New Proposal May Lead to Consensus on Assistance for Terminated Automobile Dealers

As ADERRA stalls in the Senate, a potential compromise proposed by dealer associations offers alternative assistance to terminated GM and Chrysler dealers.

In July, the House of Representatives passed the Automobile Economic Rights Restoration Act (ADERRA) as part of a broad appropriations bill. ADERRA intends to give terminated GM and Chrysler dealers the opportunity to regain their lost franchises and to allow all GM and Chrysler dealers to force reinstatement of their pre-bankruptcy franchise agreements. Its chances of final passage, however, are uncertain. The Obama Administration and many Senators object to ADERRA in its current form. We understand the Obama Administration to believe that changes must be implemented to protect/compensate dealers but that ADERRA would have an undue adverse effect on the goals of its auto task force.

This opposition has sparked efforts to reach a compromise. The National Automobile Dealers Association (NADA), the National Association of Minority Automobile Dealers (NAMAD), and the Automotive Trade Association Executives (ATAE) have together drafted a compromise proposal.

The compromise proposal seeks to accomplish two principal goals: (1) a transparent appeals process offering a realistic opportunity for reinstatement for franchises that remain after restructuring of the manufacturer; and (2) a fair and proper compensation to affected dealers who are not reinstated.

The new proposal would provide the following process for dealers seeking reinstatement:

  1. GM and Chrysler would have to disclose the specific, objective criteria used to eliminate dealers.
  2. Each dealer would have the opportunity, in a direct meeting with the manufacturer, to learn how those objective criteria were applied in the dealer’s individual case.
  3. Each dealer would have the opportunity to provide additional information or correct inaccurate information, which may change the outcome of the initial decision.
  4. If the dealer disputes the objectivity and fairness of the decision, the dealer can appeal the decision to an arbitration panel.
  5. The arbitration panel would NOT simply decide if the manufacturer successfully applied its own criteria. Instead, the arbitration panel would decide whether the decision to terminate or wind down the dealer was objective and fair based on: a) the standard for termination of a franchise under the dealer’s state motor vehicle franchise law; b) the dealer’s financial viability; and c) any other factors agreed to by GM or Chrysler and the affected dealer.
  6. The affected dealer would have a right of first refusal to re-enter the dealer’s market, backed by a right to appeal to an arbitration panel.

The compromise proposal provides additional benefits for dealers. Specifically, for dealers seeking additional compensation, it would provide:

 

  1. Any dealer not seeking or failing to obtain reinstatement would receive compensation based on a formula (this currently would extend to Pontiac dealers).
  2. In addition to the formula-based compensation, a dealer could seek additional payments to reflect exigent circumstances, such as recent investments in the franchise or dealership facilities associated with the franchise.
  3. Any disputes about these payments could be resolved before an arbitration panel.

The prospects for the compromise proposal’s passage appear better than that of the more aggressive ADERRA. Senator Dick Durbin from Illinois is already overseeing negotiations among GM, Chrysler and these dealer associations to see if the parties can come to an agreement based off this proposal. Harris Beach through its representation of a national client will have one of its partners along with other top firms participating in these negotiations with GM and Chrysler as well as with congressional staff. There have been two days of negotiations, and a third day is scheduled.

In the end, any final legislation may look different from this proposal, but perhaps many aspects of this proposal will make it into law. Already-terminated dealers and those who are currently winding-down may want to consider their strategy moving forward in advance of any legislative enactment. Prudent planning may allow these dealers to take steps now to enhance any claims they might have and to better posture their bargaining position when negotiating a settlement. If you have questions about the information contained in this legal alert or would like assistance with legal issues related to contract and bankruptcy law as well as other issues related to automobile dealerships, please contact Patrick Dalton at (585) 419-8607, Douglas Foss at (585) 419-8612, H. Todd Bullard (585) 419-8696, any member of the Automotive & Vehicles Industry Team, or the Harris Beach attorney with whom you usually work.

This legal alert provides a brief summary on matters related to contract and bankruptcy law and does not purport to substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York, including Albany, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse and Yonkers, as well as Newark, New Jersey.