Published June 6, 2012, Los Angeles Daily Journal – The last four years have laid witness to some of the most extraordinary events in our nation’s history. The 110 year-old Lehman Brothers toppled in an instant, Merrill Lynch was sold over a weekend, and our government began doling out billions in an effort to save it all. Sweeping measures of enormous degree were taken on a moment’s notice, as policy makers contemplated financial devastation if immediate action was not taken.
The domestic automotive industry was at the epicenter of the crisis, suffering from decades of complacency and neglect. Foreign automakers were quicker, leaner and more competitive, leaving the domestics laboring under the weight of billions in debt. And when the credit markets froze, the manufacturers’ continued viability was called into doubt.
Chrysler and GM responded to the crisis by making deep cuts in their employee base, closing factories and eliminating slow moving vehicle lines. They also sought to thin their franchised dealers over the course of several years. In its plea to Washington to for financial relief, GM said that it would eliminate 1,650 dealers over the six years, and Chrysler claimed to have similar plans although it was less specific about the details.
In February 2009, President Barack Obama created the Presidential Task Force on the Auto Industry, whose purpose was to review the Chrysler and GM restructuring plans. The Auto Task Force reviewed the manufacturers’ plans, and rejected them claiming that they were not fast enough in their dealer closures. The automakers were then given 60 days to submit a “more aggressive plan.” As the Auto Task Force noted, it wanted the manufacturers to emulate the “Toyota model” of having fewer dealers, with higher sales per dealer.
Chrysler and GM revised their plans to call for the immediate termination of a combined 2,243 dealers through a pre-packaged bankruptcy process. Under this new plan, rather than a slow wind down of the dealers, Chrysler and GM would terminate the dealerships right away, using the bankruptcy powers to cut off all liability. The Obama Administration then approved the plan, and Chrysler and GM received $81 billion in financial support as they exited bankruptcy.
While the dealership closures were said to be a cost savings measure, many pundits believe that terminating independently owned franchises was of marginal benefit to the manufacturers. In fact, two of the members Auto Task Force publicly admitted that cost saving measures were not a factor in requesting the immediate dealership closures. Rather, it appears that the Auto Task Force was focused on melding the manufacturers into the Toyota mold, even though Chrysler executives stated that such a model would “never work” for Chrysler.
Because of the financial devastation to the 2,243 terminated dealers, and the public outcry that followed the Obama Administration’s decision to support the plan, in 2009 Congress began holding hearings to determine whether law should be passed to reinstate terminated dealers. The hearings resulted in the passage of the Consolidate Appropriations Act of 2010, which enabled terminated dealers to file for arbitration requesting reinstatement.
The legislation was predicated on the premise that the Chrysler and GM closures were arbitrary and capricious, and the Act sough to impose a standardized criteria for termination. If the dealers were found to be “under performing” using an objective criteria, then termination would be authorized; otherwise, the dealers would be reinstated in the dealer network. Of the 789 Chrysler dealers that were terminated, 418 filed for arbitration. Of this number several were voluntarily reinstated or otherwise informally resolved, and a 108 went to a decision, with 32 prevailing.
Following the conclusion of the arbitrations, questions arose as to exactly what was meant by the word “reinstatement.” The dealers naturally took the position that reinstatement meant just that; that they were entitled to their resume their position in the dealer network at their prior location. After all, most of the dealers still held the real estate, which in many cases was not being utilized but still subject to a mortgage. Yet, Chrysler took the position that reinstatement only entitled the dealers to a “letter of intent” to be reinstated at a future date and at an undetermined place.
In 2010, litigation ensued against Chrysler, with the terminated dealers seeking to enforce their arbitration awards. In the much anticipated ruling, Judge Sean Cox of the U.S. District Court, Eastern District of Michigan, held that the terminated Chrysler dealers who were successful in arbitration were entitled to no more than “a customary and usual letter of intent to enter into a sales and service agreement” with Chrysler.
The court further held that the letter of intent did not necessarily need to reinstate the dealer in the same location, only that the dealer generally be permitted to rejoin the Chrysler network. So, it would be perfectly acceptable for Chrysler to take a dealer who had been in business for 30 years, as was the case with Village Automotive Center in Royal Oak, Michigan, and provide the dealer a letter of intent for a franchise in an entirely different part of the state.
While there are obvious differences between reinstatement and a letter of intent for reinstatement, the most important distinction is one that may not be very well known. Under most state dealer laws, a letter of intent for a franchise gives neighboring dealers a right to protest the proposed new dealership. In California, for instance, Vehicle Code Section 3062 states that a dealer within 10 miles of a proposed new franchise may file a protest with the California New Motor Vehicle Board to block the new dealership from being established. Once a protest is filed, a trial on the merits is required to determine whether good cause exists to establish the new franchise.
For the 32 terminated Chrysler dealers, the court’s ruling means that their win in arbitration was not a win at all, but rather the start of another arduous path of litigation and appeals. For dealers who have already been out of business for three years, the prospect of further litigation over the next several years is all but certain death. For those who have already suffered so much – and who have proven that they never should have been terminated – such a result is a manifest case of injustice.