Inside the New GM Dealer Agreements

The automakers complained that the state laws had held them back from addressing economic and market realities. For more than a decade, they had been trying to trim their dealer networks. An early harbinger of what was to come was GM's elimination of Oldsmobile in 2004. That transaction was done primarily with GM “buying out” the Oldsmobile dealers (at a very reduced price), and the transaction was not viewed by many as successful.

Chrysler Rejects Dealer Agreements

Bankruptcy offered the carmakers the possibility of shedding dealers en masse or of remaking their dealer agreements on a wholesale basis. Their strategy is founded upon bankruptcy precedents based upon union contracts ' when, for example, airlines could force unions to make immense concessions through the power of the Bankruptcy Code.

Chrysler took the direct route to dealer termination. In mid-May, after filing for bankruptcy, it made a motion in the Bankruptcy Court to “reject” nearly 800 dealer agreements. Rejection is the equivalent of termination. The dealer gets a claim in damages as an unsecured creditor, which is worth next-to-nothing.

Chrysler's motion was extraordinary for its breadth. Not only did it end the dealer agreements, it expressly overrode state dealer laws, directed the dealers to instantly stop holding themselves out as Chrysler dealers, and put in place an enforcement mechanism to bring them before the court on five days' notice if they violated the terms of the order granting the motion. The motion also was extraordinary because it did not address the issue of whether any individual agreement was burdensome to the estate. Rather, the argument was that these 800 agreements were a burden in general. The court granted the motion without elaboration.

GM Creates 'Participation Agreements'

With the Chrysler motion as precedent, GM swung into action. Having filed for bankruptcy, it had the power to reject its dealer agreements, but it held that power in abeyance. Instead, it presented its dealers with one of two agreements: Those who were to be trimmed got “Wind-Down Agreements,” under which they would get a stipend and a bit of time to leave the system; those who were chosen to stay got “Participation Agreements,” in which they agreed to a host of new requirements.

The Participation Agreements are, in fact, not quite dealer agreements. They are styled as amendments to the existing agreements. They contain very broad undertakings by the dealer in three principal areas:

1. The dealer agrees to sell a minimum quota of cars;
2. The dealer agrees to carry a larger inventory of cars; and
3. The dealer agrees to eliminate from its showroom any competitive lines of cars.

The Participation Agreement echoes the practices of automobile manufacturers half a century ago, before dealer statutes were prevalent. At that time, manufacturers terminated dealers with little or no notice; they forced them to take cars that they did not order; and they dictated requirements for their premises.

Whether the Participation Agreement will usher in a new era of old practices remains to be seen. It left most of the questions unanswered. In a letter to dealers clarifying the Participation Agreements, GM said that it expected that dealers would have “significant opportunities to increase sales” and that to take advantage of those opportunities, dealers would need to have “up-to-date competitive facilities” and to “eliminate non-GM line makes from their showrooms to place proper customer focus” on GM lines.

Turning to specifics, GM explained that it could not gauge the quota requirement until it knew how many dealers would sign the Participation Agreements and where they would be located. It explained that in the first quarter of 2010, GM and the dealer would meet and agree upon sales goals in light of the dealer's historical market share and “market opportunity.” The goals are to be implemented in the second half of 2010 or in 2011.

GM does not address the issue of what will happen if the sales quotas are set too high or if the dealer does not agree with GM. At common law, the parties have a duty to negotiate with each other in good faith. If they fail to agree, a court could find that they failed to agree upon essential terms and that, therefore, the agreement is unenforceable. Under many state dealer laws, the manufacturer either cannot set a quota, or any quota that it sets is unlawful or unenforceable. GM has hinted in the press that it will use the continuing jurisdiction of the Bankruptcy Court to enforce the Participation Agreements. But how it will do so, once it is out of bankruptcy, is not clear. The Participation Agreement, in short, raises more questions than it answers.

