On May 19, 2009, Governor Martin O’Malley signed Senate Bill 668, which adds a number of new provisions that provide additional protections to Maryland motor vehicle dealers (click here). The amendments address coercion, performance standards and sales objectives, exclusivity and facility upgrades, discrimination, rebates and incentives, ownership transfer and rights of first refusal, incentive and reimbursement programs, and termination obligations. These amendments, which become effective on June 1, 2009, are summarized below.

Coercion of Dealers

In its current state, Md. Code Ann. Transp. § 15-207 prohibits coercion of dealers and defines “coerce” as “to compel or attempt to compel by threat of harm, breach of contract, or other adverse consequences.” Senate Bill 668 expands the definition of “coerce” in two ways. First, it expressly provides that the definition of “coerce” includes acting in a manner that violates Md. Code Ann. Transp. § 15-206.1. Section 15-206.1 requires manufacturers to act in good faith, i.e., with honesty in fact and in observance of reasonable commercial standards of fair dealing in the trade, when acting or purporting to act under any franchise agreement or in any transaction or conduct governed by Maryland’s dealer laws. Second, Senate Bill 668 adds language expressly stating that the loss of any benefit made available to other dealers of the same line make in the state constitutes an “adverse consequence” under Md. Code Ann. Transp. § 15-207.

In addition to expanding the statutory definition of “coercion,” Senate Bill 668 also expands the scope of the “coercion” statute to apply to “affiliates” of manufacturers, distributors and factory branches. While “affiliates” is not statutorily defined, the term will likely be construed to apply to parent companies of manufacturers, distributors and factory branches. The amendments also make it unlawful to coerce a dealer to make an agreement with an agent, employee, affiliate or representative of a manufacturer, distributor or factory branch.

Performance Standards and Sales Objectives

Senate Bill 668 also amends Md. Code Ann. Transp. § 15-207(e), which addresses “performance standards,” in several ways. First, § 15-207(e)(2)(I) adds sales objectives to the provisions addressing “performance standards” requiring that a “sales objective” that may have a material effect on a dealer and the application of the objective also be fair, reasonable, equitable and based on accurate information. The bill further amends this provision to clarify that performance standards, sales objectives, and programs measuring dealership performance and their application must be fair, reasonable, equitable and based on accurate information when they affect a dealer’s right to payment under any incentive or reimbursement program.

In addition, § 15-207(e)(2)(III) expressly assigns the burden of proof to the manufacturer to prove that a performance standard, sales objective, or program for measuring dealership performance is fair and reasonable under § 15-207. Finally, § 15-207(e)(2)(II) authorizes dealers, who claim that the application of a performance standard, sales objective or program for measuring dealer performance is unfair or unreasonable due to demographic characteristics of the population in the Dealer’s assigned market area, to file claims in court to determine whether the application of the performance or program is unfair or unreasonable under § 15-207. By spelling this right out expressly, there is an argument that this right to file a claim in court is limited to only unfairness and unreasonableness challenges based on demographic characteristics.

Exclusivity and Facility Upgrades

Senate Bill 668 limits manufacturers’ control over the facilities owned or operated by dealers. Specifically, § 15-207(h)(2) prohibits manufacturers from requiring a dealer to alter or replace an existing facility, or from denying or threatening to deny any benefit generally available to all dealers for a failure to alter or replace an existing facility, unless the dealer violates a state or local law intended to protect the public. Additionally, § 15-207(h)(3) also prohibits manufacturers from reducing the price of vehicles charged to a dealer or providing different financing terms to a dealer in exchange for the dealer agreeing to maintain an exclusive sales or service facility, build or alter a sales or service facility, or participate in a floor plan or other financing arrangement.

Discrimination, Rebates and Incentives

Senate Bill 688 adds Md. Code. Ann. Transp. § 15-207(j), which prohibits manufacturers from discriminating among its dealers in any program that provides assistance to its dealers, including Internet listings, sales leads, warranty policy adjustment marketing programs, and dealer recognition programs. In addition, § 15-207(h)(1)(I) requires that any consumer rebates, dealer incentives, price or interest rate deductions, or finance terms that a manufacturer offers or advertises or allows its dealers to offer or advertise, be offered to all dealers of the same line make. However, § 15-207(h)(1)(II), makes clear that such rebates, incentives, deductions and finance terms may be denied to dealers that do not meet performance standards so long as the manufacturer can show that the applicable standards comply with Md. Code Ann. Trans. § 15-207.

Similarly, § 15-207(i) was also added by Senate Bill 668. This provision permits manufacturers to offer dealers rebates, cash incentives or other promotional items for vehicle sales only if the incentive, rebate or promotional item is offered to all of its line-make dealers; and provided that any rebate, cash incentive or promotion based on an individual vehicle sale is not increased for meeting a performance standard unless the standard is reasonable under the circumstances.

