Motor Vehicle Dealership Reinstatement Measure Signed into Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

More than 2,000 motor vehicle dealers that had their franchises terminated in connection with the federal government-funded restructuring of General Motors and Chrysler earlier this year now have an opportunity to seek reinstatement of their franchises under legislation signed yesterday by President Obama.

Under the new law, dealerships that were not lawfully terminated under state laws on or before April 29, 2009, shall be authorized to request reinstatement or continuation of their franchise agreements or to be added as a franchisee to the dealer network of their former franchisor in the geographical area where the dealership was located when its franchise was terminated, not assigned, nonrenewed, or discontinued.

Such an election by the dealership would have to occur within 40 days of the legislation’s enactment.

Those seeking reinstatement or continuation must make a request for binding arbitration. The arbitrator would be required to balance the economic interests of the dealership, the economic interest of the manufacturer, and the economic interest of the public at large and decide whether or not the dealership should be reinstated or continued.

The factors considered by the arbitrator include:

(1) The dealership’s profitability in 2006, 2007, 2008, and 2009,
(2) The manufacturer’s overall business plan,
(3) The dealership’s current economic viability,
(4) The dealership's satisfaction of performance objectives,
(5) The demographic and geographic characteristics of the market territory,
(6) The dealership’s performance in relation to the manufacturer’s criteria, and
(7) The length of experience of the dealership.

The dealership reinstatement measure is contained in H.R. 3288, the Consolidated Appropriations Act of 2010 (Public Law 111-117).

Full text of the reinstatement provision (Sec. 747) will appear at CCH Business Franchise Guide ¶14,281.

House-Passed Appropriations Bill Includes Measure to Resurrect GM, Chrysler Franchises

This posting was written by John W. Arden.

The U.S. House of Representatives yesterday passed a general financial services and appropriations bill that includes a provision attempting to restore automobile franchises terminated pursuant to the bankruptcy plans of General Motors and Chrysler Corp.

The Financial Services and General Government Appropriations Act, 2010 (H.R. 3170) cleared the House of Representatives last night by a 219 to 208 vote.

Appended to the general appropriations bill were two provisions (Sec. 245 and Sec. 246) that:

(1) Prohibit the use of any appropriated funds to obtain a financial interest in an automobile manufacturer “that deprives an automobile dealer of its economic rights under a dealer agreement” and does not assume each dealer agreement that is valid, pre-existing, and not lawfully terminated and

(2) Require bankrupt automobile manufacturers in which the federal government has an ownership interest—and their successor companies—to enter into a new dealership agreement with dealers having a valid agreement at the time of the bankruptcy filing.

White House Opposition

The dealership measure, authored by U.S. Rep. Steven C. LaTourette (R-Ohio), was left in the bill, despite strong opposition from the White House. In a July 15 statement of administrative policy, the Obama Administration supported passage of the bill, but “strongly opposes the language in the bill that attempts to restore prior Chrysler and General Motors (GM) franchise agreements.”

According to the statement, “the decision by Chrysler and GM to rationalize their dealer networks was a critical part of their overall restructuring to achieve long-term viability in order to save jobs in the long run, and to improve the prospects for the company’s repayment of the substantial taxpayer investments. Without the significant steps these automakers have taken to revamp their operations, the companies would have failed—imperiling ever GM and Chrysler dealer in the country.”

As previously reported, GM plans to reduce the number of its dealerships by 2,641—from 6,246 to 3,655—by the end of 2010. The U.S. Bankruptcy Court for the Southern District of New York ruled on June 9, 2009, that Chrysler could immediately terminate 789 Chrysler, Dodge, and Jeep franchises—about a quarter of its dealership base.

Job Losses

In a July 16 news release, Rep. LaTourette criticized President Obama’s Auto Task Force for encouraging automobile companies to terminate dealers, stating that the closure of GM and Chysler dealership would cause the loss of approximately 200,000 jobs.

“Under these policies the only jobs that will be stimulated will be clerks at the unemployment offices in the country,” said LaTourette.

The representative cast doubt on the financial necessity of closing dealerships. “The auto companies have never been able to demonstrate that the dealers are a drag on their bottom line,” he remarked. “I think many agree that the tramping of state franchise laws is wrong and many have no stomach for the way these dealers were treated.”

Further details regarding H.R. 3170 appear here at the Library of Commerce’s Thomas web site.

Agreement with State Attorneys General

In a related matter, the attorneys general of 30 states reached an agreement with GM regarding protections afforded under state laws to dealers and consumers. The attorneys general had filed an objection to the GM’s termination of 2,641 dealers in U.S. Bankruptcy Court for the Southern District of New York, contending that the bankruptcy plan would permit GM to ignore state motor vehicle anti-termination statutes.

