Economic, regulatory and other market forces create a dynamic automotive industry requiring flexible strategies to stay competitive. While manufacturers must respond to international and national trends, dealers focus on local market demands. Consequently, the strategies adopted by manufacturers and dealers often conflict and result in mutually exhausting litigation, distracting resources required to stay competitive.
Legal counsel can sometimes best serve their manufacturing or dealer clients by working with the business managers to develop uniformly applied procedures that enhance the prospects of staying out of costly and protracted litigation. This avoidance counseling is increasingly requested by clients and provided by trial lawyers, following the logic that the best way to avoid litigation is to confer with professionals who routinely observe its causes.
This article identifies some of the economic and legislative/regulatory reasons for the rise in dealer/manufacturer disputes, and then provides some tips on how to avoid becoming a litigation victim.
Economic Developments Affect Manufacturers and Dealers Differently
The market for cars and trucks has been stagnant while competitive pressures continue to rise. 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) and even down from the 1978 total of 12,800,000. Japan produced 10,152,677 in 2004, and Germany came in with 5,499,710. New manufacturers, too, have entered the market and increased competitive pressure.
Strategies implemented by manufacturers and dealers to stay competitive sometimes conflict. For example, JD Power & Associates reported in July 23, 2003 that manufacturers have improved the quality of their products, resulting in lowered warranty costs and improving their profits. To replace declining warranty repair revenue, dealers must compete with independent service facilities for customer-paid service work, sometimes distracting from warranty repair service.
Changing demand and demographics have also resulted in some manufacturers having too many dealers in some areas, contributing to inferior facilities, customer satisfaction, and local marketing power. In recognition of a marketing reality, i.e., more is not always better, the number of dealerships have declined from 51,000 in 1950, to approximately 22,000 today.
In addition, the market for used vehicles has increased in recent years, resulting in part from the trend toward leasing, combined with longer automobile life. Accordingly, current used vehicle sales generate a higher percentage of dealership profits than two decades ago.
As another example of industry change, the automotive industry is increasingly undergoing consolidation. While there are fewer dealers, they are bigger, and sometimes consolidated within multi-region private and publicly owned dealer groups. Manufacturers have consolidated (and in some cases eliminated) product lines. Although sometimes motivated by different perceived needs, the goals of dealers and manufacturers are really the same: to survive and become stronger.
States Inconsistently Regulate Common Areas of Dispute
While states regulate the manufacturer/dealer relationship, this regulatory oversight is not uniform throughout the fifty states. The absence of regulatory uniformity constitutes a challenge to manufacturers, and also to some of the larger dealer groups.
Areas in which states implement different regulatory schemes include franchise termination and transfers, establishment of new dealerships, vehicle allocation, uniform versus discriminatory practices, factory control or ownership of dealership operations, manufacturer direct sales, warranty repair, performance related criteria (e.g. CSI, SSI, planning volume, etc.), manufacturer imposed dealer qualification, and used vehicle sales. Even the definition of "motor vehicle" differs from state to state. For example, in some states certain specialty vehicles (e.g., school buses, fire trucks, ambulances) or vehicles in excess of a certain gross weight are exempt from certain regulatory controls. Considering the manufacturers' need to implement nation-wide strategies, it is not surprising that regulatory inconsistency promotes manufacturer/dealer disputes.
Arbitration – A Lost Opportunity
Until recently, automotive manufacturers could avail themselves of efficiencies inherent in the arbitration process. In fact, even though some state laws sought to void arbitration clauses within franchise agreements, arbitration could still be compelled 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 enacted the following legislation:
. . . [W]henever 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. 15 U.S.C. § 1226(a)(2).
This exception applies to contracts "entered into, amended, altered, modified, renewed, or extended after November 2, 2002." Because franchise agreements are typically amended or renewed annually, compulsory arbitration is unavailable in many, if not most, existing situations.
Tips to Avoid Litigation
Despite obvious reasons to avoid disputes (e.g., cost, risk, distraction, damage to relationships, etc.), litigation between manufacturers and dealers continues to rise. The following tips for avoiding litigation are based on many of the recurring causes of litigation.
- Separate Stubbornness from Business. This common human characteristic (most aptly illustrated by Dr. Seuss in his short story "The Zax") is one of the primary reasons that avoidable disputes proceed to litigation. One cure is to separate the proverbial hothead from the decision making. Put bluntly, the person making the final decision is not always the one you want at the helm.
- Know Your Case, Know the Law. Parties often decide to engage in litigation without adequately analyzing the facts, the controlling law, or the available options for compromise. Before committing to a course of action, counsel should sufficiently explain the controlling legal standards, burdens, and procedure to allow meaningful understanding of the potential risks and opportunities, i.e., look before you leap.
- Talk Frequently; Talk Clearly; Talk in Good Faith. Early disagreements often grow into mutually harmful litigation because the parties failed to adequately communicate, resulting in misunderstandings, confusion, and mistrust.
- Analyze Historic Experience. Practices that result in a higher risk of litigation are sometimes deeply rooted within a business's operational structure. A company should identify and study the areas generating litigation.
- Respond Rapidly. Opportunities to avoid litigation are often missed because inadequate attention is given during a dispute's embryonic stage. One effective method to ensure proper recognition, identification, and analysis of a potential or existing risk is to implement an expedited review process that timely directs resources to early case assessment.
- Apply the Golden Rule. This tip speaks for itself and applies equally to manufacturers and dealers.
Conclusion
Continually evolving economic and other market pressures require highly flexible and responsive marketing. However, perceptions of conflicting market demands combined with the inconsistent regulatory schemes adopted by the states have resulted in an increasingly contentious environment. In the automotive industry perhaps more than any other, avoidance counseling is a step manufacturers and dealers should take to ensure that neither emotions nor inadequate information rule the day.