There are no “good people” or “bad people” here, just carmakers vs. car sellers. But one group has state legislatures on its side.
The role of car-dealer franchises is in a period of crisis. That’s hardly ever mentioned, but it’s a key factor as General Motors, Ford and Chrysler struggle to survive.
The dealerships constitute a powerful lobby in the Colorado Legislature, which has witnessed amendments to the car-dealer franchise law almost every recent year. This year’s pro-car-dealer bill is Senate Bill 91, sponsored by Sen. Chris Romer, D-Denver.
Historically, it didn’t have to be this way. Dealerships could have been controlled by carmakers and distributors, who would have had the right and the flexibility to close inefficient
operations. Instead, franchises were born.
James Surowiecki, of The New Yorker magazine, wrote an excellent column 30 months ago on what would happen in a monetary crisis. He has been proven right: The most powerful players in today’s auto industry are the car dealers.
Car dealers are “local,” known politically to legislators both in Colorado and other states. Whatever Lola wants, Lola gets. The same is true for locals, especially fundraising and fund-giving locals.
In 1937, Colorado was among the first states to start interfering in arrangements between dealers and manufacturers. It is still on the books as CRS 112-6-201 to 213, the Antimonopoly Financing law. In 72 years, just one section has been amended.
Let’s look at the legislative intent in the first two paragraphs of 12-6-101, broken down here, in part, for emphasis.
“The sale and distribution of motor vehicles affects the public interest and confidence of the purchaser in the retail dealer from whom the purchase is made and the expectancy that such dealer will remain in business to provide service for the motor vehicle purchased.
“Proper motor vehicle service is important to highway safety and
(1) the manufacturers and distributors of motor vehicles have an obligation to the public
(a) not to terminate or refuse to continue their franchise agreements with retail dealers
(b) unless the manufacturer or distributor has first established
(i) good cause for termination or noncontinuance of any such agreement,
(ii) to the end that there shall be no diminution of locally available service.”
The manufacturers have the burden of showing “good cause,” but even if they do, they also have to show “no diminution of locally available service.”
(Note to the drafting office: “Good cause” is not defined in the statute. “Good faith” is.)
As a result, car dealerships have gained territorial monopolies (called geographic areas) from their manufacturers, fending off anyone who might want to muscle in by opening a competing franchise. So if Chrysler merged with Ford, who gets to sell the Chrysler cars? Does territorial integrity mean Chrysler franchises lose out, or that Ford franchises must defend themselves from lawsuits across the country?
Romer’s SB 91 is assigned to the Business Affairs Committee. Here’s a sampling of the various amendments in the bill:
1. The manufacturer “who disapproves of a sale or transfer of a franchise shall reimburse the prospective purchaser and seller for any actual costs incurred in attempting to sell or transfer the franchise.”
Which means that there is no down side for the seller or purchaser. Payments must be made for lawyer or accountant fees. No wording has been added requiring “good faith” on the part of the potential purchaser or seller.
2. Temporary ownership of the franchise.
Present law allows the manufacturer two years to make the transition to another dealer. The bill cuts that in half to one year, providing less time to determine the credibility of applicants.
3. Termination of franchises.
Manufacturers with “good cause” are presently out of pocket for payments to the bad franchiser by statute. The Romer bill adds to that: The unused portion of the facility lease costs and “goodwill value.”
In addition, in order to prove “good cause,” manufacturers must submit a great deal of information for termination to occur. The Romer bill sets a time limit of 30 days for the manufacturer to submit that information.
Pragmatically, it would be smarter to pay off a bad franchiser than to try to meet the requirements of Colorado’s car franchise statute.
4. Squeezing the best out of ANY promotion.
A manufacturer, to save one franchise from going under in South Carolina, might offer a unique concept, such as offering trade-ins at no cost to either the dealer or the consumer. Under the Romer bill, the manufacturer would have to make exactly the same offer to each of its franchises in Colorado.
Back in 2000, I made the following points in discussing a pro-car dealer franchise bill:
“Why is the state Legislature leaving fingerprints all over contracts entered into between mature, adult, businesspeople who sell cars and their supplier, the car manufacturer?
“The answer is easy. If car dealers can’t hack it at the bargaining table, they can get the Legislature to do the dirty work because they have friends in Capitol places.
“HB 1186 adds one-sided statutory language to contracts already entered into between dealers and suppliers. In general terms, the bill increases car dealer monopolistic power over territory and allows the franchise to be passed down to heirs forever.”
In its 2006 Sunset report, the Department of Regulatory Agencies emphasized that the Motor Vehicle Dealers Board has been “captured” by the industry.
“When a regulatory program is captured by the industry it is supposed to regulate, the public suffers because the government offers little or no recourse when statutes and regulations are violated. In some cases, competition can be stifled as the industry-driven regulatory authority uses the police power of the state to distort the market.”
Stifling competition? That’s what Sunday closing laws, which were passed in 1955 in Colorado have done. It has nothing to do with religion, and everything to do with “keeping everyone in lockstep.”
There are only 14 states and assorted counties that ban car sales on Sunday. The car lot might be in a shopping mall location with a decent number of consumers, but they can’t even get into a car, new or used, to see if they want to buy it. And Colorado counties lose out on possible sales tax they so desperately needs.
Why not allow dealers to open or stay closed on Sundays from July 1, 2009 to March 1, 2010, with each dealer required to report any Sunday sales to the dealers’ board on a monthly basis? That would give legislators sufficient information to decide whether to do away with the Sunday closing law.
Jerry Kopel served 22 years in the Colorado House.