The agreement, which was formally ratified by the bankruptcy court on July 5, required New GM to comply with state franchise and dealership laws going forward, honor warranties and comply with state lemon laws, and honor product liability claims for acceding involving cars sold before the bankruptcy. (See Trade Regulation Talk, July 8, 2009).

GM Reaches Agreement with State AGs Regarding Compliance with State Dealer Laws

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The attorneys general (AGs) of 30 states have reached an agreement in principle with GM regarding protections afforded under state laws to dealers and consumers. The agreement requires New GM, a newly formed entity created by the U.S. Treasury, to comply with state laws governing the relationships between dealers and manufacturers. The agreement was formally ratified by the U.S. Bankruptcy Court for the Southern District of New York on July 5, and additional states are expected to participate.

The AGs had filed objections to GM’s plan to reduce the number of its dealerships by 2,641--from 6,246 to 3,605--by the end of 2010. The AGs contended that the bankruptcy plan would permit GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

Nebraska Attorney General Jon Bruning, who also serves as President of the National Association of Attorneys General, stated about the agreement:

"We are pleased GM was willing to work with the states to resolve our concerns so that consumers, dealers and the environment will continue to receive the protection of state law." The initial positions of GM and the Treasury Auto Task Force would have left thousands of GM customers and dealers without the protections afforded to them under state law. "I’m confident the concessions given to the states, while of great benefit, won’t interfere with the ability of new GM to function as a viable company nor should they add to the burden placed on taxpayers by the Treasury’s purchase of GM."

Texas Attorney General Greg Abbott called the bankruptcy court's decision a significant victory. In a July 6 statement, he added "the federal court ruled that franchise agreement disputes between General Motors and its Texas dealers will be decided by the Texas Department of Transportation, not a federal bankruptcy court 1,300 miles away in New York City."

GM Concessions

Specifically, among concessions sought and received by the state AGs, GM has agreed to:

(1) acknowledge that all dealers staying with the new GM will be protected by state franchise and dealer laws;

(2) accept responsibility for compliance with environmental laws for new company facilities and expand funds available to cleanup sites that will stay with the old GM;

(3) honor express warranties and comply with state lemon laws;

(4) accept responsibility for payment of state tax obligations;

(5) comply with state privacy laws, including state Do Not Call laws; and

(6) honor products liability claims for accidents occurring after the closing date that involve cars sold before bankruptcy.

GM Should Not Be Allowed to Avoid Dealership Protection Laws: State AGs

This posting was written by John W. Arden.

Texas and Nebraska Attorneys General are strongly objecting to General Motors’ bankruptcy plans to drastically reduce its number of dealerships in the United States, while avoiding state dealership protection laws.

In its April 27 viability plan, GM has announced an intention to reduce the number of its dealerships by 2,641—from 6,246 to 3,605—by the end of 2010.

On June 12, Texas Attorney General Greg Abbott filed objections in the federal bankruptcy court in New York City, arguing that the bankruptcy plan would allow GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

According to Abbott, the bankruptcy plan would allow GM to free itself from laws limiting its ability to terminate or modify franchises, to skirt laws protecting dealers from coercion in the ordering of new vehicle inventory, to deny dealers of their rights to market other brands, to alter dealer rights to relocate, and to limit dealer warranty claims.

The right of states to provide legal protections for dealers has been long established—and was recognized by the U.S. Supreme Court in New Motor Vehicle Board of California v. Orrin W. Fox Co., 439 U.S. 96 (1978)—the Texas Attorney General said.

The attorney general’s objections are scheduled to be considered at a hearing of the bankruptcy court on June 30. A statement on the objections appears here on the website of the Attorney General of Texas.

Meanwhile, Nebraska Attorney General Jon Bruning is promising to take direct action against GM and urging his colleagues to do likewise.

On June 15, Bruning sent a letter to all other state attorneys general, expressing an intention to file suit against the company “to try and put a stop to its illegal tactics.”

“What GM is trying to do in Nebraska and other states is unconscionable,” said Bruning. “That is why I’m leading an effort involving other state attorneys general.”

By ignoring state laws that protect consumers and dealers, GM leaves consumers vulnerable by depriving or deferring warranty service and avoiding lemon laws, said Bruning. This behavior not only violates consumer protection laws, but also may violate antitrust laws, he observed.

Further details on the Nebraska Attorney General’s views appear here in a June 15 news release.

Bill Requires Bankrupt Auto Makers to Reimburse Dealers from Federal Funds

This posting was written by John W. Arden.

A bill to require bankrupt automobile manufacturers that receive funds from the federal government to use such funds to fully reimburse dealers for inventory of vehicles and parts has been proposed in House Bill No. 1256.