GM used the same tactics with respect to inventory requirements as it did with quotas. It told the dealers: “Simply put, GM needs dealers to order adequate inventory to meet or exceed expected sales performance requirements ' ” It left several critical questions unanswered: Will dealers be required to order all types of models? Will GM dictate the accessories that are added to the cars in the dealers' inventories? Again, these are practices that many manufacturers engaged in 50 years ago and that have since been reined in by state laws.

Perhaps the most controversial provision of the Participation Agreement is the requirement that non-GM brands be removed from the showroom and, in some markets, that they be removed entirely from the premises, all by the end of this year. For many dealers, removing non-GM brands from the showroom is equivalent to removing the brand entirely, since the showroom is such a large part of their facility. For others, having service and parts departments that serve more than one brand is critical to their economic survival. And, as with the other provisions, the requirement to dispense with competitive brands runs counter to many state laws.

GM has left the resolution to these questions open. It has deliberately couched the requirements in broad terms and told the dealers that it will “work with” them to resolve any issues. If, as GM predicts, the economy and the market for automobiles improves, then there will probably be very few issues. On the other hand, if GM is off the mark, then dealers are likely to invoke their rights under state laws, and GM will test whether it can invoke the Bankruptcy Court's continuing jurisdiction. One thing is certain: History will be made.

W. Michael Garner is a partner with Dady & Garner in Minneapolis. He can be contacted at [email protected] or 612-359-9000.

Automakers Chrysler and General Motors changed the history of dealer relations when they stepped through dozens of state laws and regulations and terminated thousands of long-standing dealers through the power of the Supremacy Clause of the U.S. Constitution and the U.S. Bankruptcy Code. Now that they have emerged from bankruptcy, history remains to be written on the intriguing issues of whether GM will be able to make its new, bold agreement, heavily weighted in GM's favor, stick in the face of state dealer laws.

Prior to bankruptcy, both carmakers complained that their dealer networks had swollen to the point of being expensive and cumbersome. They wanted fewer, bigger dealers ' a trend that has been going on in the farm and heavy equipment industries for years. Dealers, however, were protected by state statutes in all states but Alaska. These dealer statutes typically protect the dealer from termination or non-renewal without good cause (meaning the dealer's deficiency), prior notice of that deficiency, and a reasonable opportunity to cure. They also protect dealers from unreasonable restrictions on transfer.

While such provisions are typical for franchise relationship statutes, many auto dealer statutes go much further: Some give dealers protected territories; some give dealers the right to carry competitive lines, which the manufacturer cannot abrogate by contract; many prohibit the manufacturer from imposing quotas or achievement of a particular market share; many prohibit the manufacturer from requiring the dealer to take particular makes or models of its line; most specify when and at what rate the manufacturer must pay warranty claims; many have catch-all provisions that prohibit the manufacturer from taking any action that is “without due regard to the equities” of the dealer.

The automakers complained that the state laws had held them back from addressing economic and market realities. For more than a decade, they had been trying to trim their dealer networks. An early harbinger of what was to come was GM's elimination of Oldsmobile in 2004. That transaction was done primarily with GM “buying out” the Oldsmobile dealers (at a very reduced price), and the transaction was not viewed by many as successful.

Chrysler Rejects Dealer Agreements

Bankruptcy offered the carmakers the possibility of shedding dealers en masse or of remaking their dealer agreements on a wholesale basis. Their strategy is founded upon bankruptcy precedents based upon union contracts ' when, for example, airlines could force unions to make immense concessions through the power of the Bankruptcy Code.

Chrysler took the direct route to dealer termination. In mid-May, after filing for bankruptcy, it made a motion in the Bankruptcy Court to “reject” nearly 800 dealer agreements. Rejection is the equivalent of termination. The dealer gets a claim in damages as an unsecured creditor, which is worth next-to-nothing.

Chrysler's motion was extraordinary for its breadth. Not only did it end the dealer agreements, it expressly overrode state dealer laws, directed the dealers to instantly stop holding themselves out as Chrysler dealers, and put in place an enforcement mechanism to bring them before the court on five days' notice if they violated the terms of the order granting the motion. The motion also was extraordinary because it did not address the issue of whether any individual agreement was burdensome to the estate. Rather, the argument was that these 800 agreements were a burden in general. The court granted the motion without elaboration.

