Lincoln Dealers: Pay Up or Get Out?

There has been significant publicity recently about Ford Motor Company’s ultimatum to Lincoln dealers. According to reports, if they want to remain Lincoln dealers, they must invest an average of $1 million to upgrade facilities. Not to handle the cars that Lincoln now builds, mind you.  But in the hope that Ford can introduce vehicles that compete with world-class luxury cars now on the market that are consistently being improved.  Invest or take a hike is apparently the message.  Really?

Ford clearly missed the memo that Chrysler and GM were able to abuse their dealers so thoroughly because they went bankrupt, with all the attendant nightmares.  To its credit, Ford did not.  But without a bankruptcy filing, Ford isn’t in a position to simply discard dealers at its whim.

Dealers in every state are protected by franchise laws.  Those statutes provide that a manufacturer who wants to terminate a dealer’s franchise or refuse to renew that franchise can only do so by going through a state mandated procedure.  Generally, that procedure includes notice to the dealer of the intention to terminate or to refuse to renew.  If the dealer challenges that, then the franchisor must go through a state administrative process, or in some states through a court process, to justify the decision.  And in that process, the franchisor must meet the standard of proof set forth in the law to justify the termination, which lawyers generally shorthand as “good cause”.  If a manufacturer can’t meet the statutory standard to show that the dealer is a bad one deserving of the business death penalty, then it may not terminate the dealer and it may not refuse to renew the dealer.  State laws recognize that dealers who invest millions and dedicate their whole business lives in support of franchisors should not have the rugs pulled from under them because a new regime wants to change marketing direction.  Thus, a franchisor may not terminate, refuse to renew, or force a sale of a dealer’s franchise at its whim.

And that is where Ford’s recent saber rattling falls short.  A Lincoln dealer has its franchise law protections.  It presumably also has its sales and service agreement that blesses its existing location.  By state law, it is entitled to renewal of its dealer agreement unless Ford wants to go to the time and expense of convincing a state administrator or a judge that the dealer’s franchise is deserving of the death penalty because the dealer won’t make the decision to invest seven figures on promises that Ford will start producing world-class luxury vehicles competitive with manufacturers who have been doing so.

Ford may argue that it is making a commitment and that the Lincoln dealers should do the same.  But is that really the case?  Ford has reportedly committed $1 billion to develop seven new Lincoln vehicles in an industry where that amount is respectable to upgrade one model and maybe two if corners are cut.  And those seven upgraded vehicles will apparently share parts with Ford line-make models.  Where is the franchisor commitment to justify the seven figure faith that Ford is demanding of its Lincoln dealers?

Of course, Ford may choose to impose requirements for facility improvements the way it and other manufacturers have done – by using per-vehicle incentives.  However, really exorbitant incentives make dealers who do not choose to knuckle under uncompetitive and threaten their ability to stay in business. Maybe that is not Ford’s goal with its Lincoln dealers.  But the recent Ford threats reported in the press to invest or get out suggest otherwise.  If Lincoln dealers are forced to litigate with Ford over its tactics, you can be sure that litigating dealers will be using those threats to show that Ford’s real intent is actually to punish and bankrupt cost-conscious dealers. And after having lost the Mercury franchise with many dealers accepting paltry payments, Lincoln dealers better be cost-conscious.