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Mandatory Arbitration of GM and Chrysler Dealer Terminations
In 2009, Chrysler and General Motors declared bankruptcy and terminated almost 2,000 of their dealers as part of overall restructuring. The dealers turned to Congress for relief. Congress responded by passing a bill, signed into law on Dec. 16, 2009, providing for mandatory arbitration for dealers seeking reinstatement.
Congress set aggressive deadlines for finishing the arbitrations. By Jan. 15, 2010, Chrysler and GM had to provide terminated dealers with the criteria used to terminate them. Dealers had until Jan. 25 to decide whether to invoke arbitration to contest the termination. Congress designated the American Arbitration Association (“AAA”) to administer the arbitrations and required that the hearings be held in the dealer's state. Only limited document discovery was allowed, and each party was responsible for its costs and fees. All arbitrations had to be completed by June 14, 2010, which arbitrators could extend for 30 days for good cause.
Also, Congress set a broad legal standard for determining whether to reinstate a dealer: The arbitrator was required to balance the economic interest of the dealer, the manufacturer, and the public to decide whether the dealership should be reinstated. In doing so, the arbitrator was required to review seven specific factual matters, including the dealership's profitability, the manufacturer's overall business plan, the dealership's economic viability, whether the dealership met performance objectives in its franchise agreement, and the dealership's experience and length of service. The arbitrator's award could decide only whether the dealer should or should not be reinstated, and could not include damages.
The AAA responded promptly to the legislation and sent out a request to select panel members to serve, explicitly advising them they would need to represent that they would set aside the time to complete multiple arbitrations within the time limits, and that they would be expected to limit their fees. Based on the response, the AAA picked a group of panel members to circulate to parties for streamlined selection. (Disclosure: I was on the panel and was selected for 10 cases.)
The AAA provided extensive training to the arbitrators. The goal was to encourage a process that would be streamlined, user-friendly, and reasonably consistent nationwide. For example, arbitrators were encouraged to engage the parties to determine whether they wanted to combine certain aspects of multiple hearings, such as having experts testify once for use in all hearings, or whether parties wanted to use affidavits or other time- and cost-saving procedures.
Dealers filed almost 1,600 cases, and all were closed by July 23. About 1,000 cases were resolved before an administrative hearing was held in the case. In total, 160 cases were tried through to award, but the AAA does not release information on results.
Participant Reaction
Participants have written very little about the process. I sent out a general request for opinions on the ABA Forum on Franchising ListServe, but I received only one substantive reply. It came from a dealer's lawyer, who expressed disappointment that the AAA administratively decided that the location of all hearings would be in his state's largest city, which added cost for his dealer clients from all around the state.
One published article to date has summarized the experience of Dady & Gardner, P.A., one of the nation's premiere franchisee firms (www.bluemaumau.org/9089/chrysler_dealer_reinstated_through_arbitration). According to the article, Michael Dady said his clients were very pleased with the results of the process, stating that “[o]f the 25 cases our firm was honored to be asked to handle for adversely affected dealers, 20 of our dealer clients are being reinstated, and five have settled their claims for cash settlements acceptable to them.”
One of Dady & Gardner's cases went all the way to award. It's the only public review of an award that I'm aware of. The hearing in that case was held on June 9-11, the briefs were due June 18, and the award was issued on June 25. According to the article, the award analyzed each of Congress' seven statutory factors in detail, noting that some favored the dealer and some favored the manufacturer. After what appears to be a careful and thorough review of all the specified balancing factors, including the public interest of consumers, the arbitrator found in favor of reinstatement.
Based on this limited public commentary on the process, drawing conclusions is tricky. But I think it's fair to say that when processes are unfair, it's common for those upset with the process to voice their complaints and criticism loudly and often. To the extent that's true, the absence of complaints and criticism suggests that the parties to the process were reasonably satisfied.
Lessons Learned
More data need to be gathered before drawing definitive conclusions from the overall process. But some preliminary issues can be considered now. First, one interesting aspect of the process is that Congress chose mandatory arbitration as the best vehicle for delivering a fast, cost-effective, fair procedure. And it did so at the same time it's considering the Arbitration Fairness Act, which would ban mandatory arbitration agreements in franchise agreements. How can this apparent inconsistency be squared?
Supporters of the Arbitration Fairness Act might claim that this is comparing apples and oranges; that mandatory arbitration may be appropriate for an emergency situation like the dealer terminations, but it's not appropriate for ordinary-course franchise agreements. Further, Congress dictated the terms of these arbitrations, whereas franchisors dictate the terms in the franchise agreement.
While these are valid points, the dealer arbitrations do show how mandatory arbitration ' if fairly structured ' can be an excellent tool for resolving franchise disputes quickly, inexpensively, and fairly. The time pressures created by the tight deadlines in the auto dealer arbitrations resulted in many settlements, and arbitrators were explicitly instructed to seek cost savings in the arbitration procedures. Furthermore, even in the cases that were tried, the awards were issued within six months of the case's initiation (if a dealer received a favorable judgment).
