Pub. 2 Issue 2

23 SUMMER 2014 Dealers gave the manufacturers large deposits and agreed to accept the cars that were built on a regular schedule. This provided car manufacturers with the much-needed cash they had to have in order to continue growing and innovating, but it also put the dealerships in the position of being investors, along with the associated risks that come with giving someone else a big chunk of cash without having any guarantees of making a profit. It worked because when people came in and saw the cars that were for sale, they wanted them. But it was still a tremendous financial risk that mostly benefited the car manufacturers. The first franchised dealerships signed agreements with the companies that were manufacturing cars, establishing a pattern that continues today. In exchange for exclusive distribution rights within a large geographical area for about a year, the dealers agreed to do the following: • Create and maintain a showroom and a repair shop • Keep a reasonable amount of cars on the lot • Sell within the specified geographical area These requirements still exist in current franchise agreements. By 1910, the car manufacturers began to require that dealers create subdealers within their geographical area. The result was a large number of independent franchisees. However, as the car manufacturers became more powerful than the many dealerships, problems began to develop because the car manufacturers could, and did, treat dealers poorly. The fact was, manufacturers had more economic power and bargaining strength than the dealerships did. Needless to say, the dealerships didn’t appreciate that. They appealed to Congress. In 1956, Congress protected dealers by passing the Automobile Dealer’s Day in Court Act. Coercion was prohibited, and dealers now had the right to sue car manufacturers in federal court if necessary. The act helped, but it did not cure the problem; for example, the courts did not always agree that poor behavior on the part of a car manufacturer rose to the level of coercion. In a continuing attempt to fix the problems that were still there, other legislation soon followed, especially during the 1960s and 1970s. What the problem really came down to was simple: • Dealership franchises, by their very nature, are local. States love them because they are strong economic contributors that directly benefit the communities where they are located. • Car manufacturers are exactly the opposite: national businesses, not local ones, operating a long way away and controlled by people who have little or no investment, emotional or otherwise, in the communities that indirectly support them. When car manufacturers have most of the power in the relationship, that power inequity creates a situation where business abuse is almost inevitable because the car manufacturers and the dealerships don’t always have the same interests. What does that mean for day-to-day business operations? For one thing, car manufacturers can get away with the following: • They can refuse to promptly take care of safety issues because they are more interested in reducing the cost of warranty and recall repairs. For examples of this, look at the Ford Pinto, Firestone tires, floor mats in Toyotas, and the effect of big key chains on GM switches. The people who buy and use the cars end up dying or being injured because executives thousands of miles away don’t want to solve a problem that will cost money. • They can play financial games, like stalling — sometimes forever — when it is time to reimburse a dealership for repairs that were supposed to be paid for by the car manufacturer. If a car manufacturer can get a  Franchise System — continued on page 24 IT’S NO WONDER DEALERSHIPS DON’T APPRECIATE THESE SORTS OF BUSINESS PRACTICES. BUT DESPITE EXISTING FEDERAL LEGISLATION, THE LOGICAL PLACE FOR RESTRAINT IS REALLY ON A STATE LEVEL. WHY? DEALERSHIPS ARE LOCAL, NOT NATIONAL, IN NATURE.