Never Too Early to Fight Franchise Termination

A successful dealer defense begins when the manufacturer starts down the termination road.

Michael Charapp

June 1, 2012

3 Min Read
Never Too Early to Fight Franchise Termination

Here is a multiple-choice question about dealer franchise law: When should you begin to prepare your case if an auto maker seeks to terminate your franchise?

A.   When you get a default notice.
B.   When you get the termination notice.
C.   When you file for a hearing.
D.  None of the above.

The answer is D.  If you have waited for the events in A, B, or C, you may have already hurt your case.

Franchise statutes in all states protect dealers from frivolous terminations. An auto maker that wishes to terminate a dealer must follow the applicable state statute and show that it has a basis for termination. In lawyer shorthand, that means “good cause.”

Franchisors know that good-cause statutes impose a significant barrier to termination. They do not, however, make a dealer’s franchise termination-proof.

In fact, a manufacturer can still terminate a franchise by carefully following the state statute. An occasional dealer may face a sudden, serious problem that may justify termination of its franchise – loss of floorplan, loss of a dealer license and the like.

But in most cases, manufacturer terminations are based on alleged long-term dealer operational problems, usually the failure to meet sales objectives or satisfy customers. In those cases, factories have learned to build a record over time.

At a hearing, a dealership facing termination may argue that the factory sales-efficiency measurements are inappropriate. Or the dealership may contend it did not get the vehicles to meet objectives. Or it may say that the manufacturer’s customer-satisfaction index system is flawed.

Invariably, the factory’s response is one of feigned surprise: We never heard from the dealer prior to the termination notice about these problems, so they must be fabricated in order to fend off termination.

Learn the lesson from the manufacturers’ strategy. A successful defense begins when the manufacturer starts down the termination road. A solid record of responsiveness to every critical communication is the difference between getting a termination notice and not getting one.

Here are important steps to take:

  • Respond to every performance criticism from a manufacturer. Does the factory claim performance is deficient based on its measurements? Take issue with those, whether it is an explanation that your primary market area critical to sales efficiency is inappropriate, or proper adjustments have not been made for your local conditions affecting your sales, or that you have not been allocated enough vehicles to meet objectives.

  • Build your own record. Respond to every point in each critical communication. If the manufacturer is telling you that you are doing three things wrong, don’t respond to one and think that is enough. Address every issue raised.

  • Don’t hide your improvements or your strengths. If you have made changes to address criticisms, tell the manufacturer what those changes are. Emphasize the strengths of your dealership to explain what you are doing right.

  • Never agree that you are in breach. Sometimes a manufacturer will send you a franchise-agreement addendum or a letter to countersign. Never agree that you breached obligations. Never agree that the performance objectives are appropriate and that you aren’t meeting them. Never agree to standards that you must meet to comply with your agreement unless you know you can meet those standards and there are exceptions for problems outside your control.

  • Get legal counsel. The franchisor plans its campaigns with the help of its lawyers. Why should you do any less when your survival is at stake?

Your defense to any termination action should begin the moment the manufacturer commences its campaign of criticism. You must respond, counterpoint and show what you are doing to improve your performance.

A manufacturer’s lawyer reviewing whether to pursue termination may recognize what the factory is up against and recommend dropping the case. That is what you want. But even if the manufacturer decides to go forward, it won’t be in a position to argue that your defense is made up of belated excuses.

Michael Charapp is a lawyer who represents auto dealers. Based in McLean, VA, he is at (703) 564-0220 or [email protected].

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