By: James Waite, Esq. and Rene Del Barco of JWL International
Most equipment dealers in the United States, as well as their lawyers, are aware of the fact that a vast array of federal, state and local laws, including dealer, franchise, antitrust, commercial, consumer protection, environmental, OSHA, employment and other mandates apply to their businesses. Few that I’ve spoken with, however, would feel comfortable providing a clear answer regarding whether or when a given dealer or distribution agreement might be subject to expiration, termination or modification, without first conducting substantial research and perhaps consulting with multiple attorneys, accountants, consultants and other experts. Such caution is well-advised, as the difference between being right and wrong can be millions of dollars. The purpose of this article is to provide a starting point for winning (or at least not losing) in these cases.
The Starting Point: In 1889, Fred Koller opened the first automobile dealership in the U.S.; the Reading Automobile Company in Pennsylvania. By 1927, over 53,000 such dealerships had sprung up across the United States.
The Problem: This profusion vastly increased the number of vehicles sold during the auto industry’s formative years, but ultimately, it also resulted in dwindling profits, multiple business failures, and mounting inequality in the bargaining power of predominantly small local dealers and that of powerful national manufacturers (reflecting this, average dealer profit margins decreased from 33% to 5% between 1914 to 1956).
The Legislative Response: In recognition of this disparity, the federal government and various states began enacting laws that protected auto dealers. Not long thereafter, state legislatures began extending similar protections to other industries, including equipment manufacturing and distribution. That expansion continues to this day, with the vast majority of states having, by now, enacted at least one equipment dealer and/or franchise statute, with many states having revised and expanded their dealer protections multiple times.
The Growing Legal Labyrinth: Curiously, however, as state legislatures have continued to develop these laws, although such laws have become conceptually more similar in some respects, they remain dramatically different in others. Following are some examples:
- Most cover only certain types of equipment, and among the various states, those equipment types are often entirely different (agricultural, construction, utility, industrial, mining, forestry, material handling, etc.) and often appear to be largely products of what the individual state legislatures, or perhaps what their more influential constituencies, deem most important;
- Many specifically exclude certain types of equipment, while others leave it to the courts to decide whether a vague statute might cover unspecified types of equipment;
- The majority prohibit a manufacturer or distributor from terminating a dealership other than for “good” or “just” cause, but more than a dozen do not;
- Definitions of what constitutes “good” or “just” cause vary substantially among those states that require it for termination;
- Some require that a dealer first be notified of the source(s) of good or just cause for termination and be afforded an opportunity to “cure” the alleged default(s); others allow for immediate termination;
- Some extend their protections to distributors (wholesalers) and/or providers of parts and services, while others cover only dealers (those who sell machines primarily at retail);
- Most, though not all, require a supplier to repurchase the dealer’s inventory of unsold equipment and parts (and in some cases, other items, such as specialized tools, hardware and software) upon termination of a dealer agreement, and in such event, require payment of differing amounts (Par exemple, full purchase price for new, unused and undamaged equipment, a fraction, perhaps 90% of the amount(s) paid for parts; and fair market or depreciated value for used equipment and/or parts);
- Many, though far from all, provide that a dealer agreement cannot overrule the state’s dealer statute,[1]making reliance solely on the terms of the dealer agreement inadvisable in many cases;
- A few require flexibility regarding transfers of dealerships (at least among family members), but most restrict transfers or permit suppliers to substantially restrict them in their dealer agreements;
- A number of states have incorporated specific peculiarities that would not likely occur to most industry participants (for example, Alaska excludes manufacturers with 50 or fewer employees; both Kansas and Missouri maintain five different dealer statutes, only three of which require good cause for termination; Texas requires two (2) years’ prior written notice if termination is to be effected because of a failure to satisfy an OEM’s performance objectives; South Dakota makes it a crime, a Class 1 misdemeanor, for a supplier to cancel a dealer agreement without satisfying the statute’s “good cause” requirements); and
- Lastly, if you operate in a state that does not maintain an applicable dealer statute (Par exemple, New Jersey, Arkansas, etc.), or one that is very lenient, don’t assume that no statutory protections apply to your business. Many states maintain “franchise” laws that offer protections similar to dealer laws.