The debate about the benefits of arbitration and ways to reform the process is complex and multi-faceted. But Congress and the AAA seem to have gotten it right on this one. We should all look hard at the process as it is analyzed over the upcoming months to see what we can learn about making dispute resolution faster, cheaper, and fairer for franchisors and franchisees.
Peter R. Silverman is an attorney with Shumaker, Loop & Kendrick, LLP, in Toledo, OH. He can be contacted at 419-321-1307 or [email protected].
In 2009, Chrysler and
Congress set aggressive deadlines for finishing the arbitrations. By Jan. 15, 2010, Chrysler and GM had to provide terminated dealers with the criteria used to terminate them. Dealers had until Jan. 25 to decide whether to invoke arbitration to contest the termination. Congress designated the American Arbitration Association (“AAA”) to administer the arbitrations and required that the hearings be held in the dealer's state. Only limited document discovery was allowed, and each party was responsible for its costs and fees. All arbitrations had to be completed by June 14, 2010, which arbitrators could extend for 30 days for good cause.
Also, Congress set a broad legal standard for determining whether to reinstate a dealer: The arbitrator was required to balance the economic interest of the dealer, the manufacturer, and the public to decide whether the dealership should be reinstated. In doing so, the arbitrator was required to review seven specific factual matters, including the dealership's profitability, the manufacturer's overall business plan, the dealership's economic viability, whether the dealership met performance objectives in its franchise agreement, and the dealership's experience and length of service. The arbitrator's award could decide only whether the dealer should or should not be reinstated, and could not include damages.
The AAA responded promptly to the legislation and sent out a request to select panel members to serve, explicitly advising them they would need to represent that they would set aside the time to complete multiple arbitrations within the time limits, and that they would be expected to limit their fees. Based on the response, the AAA picked a group of panel members to circulate to parties for streamlined selection. (Disclosure: I was on the panel and was selected for 10 cases.)
The AAA provided extensive training to the arbitrators. The goal was to encourage a process that would be streamlined, user-friendly, and reasonably consistent nationwide. For example, arbitrators were encouraged to engage the parties to determine whether they wanted to combine certain aspects of multiple hearings, such as having experts testify once for use in all hearings, or whether parties wanted to use affidavits or other time- and cost-saving procedures.
Dealers filed almost 1,600 cases, and all were closed by July 23. About 1,000 cases were resolved before an administrative hearing was held in the case. In total, 160 cases were tried through to award, but the AAA does not release information on results.
Participant Reaction
Participants have written very little about the process. I sent out a general request for opinions on the ABA Forum on Franchising ListServe, but I received only one substantive reply. It came from a dealer's lawyer, who expressed disappointment that the AAA administratively decided that the location of all hearings would be in his state's largest city, which added cost for his dealer clients from all around the state.
One published article to date has summarized the experience of
One of Dady & Gardner's cases went all the way to award. It's the only public review of an award that I'm aware of. The hearing in that case was held on June 9-11, the briefs were due June 18, and the award was issued on June 25. According to the article, the award analyzed each of Congress' seven statutory factors in detail, noting that some favored the dealer and some favored the manufacturer. After what appears to be a careful and thorough review of all the specified balancing factors, including the public interest of consumers, the arbitrator found in favor of reinstatement.
Based on this limited public commentary on the process, drawing conclusions is tricky. But I think it's fair to say that when processes are unfair, it's common for those upset with the process to voice their complaints and criticism loudly and often. To the extent that's true, the absence of complaints and criticism suggests that the parties to the process were reasonably satisfied.
Lessons Learned
More data need to be gathered before drawing definitive conclusions from the overall process. But some preliminary issues can be considered now. First, one interesting aspect of the process is that Congress chose mandatory arbitration as the best vehicle for delivering a fast, cost-effective, fair procedure. And it did so at the same time it's considering the Arbitration Fairness Act, which would ban mandatory arbitration agreements in franchise agreements. How can this apparent inconsistency be squared?
Supporters of the Arbitration Fairness Act might claim that this is comparing apples and oranges; that mandatory arbitration may be appropriate for an emergency situation like the dealer terminations, but it's not appropriate for ordinary-course franchise agreements. Further, Congress dictated the terms of these arbitrations, whereas franchisors dictate the terms in the franchise agreement.
While these are valid points, the dealer arbitrations do show how mandatory arbitration ' if fairly structured ' can be an excellent tool for resolving franchise disputes quickly, inexpensively, and fairly. The time pressures created by the tight deadlines in the auto dealer arbitrations resulted in many settlements, and arbitrators were explicitly instructed to seek cost savings in the arbitration procedures. Furthermore, even in the cases that were tried, the awards were issued within six months of the case's initiation (if a dealer received a favorable judgment).
The debate about the benefits of arbitration and ways to reform the process is complex and multi-faceted. But Congress and the AAA seem to have gotten it right on this one. We should all look hard at the process as it is analyzed over the upcoming months to see what we can learn about making dispute resolution faster, cheaper, and fairer for franchisors and franchisees.
Peter R. Silverman is an attorney with
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