Both the ongoing Coronavirus pandemic and the fallout from the 2020 election are expected to have the most legal impact on dealers in 2021 and affect many other issues. Dealers must contend with the consequences of the pandemic as well as anticipated changes in governance and policies. Below is a rundown of the top legal trends that are expected to impact the franchised automotive retailing industry in 2021.
COVID-19 changed virtually everything in early 2020. In a matter of weeks, unemployment levels soared from record lows to record highs. Many dealers were closed for up to two months, and buy-sell activity died. Congress took unprecedented action, spending trillions of dollars to pay both people and businesses during short closures and slowdowns.
Business for dealers roared back in the summer, and buy-sell transactions were robust in the second half of the year. Unemployment dipped under 8%. By the fall of 2020, most dealers had come full circle with brisk sales and service activity.
In the final months of 2020, the pandemic surged, again, resulting in the re-impositions of limitations on certain businesses and other activities in several states. Amid this negative news, several pharmaceutical companies developed approved vaccinations in record time. As of the end of March, more than 100 million Americans have been vaccinated, with the pace accelerating as vaccine distribution and processes improve. The expectation is that everyone desiring vaccinations will get them by mid-summer.
No one should expect the ways of doing business to return to a pre-COVID “normal” anytime soon. Instead, preventive measures are expected to continue well into 2021. Even after that, dealers will likely continue with standards of hygiene, masking and social distancing. Dealers now readily serve customers at their homes upon request. Pick-ups and deliveries may become as commonplace in dealership sales and service as home delivery of meals.
Dealers must take care to enforce rules mandated by their states. A rising number of consumers vow to do their car shopping and deliveries at home — a phenomenon that already was taking hold before the pandemic struck. Dealers should now operate as if the next pandemic is coming, with strong safety measures and an enhanced virtual capability.
Significance of the 2020 Election
The 2020 election was like no other in American history. The Senate majority remained in limbo until the January 5, 2021 runoff elections for Georgia’s two senators. Now, with a 50-50 split between the parties, Democrats have control, with Vice President Harris as the tie-breaking vote. Democrats also enjoy a narrower edge than before in the House of Representatives.
The Biden administration vows to be focused on the reinvigoration of regulations, be consumer-oriented, and further the “greening” of American life and business. Dealers must expect legislative and regulatory influence that will drive product development, choice and performance. CAFE standards will be revisited. Electric vehicles will be further encouraged and incentivized; credit questions about racial disparity may see federal investigations of dealer practices; unionization will be encouraged again, and the NLRB will not be sympathetic to businesses. President Biden will likely preside over many legislative, executive and regulatory changes that will impact dealers.
The Data, Internet, Social Media, Identity Theft and Privacy Minefield
For dealers, this topic encompasses a moving set of targets that embrace both opportunity and risk. No dealer can operate successfully without meaningful emphasis upon cybersecurity and capability, including regular updates in hardware, software and regulatory developments. But enormous dangers and challenges loom because dealerships are vulnerable to cybercrimes, particularly in certain areas of their business. According to a December 9, 2019, Automotive News article (Retailers Prime Targets For Data Theft), an average of 153 viruses and 84 malicious spam emails are aimed at dealer computer networks and are blocked by technology each day. There are many cyber pitfalls that affect dealers, including direct attacks by cybercriminals, identity theft, ransomware and other threats, all of which are surging.
We’ve also seen an increase in lawsuits related to the Americans with Disabilities Act and comparable state laws, claiming that consumers cannot easily access dealer websites with certain impairments. Many dealers have paid substantial settlements in attorneys’ fees and “corrected” the “offending” websites. It is incumbent upon every dealership to have “cyber-savvy” employees and ensure the dealership has continuous access to updates in relevant technology and associated legal developments.
