FRANCHISE LAW: IT’S NEVER TOO EARLY TO DERAIL TERMINATION

The best strategy for protecting against a franchise termination is to aggressively make your case when you get the first factory letter critical of your performance. If you wait until the termination notice is issued, you may cripple your defense.

Dealers are confident that their state franchise statutes will protect them from termination. That confidence is generally well placed. Franchise statutes in all states protect dealers from frivolous terminations. A manufacturer that wishes to terminate a motor vehicle dealer must follow the applicable state statute and must show that it has a basis for termination, which lawyers shorthand as “good cause”.

Franchisors know that good cause statutes impose a significant barrier to termination. They do not, however, make a dealership’s franchise termination-proof. In fact, a manufacturer can still terminate a dealer’s franchise by carefully following the state statute. While an occasional dealer may face a sudden problem that may justify termination of its franchise – loss of floorplan, loss of a dealer license, and the like – in most cases manufacturer terminations are based on alleged dealer operational problems, usually the failure to meet sales efficiency objectives and the failure to satisfy customers. In those cases, factories have learned to “build a record” over the years.

At a hearing, a dealer facing termination may argue that the factory sales efficiency measurements are inappropriate. Or it may argue that it did not get the vehicles to meet objectives. Or it may argue that the factory’s CSI system is flawed. Invariably, the factory’s response to these sorts of explanations is one of phony surprise: we never heard from the dealer prior to the termination notice about these problems, so they must have been fabricated to delay termination.

Learn the lesson from the manufacturers’ strategy. A successful defense starts when the manufacturer begins down the termination road. Lots of franchisors send many dealers letters about performance deficiencies. Some of those dealers may eventually receive notices of default. A few dealers may even receive termination notices. A solid record of responsiveness is the difference between getting a termination notice and not getting one.

  • Respond to every performance criticism issued by your manufacturer. Does the factory claim you are sales inefficient? In many cases, that is the result of a faulty measuring process. Explain why the manufacturer’s measurement is inappropriate for you. Perhaps your primary market area is too large. Perhaps the demographics of the residents of your PMA are not suitable for the level of sales for which you are responsible. Perhaps there are physical impediments in your PMA – mountains or rivers – which give other dealers a sales advantage. Do the same with customer satisfaction measures. What about the manufacturer’s methods make the survey results susceptible to challenge? If you do your own surveys, explain why your own results showing satisfied customers are more appropriate.
  • Build your own record. Respond to every point made 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. Take issue with every issue raised.
  • Emphasize your strengths.  Often, the criticism is one aspect of your performance. Point out where you excel, and don’t be afraid to mention your investment in time and capital to represent the manufacturer.
  • Don’t hide improvements you have made. If you have made changes to address criticisms, tell the manufacturer what those changes are. Show that you are responsive.
  • Communicate with those who communicate with you. Respond to the person who wrote to you. Send CCs to those on the factory CC list. Make sure your communications are getting to the people who matter. Those people are generally listed on the letter sent to you.
  • 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 are in breach of your obligations. Never agree that the performance objectives are appropriate and that you are failing to meet them. Never agree to standards that you must meet to be in compliance with your agreement unless you know you can meet those standards and there are exceptions for problems outside your control.
  • Consult 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, and you must point out why the manufacturer is wrong, what you are doing to improve your performance, or both. A manufacturer’s lawyer reviewing whether to pursue termination who can recognize what the factory is up against may recommend that the factory not pursue termination.  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 excuses you never brought to the factory’s attention.

Tags: