Of significant value to auto dealers are the form agreements, such as retail purchase agreements and retail lease agreements (collectively, “Buyer’s Orders”), generated by their dealer management system (DMS) software. Buyer’s Orders generated by DMS software often vary by state and contain state-specific statutory references, which create the reasonable expectation that those Buyer’s Orders comply with the laws of the state in which they are intended to be used. This expectation is reinforced if the DMS vendor controls the forms of Buyer’s Order, and the dealer is not at liberty to revise them without the approval and, perhaps, intervention of the DMS vendor.
It is imperative that Buyer’s Orders comply with applicable state law for a variety of reasons. If Buyer’s Orders do not comply with the law, the dealer utilizing them risks being investigated by the state attorney general and may suffer damage to its reputation and goodwill. Furthermore, the consequences of non-compliance may be significant since a Buyer’s Order is used in each sale or lease of a vehicle by a dealership, which means that any problem with the underlying form of Buyer’s Order will likely affect a large percentage of dealership customers. Additionally, for certain violations of law, state consumer fraud, or consumer protection statutes may impose statutory damages that exceed the actual loss sustained by a customer as a result of the Buyer’s Order not complying with law in some respect. See, e.g., the New Jersey Consumer Fraud Act codified at N.J.S.A. 56:8-1 et seq.
If a Buyer’s Order generated by DMS software does not comply with the law, who should bear the risk and consequences of non-compliance: the DMS vendor or the dealer? The predictable response of a DMS vendor, perhaps reflected in the form of master agreement that it utilizes with dealers, is that the dealer is responsible for ensuring it conducts business in compliance with law, and that obligation extends to the contracts that the dealer uses in its day-to-day operations. At first blush, it seems reasonable for a DMS vendor to maintain this position; the fact that the DMS software is the conduit for many dealership transactions should not, from the DMS vendor’s perspective, absolve the dealer of the obligation, common to all business owners, to operate its business in compliance with law.
However, upon closer analysis, a compelling argument can be made that it is inequitable to foist upon a dealer the risk that a DMS-generated Buyer’s Order does not comply with the law. DMS software is the lifeblood of a dealership. A dealership relies upon the software to perform or enable many critical functions and pays a substantial fee for that functionality. Just as a dealer should not be required to troubleshoot a software defect that prevents the DMS from communicating properly with a factory or generating accurate financial statements, the dealer should not be required to ascertain whether a Buyer’s Order generated by DMS software complies with the law. Especially for a dealer with sister stores in other states, with the Buyer’s Order for each state containing specific statutory references, it likely would not occur to the dealer to review a Buyer’s Order to ensure it complies with the law of the jurisdiction in which the dealer is operating; compliance with law is reasonably implied by the very contents of the Buyer’s Order. Even if a dealer were inclined to undertake a review to ensure a Buyer’s Order complies with law, the dealer will likely find that it has no ability to revise the form of Buyer’s Order, both due to software limitations and protections afforded under federal or state copyright law.
Considerations of economic efficiency also militate in favor of the DMS vendor taking on the compliance-with-law risk relating to Buyer’s Orders generated by its software. A numerical example is illustrative. Assume that the initial cost to a DMS vendor to prepare a form of Buyer’s Order and ensure that it complies with applicable state law is $10,000 and that the annual cost thereafter to monitor changes in the law and make any necessary revisions to the Buyer’s Order is $1,500. Assume further that a DMS vendor has only 10 dealer customers in each state in which the vendor licenses its software. Even if the DMS vendor were to pass along these “compliance with law” costs to its dealer customers, the tithe to each dealer would be $1,000 upfront and $150 annually thereafter. Compare that to the cost each dealer would have to incur (i.e., $10,000 initially and $1,500 per annum thereafter) if it had to ensure that the Buyer’s Orders comply with law. While recognizing that commercial decisions in the private sector are not made on a collective basis with an eye toward maximizing societal efficiency — in part, a consequence of unfair trade practices and antitrust statutes — it is easy to imagine how individual negotiations between a DMS vendor and each dealer could lead to an efficient outcome as previously described.
Risk allocation is effectuated through various provisions in a DMS master agreement. A DMS master agreement likely includes a provision by which the dealer acknowledges that conducting business in compliance with applicable law is the responsibility of the dealer, a responsibility that extends to the dealer’s use of the services and products derived from the licensed software, including Buyer’s Orders. Such a provision places the compliance-with-law risk of a Buyer’s Order squarely on the shoulders of the dealer. As a further liability shield for the DMS vendor, the master agreement likely includes provisions by which the vendor disclaims responsibility for lost profits, as well as exemplary, incidental, consequential and punitive damages, and limits the dollar amount of direct damages for which the DMS vendor is liable. The cap on direct damages will likely be tied to the aggregate fees paid by the dealer to the vendor over a specified period, often 12 months. The cumulative effect of these provisions is to deny the dealer meaningful recourse against the DMS vendor if the Buyer’s Orders generated by the vendor’s software do not comply with law, resulting in lawsuits against or other losses to the dealer.
The dealer is well advised to seek to shift to the DMS vendor or, at a minimum, mitigate these compliance with law risks. One way to do so directly is to insert in the master agreement a representation and warranty from the DMS vendor to the effect that the use of the DMS software, and the products generated by it, including Buyer’s Orders, comply with applicable law. Here, great care should be taken to ensure that “applicable law” is defined to include the laws of all states in which the Buyer’s Orders are intended for use. Further, the dealer should seek to negotiate a more liberal cap on direct damages, perhaps a multiple of what the DMS vendor proposed in the first instance. Additionally, the dealer should seek a carve-out from all limitation of damages provisions, in the event of third-party litigation alleging that the form of Buyer’s Order does not comply with the law.
While a dealer may not want to incur the cost to have outside counsel perform an exhaustive compliance with law review of its Buyer’s Orders, the dealer is well advised to have counsel confirm that the Buyer’s Orders contain a waiver of class action litigation and multi-party arbitration of disputes, with all disputes to be resolved through arbitration between the dealer and the customer. If such alternate dispute resolution provisions are contained in the Buyer’s Orders and are enforceable under the law of the state in which the dealer operates, the dealer has protection against the specter of a class action lawsuit alleging that its form of Buyer’s Order does not comply with the law. It should be noted that while a review of applicable case and statutory law may not establish conclusively that class action litigation and multi-party arbitration waivers are enforceable, the review should uncover whether such provisions have been affirmatively disallowed by court ruling or legislation. See, e.g., Pace v. Hamilton Cove, 258 N.J. 82 (2024).
In conclusion, dealerships should seek written assurances from their DMS vendors that their Buyer’s Orders comply with law and seek to mitigate the compliance-with-law risk and shift it to the DMS vendor to the greatest extent possible.