GM Creates 'Participation Agreements'

With the Chrysler motion as precedent, GM swung into action. Having filed for bankruptcy, it had the power to reject its dealer agreements, but it held that power in abeyance. Instead, it presented its dealers with one of two agreements: Those who were to be trimmed got “Wind-Down Agreements,” under which they would get a stipend and a bit of time to leave the system; those who were chosen to stay got “Participation Agreements,” in which they agreed to a host of new requirements.

The Participation Agreements are, in fact, not quite dealer agreements. They are styled as amendments to the existing agreements. They contain very broad undertakings by the dealer in three principal areas:

1. The dealer agrees to sell a minimum quota of cars;
2. The dealer agrees to carry a larger inventory of cars; and
3. The dealer agrees to eliminate from its showroom any competitive lines of cars.

The Participation Agreement echoes the practices of automobile manufacturers half a century ago, before dealer statutes were prevalent. At that time, manufacturers terminated dealers with little or no notice; they forced them to take cars that they did not order; and they dictated requirements for their premises.

Whether the Participation Agreement will usher in a new era of old practices remains to be seen. It left most of the questions unanswered. In a letter to dealers clarifying the Participation Agreements, GM said that it expected that dealers would have “significant opportunities to increase sales” and that to take advantage of those opportunities, dealers would need to have “up-to-date competitive facilities” and to “eliminate non-GM line makes from their showrooms to place proper customer focus” on GM lines.

Turning to specifics, GM explained that it could not gauge the quota requirement until it knew how many dealers would sign the Participation Agreements and where they would be located. It explained that in the first quarter of 2010, GM and the dealer would meet and agree upon sales goals in light of the dealer's historical market share and “market opportunity.” The goals are to be implemented in the second half of 2010 or in 2011.

GM does not address the issue of what will happen if the sales quotas are set too high or if the dealer does not agree with GM. At common law, the parties have a duty to negotiate with each other in good faith. If they fail to agree, a court could find that they failed to agree upon essential terms and that, therefore, the agreement is unenforceable. Under many state dealer laws, the manufacturer either cannot set a quota, or any quota that it sets is unlawful or unenforceable. GM has hinted in the press that it will use the continuing jurisdiction of the Bankruptcy Court to enforce the Participation Agreements. But how it will do so, once it is out of bankruptcy, is not clear. The Participation Agreement, in short, raises more questions than it answers.

GM used the same tactics with respect to inventory requirements as it did with quotas. It told the dealers: “Simply put, GM needs dealers to order adequate inventory to meet or exceed expected sales performance requirements ' ” It left several critical questions unanswered: Will dealers be required to order all types of models? Will GM dictate the accessories that are added to the cars in the dealers' inventories? Again, these are practices that many manufacturers engaged in 50 years ago and that have since been reined in by state laws.

Perhaps the most controversial provision of the Participation Agreement is the requirement that non-GM brands be removed from the showroom and, in some markets, that they be removed entirely from the premises, all by the end of this year. For many dealers, removing non-GM brands from the showroom is equivalent to removing the brand entirely, since the showroom is such a large part of their facility. For others, having service and parts departments that serve more than one brand is critical to their economic survival. And, as with the other provisions, the requirement to dispense with competitive brands runs counter to many state laws.

GM has left the resolution to these questions open. It has deliberately couched the requirements in broad terms and told the dealers that it will “work with” them to resolve any issues. If, as GM predicts, the economy and the market for automobiles improves, then there will probably be very few issues. On the other hand, if GM is off the mark, then dealers are likely to invoke their rights under state laws, and GM will test whether it can invoke the Bankruptcy Court's continuing jurisdiction. One thing is certain: History will be made.

W. Michael Garner is a partner with Dady & Garner in Minneapolis. He can be contacted at [email protected] or 612-359-9000.