The measure—proposed as the Auto Dealers Assistance Amendment (#1270)—would require manufacturers to use any funding received from the U.S. Treasury while in bankruptcy to:

(1) Fully reimburse dealers rejected in bankruptcy for the cost of all parts and inventory in the dealer’s possession on the date of the bankruptcy and all other obligations owed under franchise and dealership agreements, and

(2) Provide dealers rejected in bankruptcy with at least 180 days to shut down their businesses and sell off their inventories through a “wind down period.”

The amendment further specifies that a bankruptcy court may not allow a bankrupt dealer to obtain access to debtor-in-possession funding unless the credit agreements expressly provide for reimbursement and wind-down as provided by the measure.

U.S. Senator Bob Corker (R-Tenn.) introduced the amendment on June 4.

“We continue to receive assurances from Chrysler and GM that their dealers across Tennessee and across the country will be treated fairly,” said Corker. “We understand that a bankruptcy is inherently painful and our efforts aren’t to interfere.

“We filed this amendment to apply pressure on the automakers to keep their word to rejected dealerships and fully reimburse them for their inventories of vehicles and parts,” he continued. “We hope Chrysler and GM will take these appropriate actions and make this amendment unnecessary.”

A statement by Senator Corker and text of the amendment appear on the Senator’s website.

Motor Vehicle Dealer Not Damaged by Phase-Out of Oldsmobile Line

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A motor vehicle dealer's breach of contract claim against General Motors (GM) for phasing out its Oldsmobile line of vehicles necessarily failed because, as a result of the dealer's actions to mitigate its damages, it suffered no loss, the U.S. Court of Appeals in Richmond, Virginia, has held.

GM had entered into an agreement authorizing a dealer to operate an Oldsmobile dealership from November 2000 through October 2005. Only weeks later, GM announced its decision to terminate the Oldsmobile line, the court observed.

After being informed of the decision, the dealer, without consulting GM, purchased a nearby Nissan dealership in order to mitigate the anticipated loss of Oldsmobile sales. The dealer purchased the goodwill of the Nissan dealership for $1 million and entered into a Nissan dealership agreement that required it to separate its GM and Nissan facilities after a period of time.

In December 2001, the dealer informed GM of the dealership acquisition and the fact that the Oldsmobile dealership would be sharing the building with the Nissan operation for two years. Soon thereafter, GM sent the dealer a letter agreement, stating that the addition of the Nissan dealership without GM’s approval was a material breach of the dealership agreement.

Contract, Statutory Claims

In September 2005, the dealer filed an action against GM, alleging actual and anticipatory breach of the dealership agreement and violations of the West Virginia motor vehicle dealer law. The action initially claimed $2.47 million in “mitigation costs.”

The trial court dismissed the damage claim based on the fact that the dealer had profited from its mitigation. The dealer then added a claim for lost profits. An expert’s testimony on lost future profits, based on sales during a single baseline year, was excluded for failure to meet the standards of Federal Rule of Evidence 702, as clarified by Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999). Because the dealer lacked any evidence of lost future profits, the trial court entered judgment as a matter of law in favor of GM.

On appeal, the dealer argued that it was entitled to the $1 million it paid for the goodwill for the Nissan dealership, the $526,641 it paid to separate the Nissan and Oldsmobile dealership facilities, plus $1,972,985 in lost profits during the remaining term of its Oldsmobile dealership, for a total claimed loss of $3,499,626.

Lack of Economic Loss

Through its efforts at purported mitigation, the dealer had acquired a Nissan dealership with a total value of $5 million by the end of the term of its Oldsmobile dealership agreement in 2006, according to the appeals court. The $5 million figure did not even take into account the dealer's profits from the sale of at least 2,000 Nissan vehicles.

Based on the dealer's own appraisal of the value of the Nissan dealership in 2006, the Nissan dealership's increase in value more than compensated the dealer for all of its alleged mitigation damages and lost profits. It was clear that the dealer suffered no economic loss and therefore no legally cognizable damage as a result of GM's alleged breach, the appeals court held.

West Virginia Dealer Law

GM did not violate the West Virginia motor vehicle dealer law by enforcing facility requirements that were "unreasonable considering current economic conditions" or "not otherwise justified by reasonable business considerations," the court determined. Under the agreement with GM, the dealer was required to obtain GM's prior written consent before it added the Nissan line, and the dealer failed to do so.

In addition, the dealer specifically agreed in its contract with Nissan, entered into over four months prior to GM's sending of the letter agreement, that it would maintain separate facilities for the Nissan dealership. Thus, the dealer could not claim the GM's insistence that GM and Nissan dealerships be separated within two years violated the statute, the court reasoned.

The unpublished decision is C&O Motors, Inc. v. General Motors Corp., CCH Business Franchise Guide ¶14,110.