Threats to the Auto Dealer Franchise Model
For decades, franchised dealers have witnessed growing and creative efforts by auto manufacturers and other entities to invade the franchised retail auto business realm. The NADA, state associations and others have done a stellar job in making the case that franchised dealers are indispensable to fairness, honesty and excellence in retail service and sales and best serve America’s consumers. Dealer associations and other industry supporters will need to continue emphasizing the franchise system’s consumer benefits, including price competition, easy access to warranty, recall and general repairs, a commitment to improving public safety, local accountability and more.
Race, Gender and Identity in the Workplace
After George Floyd’s death, while in police custody on May 25, 2020, there was a dramatic and instantaneous change in policies throughout America. These changes did not just affect police conduct but also impacted businesses, schools and more. New policies proliferated that will alter how dealers operate with their employees and customers. Further, we can expect to see auto franchisors’ accelerated efforts to recruit and place more minority owners and managers of dealerships. The #MeToo movement seeks to end the mistreatment of women in the workplace and elsewhere, and Congress is also expected to consider “equity-based” legislation. Dealers may have to cope with a bevy of new laws and regulations in this area.
Look for a resurgence of the Consumer Financial Protection Bureau (CFPB), a more active Federal Trade Commission (FTC) and more laws and a heavy enforcement hand by the Biden administration. Dealers are already pro-consumer but need to be wary of an overly aggressive FTC and state regulators who, all too often, target dealers who have done nothing wrong. In 2021, expect to see more government legislation, regulations, and enforcement activities to proactively protect consumers from allegedly unfair or discriminatory sales practices.
Factory Sales Performance Standards
Dealers mostly acknowledge the wisdom of factories that push them to retail more cars — and incentivize them to do so. At the same time, the Covid era might have caused some factories to consider whether facilities requirements should be overhauled. They recognize the growing emphasis on off-site and virtual retailing, but some factories do act as though their image requirements should not be challenged. Dealers should be vigilant to not enter into commitments that cost more than a program is worth or sign agreements that commit to unreasonable future performance or renovations.
Trade relations are a high priority for President Biden. This emphasis could lead to smoother movement of imported vehicles and higher costs to dealers and consumers. Look for moves to, essentially, erase hard lines and financial penalties/tariffs/sanctions.
The Biden administration embraces a robust regulatory scheme, and dealers should expect some increased expenses for compliance purposes.
Dealer advertising in 2021 faces a minefield of potential hazards. Both the FTC and state/local agencies scour the media to find deviations from advertising requirements. It is incumbent on dealers to assure compliance with all advertising laws and regulations to avoid potentially harsh penalties.
Customer SatisfactionFactory measurements of customer satisfaction in ever-changing forms of customer satisfaction indices (CSI) are not reliable gauges of “true” satisfaction. But they are not going away. The importance of such scores to dealers remains a fixture in franchisors’ supervision and measuring of dealer performance.
RecallsThe annual multimillion vehicle recall trend is now commonplace in the U.S.. For decades, millions of cars are recalled to address factory defects, both large and small, significant or not. Factories should make dealers whole for their costs attributable to extra floor plan expense and other incidental losses. Dealers and state associations should press franchisors to expedite the deliveries of necessary parts.
Autonomous VehiclesAlthough the public fanfare at the prospect of widespread self-driving vehicles has faded, the reality of their development is still moving forward. This phenomenon dovetails with a new reality for the way people travel by vehicle all across America. It is only a matter of time until autonomous vehicles will be routinely available to consumers for hire or purchase. But that will not happen in a big way in 2021.
Dealership SuccessionIt is surprising that many dealers still have either no succession plan or one that lacks detail. Every dealer should have a legacy plan in place so that succession is as seamless as possible when a transition happens. It should be an essential part of an overall estate plan.
Involuntary TerminationInvoluntary franchise termination is rare in the auto industry, but its threat is not so rare. No threatened dealer should take any written suggestion of termination lightly. For several years, many auto franchisors have sent “routine” agreement letters for dealers to sign, containing admitted “breaches” that they pledge to cure, with the further admission that the breaches would be adequate cause for termination. DON’T SIGN SUCH LETTERS. A termination threat is one of those occasions when a dealer should immediately consult with experienced counsel.
