current facility.

With these expected new image and expansion requirements, dealers will have an opportunity to utilize the results of the NADA study to push back on new facility requirements or, at a minimum, negotiate a reduction in the scope of the construction. Likewise, dealers will have the opportunity to utilize the new franchise laws governing manufacturer-facility requirements to avoid unreasonable manufacturer demands. These franchise laws were extremely hard-fought by your state and metro dealer associations and, in recognition of those efforts, should be taken advantage of by dealers at every opportunity.

Richard Sox is a lawyer with the firm of Bass Sox Mercer PA (formerly known as Myers & Fuller PA) with offices in Tallahassee, Florida and Raleigh, North Carolina. The firm’s sole practice is the representation of automobile dealers in their quest to establish a level playing field when they deal with automobile manufacturers.