Pub. 12 2013-2014 Issue 3

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 13 new jersey auto retailer W W W . N J C A R . O R G When the Factory Demands Costly Dealer Investments, Franchised Dealers in New Jersey Have Considerable Rights BY ERIC L. CHASE, ESQ. F or years, we have witnessed U.S. auto franchisors seeking to impose requirements upon their dealers that translate into cost – often signi fi cant cost – for those dealers. These themes appear and reappear in various forms every year. Dealers see factory-generated programs that exhort dealers, for example, to embrace brand imaging, facility upgrades/renovations, relocations, brand exclusivity, working capital requirements, debt-to-equity ratios, sales objectives and incentives, “stair- step” benchmarks, service contracts (beyond or above warranties), tech training and so on. Sometimes, the programs are wrapped in incentive or bonus monies – the compli- ant dealer will get paid something extra for doing what the factory wants, often in the form of a per-car-retailed bonus. Sometimes, the factory issues a threat – do it, or else (and sometime the “else” is a franchise termination threat). Only rarely does the factory make gratuitous “suggestions” without consequences on matters of importance. At t he same t ime, each yea r some states enact franchise law amendments to address changing factor y tactics. The str uggle is constant: Factories devise new plans with different rules to elude state law refutations of past factory overreaches; state laws are then amended to curb the new practice, and the back-and-forth cycles never end. New Jersey’s 2011 amendments to The Franch ise Prac t ices Ac t help make it one of the nation’s best venues in the reasonable safeguarding of dealer rights, including a right, in specified circumstances, not to be unreasonably coerced into spending or losing money. New Jersey’s law is drafted so as to cover anticipated factory attempts at avoidance. The various factory programs and ini- tiatives can impact the bottom lines of dealers in two basic ways. First, there are the factory incentive programs calling for payments to the dealer when/if certain obligations or benchmarks are met. Such payments are rewards or bonuses, usu- ally tied directly to a measure of dealer performance in such areas as new unit sales or customer satisfaction indexes, as well as adherence to facility and/or CSI standards. Second, there are threats or coercions: the dealer may have to spend funds to renovate or image or dedual (become exclusive) to avoid potentially punitive consequences. More and more, there may be linkage to “minimum sales standards” that would require a dealer to be, for example, above regional average in market share or sales penetration. Impositions by the franchi- sor often involve extra expense, or even extraordinary capital investments by the dealer, sometimes in the millions of dol- lars. Factory tactics also frequently boil down to two other related basic concepts: (1) Positive persuasion characterized by benefits such as incentives and stair-step payments, can seem more palatable than literal “or-else” mandates; and (2) Nega- tive coercion characterized by threats is the most daunting – telling the dealer that its performance or facility is sub-par, and that failure to adhere to “standards,” in- cluding costly imaging or upgrades, may be subject to adverse contractual rem- edies, including franchise termination. RIGHTS  continued on page 14