Pub. 4 2014 Issue 3

22 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com n Franchise System — continued problems began to develop because the car manufacturers could, and did, treat dealers poorly. The fact was, manufacturers had more economic power and bargaining strength than the dealer- ships did. Needless to say, the dealerships didn’t appreciate that. They appealed to Congress. In 1956, Congress protected dealers by passing the Automobile Dealer’s Day in Court Act. Coercion was prohibited, and deal- ers now had the right to sue car manufacturers in federal court if necessary. The act helped, but it did not cure the problem; for example, the courts did not always agree that poor behavior on the part of a car manufacturer rose to the level of coercion. In a continuing attempt to fix the problems that were still there, other legislation soon followed, especially during the 1960s and 1970s. What the problem really came down to was simple: • Dealership franchises, by their very nature, are local. States love them because they are strong economic contributors that directly benefit the communities where they are located. • Car manufacturers are exactly the opposite: national businesses, not local ones, operating a long way away and controlled by people who have little or no investment, emotional or otherwise, in the communities that indirectly support them. When car manufacturers have most of the power in the rela- tionship, that power inequity creates a situation where business abuse is almost inevitable because the car manufacturers and the dealerships don’t always have the same interests. What does that mean for day-to-day business operations? For one thing, car manufacturers can get away with the following: • They can refuse to promptly take care of safety issues because they are more interested in reducing the cost of warranty and recall repairs. For examples of this, look at the Ford Pinto, Firestone tires, floor mats in Toyotas, and the effect of big key chains on GM switches. The people who buy and use the cars end up dying or being injured because executives thousands of miles away don’t want to solve a problem that will cost money. • They can play financial games, like stalling — sometimes forever — when it is time to reimburse a dealership for repairs that were supposed to be paid for by the car manufacturer. I f a car manufacturer can get a dealership to foot the bill for an expensive repair even though it is not the dealership’s responsibility, that’s great from the car manufacturer’s point of view. But it is also about as ethical as leaving a wallet home so a friend will have to pay for dinner. • Although a dealership might invest millions of dollars into the business, car manufacturers can sometimes take a dealership’s right to do business away arbitrarily and without a good reason. It’s no wonder dealerships don’t appreciate these sorts of business practices. But despite existing federal legislation, the logical place for restraint is really on a state level. Why? Dealer- ships are local, not national, in nature. As a result, state franchise laws were upheld as constitutional by the U.S. Supreme Court in 1978, and state franchise laws were also exempted from federal antitrust provisions. Car manufacturers, of course, are not happy about the results. They claim that laws to protect franchises make it too expensive for them to conduct business, and that market forces will correct the problem when manufacturers get too complacent about their responsibilities. However, the fact is that this type of market cor- rection doesn’t happen all at once. Cars are a big investment. It takes time to pay for the ones you have, and it takes time to get ready to buy a new one, too. Huge businesses do not usually go out of business overnight; in general, they go through a painful decline first. Car manufacturers are no different. Poor business practices will put them out of business eventually, but that is just too slow a solution, and it also doesn’t address the rights of those who are cheated, injured, or killed along the way. In reality, car manufacturers and dealerships need each other. But at the same time, having a fair and equitable business arrangement can only happen when both sides are on an equal footing. Car manufacturers have had it their own way for a long time when it comes to having the power in the franchise relation- ship. Some healthy rebalancing of that power might not make car dealerships happy in the short run, but taking advantage of the very businesses that increase your bottom line is a bad, bad business decision. Companies that get too far removed from the interests of customers who are located a long distance away are companies that will eventually fail. And that wouldn’t be good for anyone.  Cars are a big investment. It takes time to pay for the ones you have, and it takes time to get ready to buy a new one, too. Huge businesses do not usually go out of business overnight; in general, they go through a painful decline first. Car manufacturers are no different.