Reprinted from MichiganLawyers Weekly, August 30, 2004
Automotive manufacturers and dealers are confronted with an increasingly competitive environment wherein too many competitors offer an excessive supply of an increasingly redundant and deflationary product to a saturated marketplace. To increase sales and profit margins, manufacturers and dealers have been forced to adopt strategies that may conflict with one another, the manufacturer's international and national strategies often at odds with the dealers' regional and local competitive requirements. These economic forces, coupled with procedural and regulatory laws, are increasingly resulting in litigation. This article identifies some of these economic trends and how they can combine with legislative and regulatory developments to increase the prospects of litigation.
Concurrent and Sometimes Conflicting Economic Pressure Creates an Environment which can Lead to Manufacturer/Dealer Disputes
According to the 2004 Automotive News Market Data Book, the United States produced 12,140,610 cars and trucks in 2003 (down 1.5% from 2002), compared to 10,152,677 in Japan and 5,499,710 in Germany. The same source reported that 16,675,728 new cars and trucks were sold in the United States in 2003, compared to 5,876,654 in Japan and 3,521,936 in Germany. While these figures are certainly impressive, and represent a significant sales increase from 1991/92, they actually show stagnation over the longer term. For example, 12,800,000 vehicles were produced in the United States in 1978. Additionally, a plethora of new producers are adding to the competitive challenge. Hence, in an environment where increasing demand is no longer certain, competition becomes more aggressive for a share of the consumer pie which, if not actually decreasing in real terms, is certainly decreasing in relative terms and is also subject to sudden and disruptive contractions (e.g., 1975, 1980, 1992).
Strategies implemented by manufacturers to stay competitive directly impact the dealer. For example, according to a July 23, 2003, report from JD Power & Associates, manufacturers have been constantly improving the quality of their products, resulting in less warranty expense and improving their profits. To replace declining warranty repair revenue, dealers have been forced to compete with independent service facilities for customer-paid service work, sometimes to the detriment of warranty repair work. The manufacturer, however, has a vested interest in enhancing warranty service at its dealerships, as slow or otherwise inadequate service often leads to negative customer perception of the vehicle itself.
Due in part to changing product demand and demographics, some manufacturers now have too many dealers within certain geogreaphic areas. A dealer in a saturated market may realize insufficient revenue to justify additional investment in the dealership, resulting in inferior facilities, sales, and service satisfaction, and local marketing power. Simply put, more is not always better.
Overall, though, the number of dealerships continues to decline. According to the October 1998 Monthly Labor Review, the number of dealerships peaked in 1950 at 51,000, declined to 26,000 in 1996, and stands at approximately 22,000 today. Though there are fewer dealerships today, they are generally larger. This trend toward bigger dealerships is reflected in the increase of publicly owned dealerships, e.g., AutoNation, United Auto Group, Sonic, Asbury, Group 1 Automotive, and Lithia. While publicly owned dealerships account for only about 6% of new vehicle sales in the United States (according to Ward's Dealer Business), the trend toward multi-dealership chains, publicly or privately owned, is growing. When manufacturer initiatives result in disputes between the manufacturers and these chains, the chains generally have greater resources to oppose them.
Yet another trend is the increased market for used vehicles resulting, in part, from the trend toward leasing by consumers, combined with the longer average life span of automobiles. According to the October 1998 Monthly Labor Review, the average life span of an automobile manufactured in the United States is 8.5 years, compared to a 6 years in 1978 – a 40% increase. Not surprisingly, therefore, the used vehicle department of the average dealership is generating a much higher percentage of dealership profits than it was two decades ago.
The trend toward leasing has been increasing, in part, because it allows consumers to acquire otherwise unaffordable vehicles. The ability to lease a new motor vehicle for less than the cost of purchasing the same vehicle is dependent upon that vehicle's residual value at lease end. An inadequate residual value results in an excessively large lease payment. For this reason, manufacturers have sought to increase the residual values of their vehicles by incorporating the sale of used vehicles into the existing dealer network through certified pre-owned programs. In this way, the manufacturer hopes to enhance the customer's perception of vehicle value by providing limited warranties, selling the vehicles in an established dealership, guaranteeing higher quality through the certification process, and providing specialized sales and service personnel. Improving used vehicle prices increases residual values and decreases lease payments, which, in turn, promotes the sale of new vehicles. The manufacturer/dealer relationship may become strained on either side if lease programs, incentives, and efforts to maintain high vehicle values are implemented.
Recent Federal Legislation has Neutralized the Litigation Avoidance Procedure of Arbitration
Arbitration clauses have historically allowed parties to avoid otherwise protracted and costly litigation. Even though arbitration clauses within a franchise agreement were voided by some states' laws, a party could still sometimes compel arbitration under the Federal Arbitration Act,which preempts state law. See, e.g., Saturn Distrib. Corp. v. Paramount Saturn, Ltd., 326 F.3d 684 (5th Cir. 2003); Saturn Distrib. Corp. v. Williams, 905 F.2d 719 (4th Cir.) cert. denied, 498 U.S. 983 (1990). More recently, however, Congress amended the FAA as follows:
Notwithstanding any other provision of law, whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy.
This exception applies to contracts A entered into, amended, altered, modified, renewed, or extended after November 2, 2002.@ Franchise agreements are typically amended or renewed annually. Accordingly, this exception applies to many franchise agreements executed prior to November 2, 2002. Consequently, compulsory arbitration is unavailable in many, if not most, situations.
Developments in State Legislative and Regulatory Schemes Increase the Opportunity for Manufacturer/Dealer Disputes
Public policy adopted by some states produces legislation that strictly controls the manufacturer/dealer relationship in the sale of new and, in some states, used motor vehicles. This regulatory oversight is found not only in the licensing of dealers, distributors, and manufacturers, but is also increasingly seen in oversight of the contractual relationship itself. Of course, state regulatory control over the manufacturer/dealer relationship has not been uniform throughout the fifty states. This is at least partially explained by differing political agendas, e.g., Michigan produced 2,783,839 vehicles in 2003 compared to Texas' production of 238,396 vehicles. All states now have some form of motor vehicle legislation, and most states have established administrative agencies to interpret and enforce that legislation (some states rely primarily upon the court system).
State legislatures are increasing the scope and detail of regulatory control. Examples of this trend include more restrictive controls over franchise termination, establishment of new dealer points, vehicle allocation, uniformity versus discriminatory practices, factory control or ownership of dealership operations, satellite warranty repair, and the sale of used motor vehicles. Some states are also enlarging their definition of A motor vehicles@ subject to that particular state's regulatory scheme. Specifically, whereas certain specialty vehicles (e.g., school buses, fire trucks, ambulances) or vehicles in excess of a certain gross weight have often been excepted from certain regulatory controls (e.g., manufacturer sales, warranty repair), these exceptions are being narrowed and/or eliminated in some states. Additionally, certain products which have been traditionally omitted from regulatory control (e.g., used motor vehicles and off-road vehicles) are now increasingly being regulated. In a nutshell, the distribution and sale of motor vehicles is becoming increasingly regulated in an environment that instead of more regulation requires greater flexibility and responsiveness to market forces.
Conclusion
Because the measures manufacturers and dealers adopt to combat economic and market pressures are often based on differing agendas, and because of increased (and inconsistent) state regulation of the manufacturer/dealer relationship, disputes between manufacturers and dealers are on the rise and are often forced to proceed through litigation, either within the courts or through administrative agencies. There is no reason to doubt that these disputes will continue to increase for the foreseeable future.