Complicating Matters:
As if that wasn’t enough, a vast array of additional issues may require consideration. For instance, many large dealers maintain operations in multiple states, represent multiple competing manufacturers, and may do so with respect to equipment, only some of which is covered by a given dealer statute. That, coupled with the fact that dealer agreements proffered by manufacturers and distributors can range from reasonable to absurdly overreaching (and some of their provisions may be nullified or overruled by a state dealer statute, while others may not) can yield an enormously complex maze of legal requirements that must be navigated before a given operational, legal or financial decision can be made.
The dearth of interpretive case law regarding these issues only adds to the confusion. Because most disputes in the equipment industry still go to arbitration rather than to litigation (in spite of growing concerns regarding the reliability of arbitration awards in recent years), the results of which are kept confidential (arbitration awards are generally not reported publicly as they might be if they were conducted before a judge and/or jury), most industry participants as well as their attorneys are left without readily available legal guidance regarding the likely impacts of their decisions or anticipated legal outcomes. By way of example, we were recently faced with a question regarding the interpretation of the Texas Dealer Statute addressing exclusivity that the dealer’s local counsel had been unable to resolve. Texas courts were curiously silent on the issue, but an obscure Wisconsin ruling interpreting the Texas Dealer Statute provided a useful, if far-flung, resolution.
“What’s Most Important?"
Easily the most common question we encounter from dealers and manufacturers is: “What’s most important?” Annoyingly for them, more often than not, the answer is: “It depends.”
For most dealers, the starting point is usually a discussion regarding their businesses, including their current plans and objectives, equipment mixes, customer bases, supplier relationships, competitive environments, financing alternatives, facilities, delivery, service, maintenance and repair capabilities, sale/rental/lease/demo/RPO offerings, profitability, tax strategies, near-term and long-term expansion (or contraction) plans, and exit strategies, to name a few.
This information helps to create a negotiating strategy and allows both the dealer and the dealer’s advisors (including attorneys and accountants) to plan for and negotiate what matters most to that particular dealer (knowing that some suppliers will be more willing to concede some issues than others). This might include adding, eliminating and/or prioritizing certain issues, such as delivery terms, discounts, purchase, stocking or sales minimums, repurchase requirements upon termination (particularly if the applicable dealer statute(s) fail(s) to address it), interest and late charges, maintenance, facilities and/or staffing requirements, the ability to add or eliminate products in the future, exclusivity requirements, expansion into additional territories, payment and/or financing terms, rental/lease restrictions, assignability (Par exemple, to family members or trusts), technical defaults (Par exemple, ratio shortfalls, minority management and/or ownership transfers), etc.
Ultimately, what’s most important is usually understanding the specific needs of a given dealer or distributor and how the applicable environments (competitive, legal, regulatory, tax, etc.) impact efforts to achieve their goals. If you find yourself being advised by someone who doesn’t start there and then listen carefully to what you tell him or her, I would recommend finding another advisor.
Conclusion:
The unusual history of manufacturer-dealer relationships in the United States has produced a tangled array of often overlapping federal and state laws, rules, regulations, contract provisions, legal outcomes, and ultimately, impacts on industry participants. Understanding the dealer statute(s) and other requirements that might apply to your business and how they bear on your specific circumstances and objectives (near-term and long-term) before you sign a dealer agreement, and ideally, before you even commence negotiations, can be crucial. Feel free to contact us if we can help.
About the Authors: By James Waite and Rene Del Barco of JWL International. For over 25 years, the attorneys at JWL International, have specialized in domestic and international equipment transactions for manufacturers, dealers and equipment lessors. The firm is currently involved in, or has recently completed, equipment transactions in the U.S., Canada, Japan, China, Singapore, Europe, Africa, Latin America and the Caribbean. For more information, contact JWL International at (866) 582-2586 or [email protected]
[1] In general, contracts can choose the laws that will govern the agreement of two contracting parties. However, the Dealer Statutes of several states include “anti-waiver provisions” nullifying contract clauses that call for the application of another state’s laws.
