Pub. 55 2014-2015 Issue 1

36 equal force to this latter recommendation and shows why it is ill- advised. But the public policy justifications for laws prohibiting direct factory sales are much stronger when a manufacturer has established independent franchised dealers. These laws were not enacted in a vacuum. They were adopted in response to the outrageous behavior of some manufacturers which, after getting their independent dealers to invest billions of dollars in their brands and stores, tried to undercut those dealers by unfairly competing against them with factory outlets. These independent dealers in good faith entered into franchise agree- ments with manufacturers in reliance on the fact that they would be the retailers of the products they were charged with selling and servicing. The dealers did not make those investments or enter into those franchise agreements with the expectation that they would face direct competition from the very companies that encouraged that investment to represent their brands in the marketplace. The existing prohibitions on manufacturercontrolled stores represent the absolute centerpiece of the protections against manufacturer exploitation that have been enacted. The power that manufacturers typically possess over dealers, the regulation of which is at the core of these provisions, has been recognized many times over the years – by Congress nearly 60 years ago and more recently by the courts. The Congressional findings that accompanied the enactment of the 1956 Automobile Dealers Day in Court Act stated as follows: Dealers are with few exceptions completely dependent on the manufacturer for their supply of cars. When the dealer has invested to the extent required to secure a franchise, he becomes in a real sense the economic cap- tive of his manufacturer. The substantial investment of his own personal funds by the dealer in the business, the inability to convert easily the facilities to other uses, the dependence upon a single manufacturer for supply of automobiles, and the difficulty of obtaining a franchise from another manufacturer all contribute toward making the dealer an easy prey for domination by the factory. On the other hand, from the standpoint of the automobile manufacturer, any single dealer is expendable. The faults of the factorydealer system are directly attributable to the superior market position of the manufacturer. 31 Similarly, in a recent review by a federal appellate court of a state ban on direct selling by automobile manufacturers, the Fifth Circuit Court of Appeals noted that “the legislative history indicates the legislature’s intent to prevent manufacturers from utilizing their superior market position to compete against dealers in the retail car market. The legislature’s concern was fueled by the recent opening of several dealerships owned by manufacturers and the perceived detriment to the public from vertical integra- tion of the automobile market.” Ford Motor Company. v. Texas Department of Transportation, 264 F.3d 493, 500 (5th Cir. 2001). These analyses are also borne out by the history of actual manu- facturer behavior. Experience has shown that when manufacturers control both the production and distribution of new automobiles, they often opt to abuse that position by unfairly obtaining a com- petitive advantage to the detriment of dealers and consumers. 32 Manufacturers who also sell at retail have a massive informational advantage relative to their same-brand dealer competitors in that they receive detailed monthly financial and operational reports from those very dealers. This one-way informational flow allows the manufacturers to further improve their market position based on the fact they know everything about their competition. The end result is likely to be favored treatment by manufacturers of the dealerships that they own, and certainly no cost savings or other benefits would offset the harm caused by permitting direct sales. Furthermore, manufacturers have historically required their dealers to make investments in their franchises based on the expected demand for the manufacturer’s products in the dealer’s assigned territory. These investments have been made in dealer- ship facilities, tools, inventory, advertising and promotions, and good will, all to meet the dealers’ obligations under their franchise agreements. It is simply not fair for manufacturers who have imposed these requirements to be allowed to enter the market and thereby put the billions that the dealers have invested at their behest in jeopardy. There also have not been any recent shifts in market structure that might warrant a repeal of these anti-exploitation provisions. In a 2001 speech by former FTCCommissioner Thomas B. Leary (on which you rely in your writings), the former Commissioner suggested that there have been fundamental changes in the tra- ditional relationship between automobile manufacturers and their dealers and that the manufacturers have perhaps lost bargaining power with their dealers. He asserted that the dealers’ collective bargaining strength had been increased by two claimed develop- ments: an increase in the number of manufacturers competing for dealers and the rise of chain dealerships. Former Commissioner Leary was simply wrong on his facts. It is inaccurate to suggest that a level playing field existed in 2001 or exists today. That assertion does not reflect current manufacturer-dealer relationships for the vast majority of dealers. Regardless of the number of manufacturers, the typical franchise contract is not negotiated. It remains a “take it or leave it” offer presented by the manufacturers to their dealers. The basic terms of the manufacturerdealer relationship are thus set by the manu- facturers. Any movement to change those terms comes from the manufacturers, in the form of unilateral amendments to existing agreements or replacement agreements which almost always 31 S. Rep. No. 84-2073 (1956) at page 2. While the industry is less concentrated today at the manufacturer level, these findings remain accurate in describing the power of a manufacturer over a dealer. 32 Keller & Elias at pages 26-27 (Ford and GM examples).