Buy-Sell ActivityBecause of pandemic fallout, dealership sales transactions went from low velocity to high activity, and the variations in geographical differences and brand differences were noteworthy. Buy-Sell activity in 2021 is expected to be brisk, with valuations at record highs for nearly all brands.
Rights of First RefusalFactory ROFRs in dealer agreements are now commonplace. They are unlawful in only five states, so the prospect is very real when dealers negotiate their buy-sells. If you are looking to buy a dealership, investigate the likelihood of a factory ROFR exercise as soon as you can. Even though many states require expense payments by the factory to displaced buying dealers, that remedy does not usually cover all expenses.
Alternate Dispute ResolutionAlternate Dispute Resolution for disputes between dealers and consumers is a common feature of retail contracts. For decades, consumer groups have attacked mandatory contractual arbitration as allegedly unfair to consumers. Look for the Biden administration to vigorously attack dealer arbitration provisions in consumer contracts. In 2021, be vigilant about the legal developments in this arena. Such clauses in consumer contracts may become prohibited by federal law or regulation.
Dealer Associations Legal StandingAssociations should have standing to represent the common interests of their dealer members. This enables them to represent dealers in their organizations’ name, without the need for dealers to be parties. In 2021, we should see more dealer laws allowing association standing.
TaxesPresident Biden has promised to greatly overhaul tax laws to gain more government revenue from high earners and profitable businesses. That would include most franchised dealers. Dealers should work with their CPAs to develop strategies to properly protect personal and business income.
“Other” Workforce IssuesAside from the “identity” phenomenon, dealers must cope with a host of workplace policies, practices and procedures such as hiring, firing, workplace conditions, wage/hour, overtime and more. With expected legal changes, you will need to revise your operations and employee manuals. 2021 could see a higher minimum wage requirement in federal legislation.
Warranty ReimbursementBattles over retail reimbursement for parts used in warranty repair have continued for decades. Although there is not yet adequate compliance by factories, across the board, in paying earned warranty reimbursement for both labor and parts, dealers across the country have mostly prevailed in court. In 2021, dealers should continue to demand from their franchisors what they are due in parts and labor warranty reimbursement. In some states, and with some brands, compromises have been reached so that dealers accept reasonable accommodation.
Natural Disasters, Terrorism, Unrest and PandemicsWhile the pandemic year of 2020 is still fresh on everyone’s mind, dealers without emergency plans should develop them now. Dealers should have basic information on hand to contact all employees in any emergency and tell them what to do and where to go.
Encroachment and Franchise ModificationWhile protests under state laws of establishments and relocations of nearby competitive dealerships seem to have tapered off, they still happen. When a dealer is confronted with a notice announcing that the factory intends to place another same-line dealer within a protestable proximity, you will want to contest the move. Seek legal help if you get such a notice.
Factory AuditsEven though dealers grow anxious when the factory announces an audit, most audit results are uneventful. Sometimes, however, warranty or incentive audits do conclude that chargebacks are owed. Sometimes, chargebacks are excessive or penalize dealers for technical infractions that caused no losses to anyone — the factory or consumers. Often, dealer challenges to chargebacks are successful, in whole or part. Anecdotal evidence suggests that factory audits are on the rise. Usually, dealers have no meaningful option regarding whether an audit will take place. In 2021, dealers should fully understand what an audit is about and in most cases, cooperate fully. If you see a clear abuse, either call your rep or your lawyer.
Eric L. Chase is an attorney at the law firm of Bressler, Amery & Ross, P.C. He devotes a significant part of his practice to the representation of franchised automotive dealers and has been lead counsel in numerous landmark decisions. He can be reached at 973.514.1200 or via email at firstname.lastname@example.org.