Pub. 56 2015-2016 Issue 4

25 SUMMER 2016  NADA RESPONSE — CONTINUED ON PAGE 26 market structure, manufacturer behavior, and intrusion in the market by the federal antitrust statutes. And manufacturers often use this excess power to overreach and act opportunisti- cally in their relationships with their dealers, to the detriment of dealers and ultimately consumers. The state franchise laws that have been enacted operate to counteract these anomalies and to afford the dealers a reasonable opportunity to negotiate their economic relationships. e structural economic imbalance between auto manu- facturers anddealers is extensive. One key manifestation of the uneven relationship between manufacturers and dealers can be seen in the various franchise contracts. These agree- ments are not negotiated; they are contracts of adhesion that are presented to the dealer on a “take it or leave it” basis. And any movement to change those terms emanates from the manufacturer in the form of either unilateral amendments to existing agreements or replacement agreements, both of which almost always contain terms that are more onerous from the dealer perspective than what existed before. Frequently supplementing these agreements are controversial programs designed to control dealer behavior, often developed with little or no meaningful dealer input. 24 There is also a significant existing asymmetry of information between dealers and manufacturers. This exists not only dur- ing the exploratory and purchase phase but also during the operational life of the dealership. The manufacturer knows the full details of a dealer’s operations, including its customer information, its finances, the disposition of its assets, and its succession plans. Conversely, a dealer has no such insight into its manufacturer beyond public documents and SEC filings. Meanwhile, themanufacturer heavily vets any dealer principal and has minimum requirements for assets and investment and continuing access to a dealer’s books and records. And there’s more. As a result of the internet, everyone knows the dealer’s invoice price for vehicles; these are transpar- ent. Similarly, retail prices for vehicles are also transparent. What is not available to anyone — not the dealer and not the consumer — is the margin from the manufacturer. This kind of opacity can only hinder the ability of a dealer to make appropriate business decisions. 25 e important role of the dealers’ barriers to exit. In light of the foregoing, a question that clearly arises is why does a dealer remain in such a one-sided contractual relation- ship if and when its manufacturer starts using its superior bargaining power opportunistically? Stated differently, the question is why can’t dealers protect themselves like participants in other markets simply by walking away and dealing with other vendors? The short answer is that, once a dealer has signed onto a franchise agreement and has made the required investments in the franchise, 26 that dealer faces significant barriers to exit. First and foremost among these barriers is the previously mentioned sizeable economic difference and informational asymmetry between dealers and manufacturers. That disso- nance impairs the dealer’s ability tomake reasonable decisions about the future. A dealer cannot know the future state of the manufacturer or its products and, furthermore, cannot judge the success those products will have in the market. Indeed, the normal response from a merchant to such uncertainty is to have multiple product lines from multiple sources, thus allowing the merchant to hedge its risks. In the auto retail- ing arena, however, this effort to respond by stocking new or different products is restricted by the manufacturers. 27 This then also creates a second barrier to exit. Once personally invested in a business, a dealer facing a problematic or failing product line or manufacturer has few viable alternatives for disposal. After all, who makes an offer for a multi-million dollar business with high fixed costs and little control over what products can be stocked when that business is troubled or failing?  NADA RESPONSE — CONTINUED FROM PAGE 23 24 Indeed, there are many examples where a manufacturer has implemented amendments to its franchise agreement via “click-through” protocols on online portals. There are also instances where dealers unwittingly “agree” to such amendments via participation in a manufacturer program or similar behavior. Such “agreements” are clearly non- negotiable. What’s more, while many dealers may “agree” to these amendments because they feel they have no choice, those few dealers who challenge the fairness or even the legality of the amendments are often faced with the following “choice:” sign the agreement (like the majority of other dealers) or be ineligible (or render their customers ineligible) for a manufacturer incentive program. This is an impossible choice for any dealer; in reality, it is no choice at all. 25 In this connection, it is important again to recognize that what the franchise laws are regulating is these business-to-business dealings. 26 In general, the franchise agreements and related side agreements require the dealer to make continuing investments in land, buildings, equipment, computers, tools, personnel, training, advertising, and promotions. 27 Most manufacturers have strict rules against selling and servicing another manufacturer’s products at the same location.