Lawyers Debate Dealer Laws

SACRAMENTO, CA — Los Angeles attorney Lawrence Silver recalls auto makers' heavy-handedness that led to the enactment of dealer franchise laws.

“Not long ago,” says Silver, who represents dealers, “manufacturers would tell dealers, “We want you to do this.' If a dealer said no, the manufacturer would say, ‘OK, we'll put a competing dealer two blocks from you.’”

Reacting to such tactics, dealers over the years — especially in the 1960s — convinced state legislatures nationwide to adopt franchise laws to protect them.

Among the protections: limits on how close auto makers can locate same-brand dealerships from one another; prohibition of vehicle sales except by franchised dealers with contiguous service facilities; and just cause for terminating a franchise.

Since their enactment, the merits of franchise laws have been disputed within the auto industry.

Opponents of the laws say the pendulum has swung too far in favor of dealers and that too many burdensome provisions have been added to the statutes.

Proponents say the laws offer dealers and their investments a degree of defense against unreasonable auto makers.

It is still a hot topic, as evidenced by a spirited discussion among attorneys at the California New Motor Vehicle Board's sixth annual industry roundtable here.

Battle lines were drawn between two groups of lawyers: those who represent dealers and those who represent auto makers in dealer-manufacturer legal disputes.

“Given the economic power of the factory over dealers, it's a relationship of tension and an exercise of power that the franchise laws address and restrain,” Silver says.

Michael Flanagan, who also represents dealers, says, “The franchise laws didn't spring up just because dealers had good lobbyists. The laws are intended to protect substantial investments.”

The laws over the years have been amended while continuing to do what they were intended to do, Flanagan says. “They do more good than harm.”

But Kevin Colton, an attorney for auto makers, says many franchise laws create inefficiencies and hurt consumers.

“The laws were requested by dealers to prevent manufacturers from overreaching, but the industry has changed,” Colton says. “The laws limit the response to today's challenges.”

He doesn't advocate eliminating all franchise laws. But he opposes those that limit competition, lead to higher prices for customers and protect sub-standard dealers from losing their franchises at a time when auto makers are looking to reduce dealership ranks.

“A lot of states have reviewed the laws and reached the same conclusion,” Colton says. He cites efforts in Florida, Texas, Tennessee and Hawaii to modify or eliminate some provisions of the statutes.

“Franchise laws clearly hamper efficiencies and prevent implementation of termination initiatives against (under-performing) dealers,” he says.

Flanagan replies, “Much of what you say in derogation has been addressed, and franchise laws have been upheld by courts.”

That includes the U.S. Supreme Court which, in a 9-0 decision in 1979, affirmed franchise laws. Conservative Justice William Rehnquist wrote the main opinion. Liberal Justice John Paul Stevens wrote the concurring opinion.

But Allen Resnick, an attorney for auto makers, says the complaint against franchise laws isn't that they are unconstitutional. Rather, he says, they restrain competition.

“Courts aren't upholding the laws because they are good for consumers,” Resnick says.

Dealer attorney Halbert Rasmussen says auto retailers, collectively, have invested billions of dollars in their dealerships, often at the behest of auto makers.

Franchise laws “give dealers the confidence they need to make such investments,” he says.

Colton responds: “Manufacturers have invested billions, as well. They ought to have the right to say how their brand is represented. Some of these laws impede that.”

Agreeing that times have changed since the franchise laws were first enacted, Rasmussen says: “Yes, the market has changed, but not the fundamental economics.”

What has changed, too, is the notion of big and powerful auto makers lording over mom and pop dealers, Resnick says. Instead, an auto maker today is “interacting with big, publicly owned dealer groups.”

Attorney Marjorie Ehrich Lewis, who represents auto makers, claims some dealers armed with franchise laws will drag out court disputes for years.

She cites a case in which an existing Nissan dealer, claiming territorial infringement, fought the opening of a new Nissan dealership point.

“It was an abuse, and it was intended to keep a competitor out of the market for the five years that the case dragged on,” Lewis says.

But Flanagan says, “Courts have addressed the time issue of kicking the can down the road as long as possible.”

Rasmussen acknowledges auto makers of today tend to be fair and more even-handed. But he credits the franchise laws for “keeping them honest.”

Gone are the confrontational attitudes between dealers and auto makers, says Resnick. “There is not an us vs. them mentality anymore.”

Alan Skobin agrees. He is a vice president at Galpin Automotive Group in North Hills, CA. He also is a dealer member of the California vehicle board — and an attorney.

“The vast majority of manufacturers and dealers work together,” Skobin says. “There are some extremes, but it has worked pretty well. There's a co-operative nature, because we're all in this together.”

But Silver says some auto makers will withhold allocations of hot-selling vehicles if a dealer falls out of favor. “Dealers always are in the position of not wanting to tick off manufacturers because of allocations,” he says.

When a roundtable attendee questions if that still happens, Silver shoots back: “I have some depositions for you to read.”

Bruce Ishimatsu, an auto-maker lawyer, says franchise laws might be tweaked, but “the laws, dealers and manufacturers aren't going away.”