The recently passed federal appropriations bill provides a mechanism for certain terminated auto dealers to seek relief through arbitration. If the dealer succeeds in the arbitration process, the manufacturer is required to enter into a letter of intent for a sales and service agreement with that dealer.

Auto Dealers Eligible for Arbitration

Auto dealers terminated on or before April 29, 2009, may have the right to seek relief through arbitration if the termination was not in accordance with applicable state law. In order to be eligible, the dealer’s sales and service agreement must have been with a covered manufacturer (General Motors or Chrysler) and the dealer must have suffered certain negative actions (e.g., termination or failure to renew). If the dealer was terminated in accordance with applicable state law or entered into a termination agreement or similar arrangement as the result of voluntary negotiations, then the dealer is not eligible to participate in the arbitration process.

Election to Arbitrate

By January 15, 2010, covered manufacturers are required to provide each eligible dealer with the specific criteria pursuant to which the dealer was terminated, not renewed, or not assigned and assumed. The dealer then has until January 25, 2010, to determine whether or not to pursue arbitration (which date can be extended by up to 30 days by the arbitrator for good cause).

The Arbitration Process

In the event the dealer elects to arbitrate, the next step is the selection of the arbitrator. The arbitrator will be selected by mutual agreement between the dealer and the manufacturer from a list of qualified arbitrators, and if no agreement can be reached, the American Arbitration Association (AAA) will select the arbitrator.  

While the parties may present any relevant information during the arbitration, there will be no depositions and limited discovery. The arbitration will take place in the state where the affected dealership is located, and each party is responsible for its own expenses, regardless of the final result. The parties will share all other costs equally, such as arbitrator fees and administrative costs.

The arbitrator is required to balance the economic interests of the affected dealership, the manufacturer, and the public at large, to decide whether or not the dealership should be added to the manufacturer’s existing dealer network. In reaching its decision, the arbitrator shall consider the following seven factors, along with other factors it deems necessary:

  1. the dealership’s profitability in 2006, 2007, 2008 and 2009;
  2. the manufacturer’s overall business plan;
  3. the dealership’s current economic viability;
  4. the dealership’s satisfaction of the performance objectives established pursuant to the applicable franchise agreement;
  5. the demographic and geographic characteristics of the dealership’s market territory;
  6. the dealership’s performance relative to the criteria used by the manufacturer to make the decision not to continue the relationship; and
  7. the length of experience of the dealership.

An initial read of these enumerated factors leaves it unclear as to whether the arbitrator is to consider such factors from a historical or future perspective.

Result if Auto Dealer Successful

The legislation appears to be designed to produce results quickly, and provides strict timelines in which the arbitrator must render its decision. If the arbitrator finds in the dealer’s favor, the manufacturer is required to provide the dealer with a letter of intent within seven business days after receipt of the arbitrator’s decision. Once the dealership enters into the sales and service agreement and successfully completes any operational prerequisites contained in such agreement, the dealership is required to return any consideration it received from the manufacturer as a result of the initial termination, non-renewal or non-assumption.