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Designing new franchise agreement laws


Model S P1327 VIN P01867
Dec 30, 2011
Kirkland, WA
(Mods: I could not find a better forum for this topic, so please move if appropriate).

Let's say that through some large effort a bunch of people were able to come up with a plan that by November, 2015, groups in all 50 states would put voter initiatives on the ballots of each state. These initiatives would be focused on reworking existing franchise agreements to restore free market principles to automobile sales. (I'm assuming all states have a voter initiative process, which may or may not be true).

My question here is not about how such an effort could/would be pulled off (certainly an interesting topic for a different thread), but rather what the reworked laws would look like. For example, I can certainly respect that dealers invest a lot in their dealerships, and it's not unreasonable to have some regulation around having manufactures treat dealers fairly if they are using them. Also, because of the size of the dealer industry (and completely ignoring their political clout which as we know is substantial), it doesn't seem likely that simply striking existing franchise agreement laws from the books is the best goal to shoot for.

So, assuming the best goal is to overhaul the laws rather than eliminate them, what would such revised laws look like?

I live in Washington State so was looking at the laws here, covered in RCW 49.96 (found here). The current version does not include the revision recently passed by both houses as it has not yet been signed into law by the governor. A few things I noticed:

  1. The laws pretty much assume that all vehicles will be sold through dealerships.
  2. It is virtually impossible for manufacturers to break a franchise agreement, unless the dealer is actually violating the terms of the agreement (which can include sales quantities). Any possible termination has to be reviewed and approved by a judge.
  3. The manufacturer always has the burden of proof (and apparently pays legal costs) for agreement termination and so on.
  4. Once a manufacturer is using dealers, they are stuck. There is no way out.

I definitely think that some obvious revisions are to change the basic presumptions of the law (in WA's case, RCW 46.96.010) to clearly state that manufacturers can choose whether or not to use franchise dealers. It also makes sense to explicitly allow internet sales of automobiles by manufacturers.

What I've been thinking about are a couple of things:

  • Is there a reasonable way to allow a manufacturer to have both franchise dealers and manufacturer owned stores? The dealers have an inherent disadvantage, as they are pure overhead, so it does not seem possible to come up with any sort of equitable system that allows a manufacturer to have both.
    • Perhaps require manufacturers to choose either all or none on dealers for sales, but allow manufacturers to own service centers no matter which option they choose?
    • Require manufacturer owned stores to have the same markup as the dealers (silly, I know, but this really would be only a requirement to enable manufacturers to transition from dealers to their own stores - see below).
    • Perhaps it is sufficient to simply allow manufacturers that have dealers to do direct internet sales. Over time, this would most likely result in dealers disappearing and/or becoming only service centers.
    • Other ideas?
  • Is there a way to allow a manufacturer to transition out of using dealers that doesn't utterly screw the dealers? This ties in with the previous question, as it would almost certainly be impractical and infeasible for a manufacturer to suddenly switch over. They need to have a way to start opening their own stores (or taking over dealerships) on a gradual or rolling schedule. What could happen (and the reason the franchise laws came into place in the beginning) is that the direct stores could sell at prices the dealers can't compete with. As part of allowing free market to work, should this just be allowed (thereby causing even more vehement resistance to the changes), or is it reasonable to still provide the dealers some sort of protection from this?
  • The corollary would be how a manufacturer would transition from their own stores to dealers if they wanted to (it does take a number of burdens off the manufacturers which is why this whole things started in the first place).
  • What about explicitly allowing direct internet sales by manufacturers (and dealers, I suppose) whether or not they are using dealers? What if some manufacturer comes in and sells cars over the internet but does not provide any sort of service ability? Should the law require service centers, or should we let free enterprise do its thing and presume that no-one will buy a car that can't be serviced?

I'm posing these questions to get thoughts and suggestions on these general ideas and any others you can come up with. I think it would be interesting to come up with an overhaul of RCW 46.96 that incorporates these principles. While I'm sure other states' laws are quite different in many ways, the same principles should be able to be applied to them. I'm not a lawyer or politician, so would probably be unable to do anything with it once written, but I think it is a fun and interesting thought exercise to think through these problems and come up with some proposed changes.

Maybe someone else could take it from there and start the process of actually putting it on the ballot.

I'm interested in hearing your thoughts!

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