Pub. 56 2015-2016 Issue 4

28 groups may not, for example, agree to refuse to sell an unpopular car or decline to participate in an exploitative manufacturer program. Dealer groups may not require better financial arrangements as a condition of using a manufacturer’s captive finance company. And, perhaps most importantly, no group of dealers may jointly refuse to accept a manufacturer’s unilateral revisions to its franchise agreement. Unlike unions, dealers have no exemption under the federal antitrust laws to engage in collective bargaining with the manufacturers. If these restrictions did not exist, dealers would be in a position to exercise collective economic self-help in response to manufacturer behavior. The world would be a different place indeed if dealers could threaten to stop buying cars from a given manufacturer unless that manufacturer dropped a perni- cious program that it had proposed. But exercising collec- tive economic power in this manner would be illegal and is therefore not an available option for dealers. 35 The combination of a lack of individual bargaining power, the prohibitions in the federal antitrust laws against the exercise of collective economic power, and significant barriers to exit leaves auto dealers especially vulnerable to manufacturer overreach. And, unfortunately, manu- facturers have a long history of taking advantage of that superior position and behaving opportunistically relative to their dealers. Examples abound, including (1) threats of termination or a shorter term franchise agreement on re- newal based on a dealer’s failure to meet sales performance targets that were not realistically attainable, (2) pressure to upgrade facilities without any evidence of a positive return on investment, (3) pressure to accept slow-moving inventory, (4) requiring a dealer to compete when other dealers in the same market are given preferential pricing (“two-tiered pricing”), (5) requiring a dealer to join, and contribute financially to a cooperative advertising associa- tion even when the advertising is of little or no benefit in the dealer’s market, and (6) pressure to accept unordered parts and essential special tools whether needed or not. And the list expands each year due to the creative efforts of the manufacturers to outsource more and more costs. In light of their limited ability to protect themselves through normal market channels, dealers have been left with no viable option but to seek redress through their state legislatures. Professor Schneider framed the issue quite nicely when he said, during panel one, that the question that the franchise laws present is whether “you want to give dealers equal bargaining power with manufactur- ers?” TR. I; 27. This is, in fact, the question that state legislatures have been called upon to answer; and because of the structure of the relationship, the history of manu- facturer behavior, and the reduction in dealer negotiating power resulting from the federal antitrust laws, they have generally and legitimately answered that question in the affirmative. 36 Importantly, this engagement with the state legislatures was initially, and still is today, a negotiation. The manu- facturers are entitled to be (and are) full participants in the legislative process, as are other related constituencies such as consumer groups, safety advocates, municipalities, other auto industry stakeholders, and other business organiza- tions. Over the years, these public sector negotiations on motor vehicle laws and the resulting implementing regu- lations have resulted in a process that has fairly balanced a variety of competing economic and political interests. Notably, the end result serves the public interest far more than would be the case if private contractual negotiations between the dealers as a group and the manufacturers were permitted under federal antitrust laws. In this sense, the enactment of state franchise laws governing the sale of motor vehicles was the natural economic response to the absence of a free market: a dysfunctional market marked by (1) constrained dealer advocacy with threats of antitrust sanctions from the federal government and (2) actual harm from oppressive, unilateral actions from the manufacturers. In the future, the degradation of these laws would replicate the same dysfunctional market, while the retention of the statutes will replicate the same beneficial stakeholder negotiations inherent in the public policy process. C. e Economic Arguments Made at the Workshop In Opposition to the Franchise System Were Not Well Founded At their core, the arguments presented against the franchise laws by various panelists at the Workshop boil down to a  NADA RESPONSE — CONTINUED FROM PAGE 27 35 In another manifestation of their lack of understanding of the auto retailing marketplace, some of the Workshop participants were apparently unaware of these limitations. Professor Sappington argued that, in lieu of seeking resort in the state legislatures, “dealer teams” can (and should) work together with their manufacturers to work out a rela- tionship package that will best position that brand to compete with other brands. TR. II; 9. But Professor Sappington’s idyllic view of the world ignores the fact that, because of the federal antitrust laws, dealers cannot engage in those negotiations as a team and that, as individuals, they lack the bargaining power to achieve an appropriate outcome. 36While theory might suggest that any manufacturer that undermines the financial viability of its franchisors would soon face ruin, reality has unfortunately proven otherwise. The state franchise laws have been enacted to regulate this opportunistic behavior by manufacturers. Indeed, when dealers support the enactment of these laws, they are simply reacting to manufacturer overreach. A manufacturer can push cost and obligations onto dealers with little or no accountability. Therefore, it is perfectly understandable why dealers feel it necessary to petition their state governments. Absent these pressures from the manufacturers, NADA has little doubt that the state laws would be considerably less extensive than they necessarily are today.