Termination Arbitration: New Law May Hold Hope for Franchisees

A new bill approved last month in the U.S. Congress and signed by President Obama offers some hope for the terminated Chrysler and General Motors Corp. dealers, although for some it may be too little, too late. While dealers had been trying to force reinstatement or require termination compensation (and in the case of GM dealers, a more realistic termination valuation), it now appears that instead they will be benefiting from a compromise bill.

The original, more far-reaching bill for the dealerships was quickly passed by the House but stalled in the Senate. Because time is of the essence for the dealers to resolve these matters and move on with their business plans, a compromise had to be reached. Naturally, the longer that terminated dealers remain closed, the worse their outlook becomes for re-opening. Some have already seen nearby dealerships awarded their former brand, and many have defaulted on their property payments and begun to liquidate their operations.

This compromise bill was signed into law by the president last month. In its current form, the bill provides for an arbitrator to decide the appropriateness of the termination decision. Because of the obvious time concerns, the process is designed to move swiftly.

The arbitration will seem somewhat like an “add-point” case, as the issues to be argued are very similar, but the entire process will be more streamlined. First, the factory must notify the rejected dealer of its rights under this new law within 30 days of its passage. The terminated dealers will then have 40 days from the law’s passage to request the binding arbitration.

The arbitration hearing must be conducted within 180 days of the passage of the law. Typically, few disputes move through the system, whether court or arbitration, within such an expedited timeframe. In order to move the cases at the designated pace, depositions will not be permitted, unless the parties agree otherwise. Naturally, dealers should not expect Chrysler or GM to agree to depositions.

Discovery in these proceedings will be limited to the exchange of documents. Unfortunately, the documents that can be obtained from the factories will be limited to the terminated dealer only. This limitation is significant, and presumably it was added as an accommodation to the manufacturers. With the possibility of more than one thousand arbitrations that require litigation in the first half of 2010, the carmakers were likely eager to limit the discovery phase for these cases. This will substantially reduce their defense costs, and it will give them a material advantage.

While the manufacturers collect all of the sales and financial information from their dealers on a monthly basis, they typically do not make the information available. If a terminated dealer is able to demonstrate that it was 88 percent effective and it could access the data on the surviving dealers in their market to determine if they are similarly (or even less) effective, they would be able to use the favorable comparison to undermine the significance of the manufacturer’s performance criteria. However, since the law specifically limits discovery to documentation relative to the terminated dealer only, the dealership may be unable to compare its performance against the performance of surviving same-line make dealers that it competes with in the same market. While much of this data can be obtained from other sources, those other sources are costly, and the carmakers’ legal counsel may argue that the restriction in the law reflects a congressional intent that evidence of other dealers’ performance should not be considered by the arbitrator.

The specific interests that the arbitrator is to reconcile are: (1) the economic interests of the dealership; (2) the economic interests of the factory; and (3) the economic interests of the public at large. While the dealer and the factory may present any relevant evidence, the arbitrator is specifically required to consider the following: (a) the dealership’s profitability from 2006 through 2009 and its current economic viability; (b) the factory’s business plan going forward; (c) the dealership’s past performance based on objectives established by the franchise agreement; (d) the dealership’s performance as compared to the criteria used by the factory in its decision to terminate; (e) the demographics and geographic characteristics of the dealer’s market; and (f) the experience of the terminated dealer.

Items “c” and “e” above are generally significant in add-point cases, and these issues will likely require some statistical analysis. Item “a” is interesting and problematic. Many terminated dealers are in financial distress as a result of the termination, and this is likely to impact the arbitrator’s analysis of the dealer’s “current economic viability.”

One of the most significant questions will entail dealers whose points have already been awarded to others. That would appear to be part of the analysis related to the manufacturer’s business plan moving forward that will be considered under the law by the arbitrator. In these situations, even if the terminated dealer prevails, it is yet to be determined what will happen to the other dealer that was already awarded that point. Does that dealer have protest rights? Do both dealerships remain in the market? While the legislation requires the factory to award the terminated dealer a sale and service agreement, it does not address what subsequently happens to the new dealer.

In spite of these limitations, the new arbitration law is still a very positive development for the terminated dealers. While it will not be everything that they had hoped for and some may simply find it unfeasible to re-start their business in these difficult times, it does bring some sense of fairness to the situation.