Finally, Senate Bill 668 adds subsection (a) to Md. Code Ann. Trans. § 15-208. Section 15-208(a) requires manufacturers to ensure that dealers with a franchise or contract to sell vehicles or truck components of a specific line (1) are permitted to purchase the vehicle or truck component at the same price and on the same terms as other line-dealers; and (2) receive the same right to incentive payment given to other line-make dealers.

Ownership Transfer and Right of First Refusal

Md. Code Ann. Transp. § 15-211 has been expanded and strengthened by Senate Bill 668 in several ways. First, Md. Code Ann. Transp. § 15-211(k)(2)(I) authorizes existing dealers to request a hearing by the Motor Vehicle Administrator (MVA) to determine whether a manufacturer has violated Md. Code. Ann. § 15-211 in either denying a dealership sale, assignment, transfer or a change in management or improperly imposing a condition relating to the sale, assignment, transfer or change. Manufacturers may not unreasonably withhold consent to the transfer of a franchise. In addition, Md. Code Ann. Transp. § 15-211(j) prohibits manufacturers from imposing conditions on transferees if the condition would violate the provisions of Title 15 if it was imposed on an existing dealer. If the MVA finds a violation by the manufacturer, it can order the sale, assignment or transfer to be approved without any condition. Md. Code. Ann. Transp. § 15-207(k)(2)(II).

In addition, Senate Bill 668 adds Md. Code Ann. Transp. § 15-211(k), which provides that a manufacturer violates § 15-211 if, “without a statement of specific grounds consistent with this title for the action,” it takes action to either prevent or refuse to approve the sale, assignment or transfer of ownership of a dealership; the sale, transfer or assignment of a franchise; or a change in the executive management or principal operator of the dealership. Thus, a manufacturer will likely not be permitted to rely upon grounds that it did not specify in refusing to consent to the transfer. The prohibition on preventing franchise transfer has been extended to the affiliates of manufacturers, distributors and factory branches.

The new bill also confers standing upon (1) dealers claiming they were improperly denied the right to sell, assign or transfer their dealership rights; and (2) applicants for the approval of the sale, assignment or transfer of ownership; to pursue damages actions in the circuit court of the county in which the dealer’s principal place of business is located. Md. Code Ann. Transp. § 15-207(k)(3). The right is limited, however, to instances where the existing dealer does not request a hearing by the MVA and the improper denial of the sale, assignment, transfer or change in executive management is the proximate cause of the failure of the underlying contract between the existing dealer and the applicant. The statute of limitations for any court action is two years.

Notwithstanding the terms of any agreements, manufacturers are statutorily barred from exercising rights of first refusal for franchise transfers to a person who meets the manufacturer’s reasonable qualifications and is a member of the dealer’s immediate family; a qualified manager with two years’ management experience at the dealership; an existing dealer in good standing; or a business entity controlled by a person fitting any of the above-referenced descriptions. Even where a right of first refusal is properly exercised, Md. Code Ann. Transp. § 15-211(f)(3) requires the manufacturer to pay the reasonable expenses, including customary attorney’s fees, incurred by the prospective purchaser in negotiating and implementing the contract for the proposed transfer as long as the dealer has given the manufacturer at least 45 days’ notice of its intent to transfer.

Incentives and Reimbursement Programs

Senate Bill 668 amends Md. Code Ann. Transp. § 15-212.1(a) to reduce the time within which a manufacturer may charge back a false or unsubstantiated claim of payment of the incentive or reimbursement from 24 months to 6 months. Section 15-212.1(d) was added to provide that manufacturers could not refuse to pay, or claim reimbursement from, a dealer for sales, incentives or other payments related to a dealer-sold vehicle because its purchaser exported or resold the vehicle in violation of the manufacturer’s policy except in instances where the manufacturer could show that the dealer knew or should have known that the purchaser intended to export or resell the vehicle.

In addition, Md. Code Ann. Transp. § 15-212.1(e) was adopted, which provides that a manufacturer may not give any incentive payment, reimbursement payment, cash, gift or anything of value totaling more than $200 in any calendar year directly to a dealer’s employee. Instead, manufacturers are required to make such payments to the dealers who shall disburse the funds to the employee as part of the payroll process after making appropriate deductions. Dealers are authorized to retain a reasonable portion of such payments to cover the cost of payment processing. This change may affect those manufacturers, distributors and factory branches that have salesmen and/or sales manager incentive programs depending on how the programs are administered.

Termination Obligations

Finally, Senate Bill 668 imposes a number of costs and obligations on a manufacturer that terminates, suspends, refuses to renew, closes or refuses to supply new vehicles to a dealer. In such cases, the manufacturer must:

  • Reimburse the dealer for costs incurred for facility upgrades or alterations required by the manufacturer within the prior two years;
  • Pay the dealer at least the dealer cost plus charges, less allowances paid to the dealer, for any new, undamaged motor vehicles purchased within 18 months of the dealer’s termination, suspension, refusal to renew, closure or refusal to supply;
  • Pay the dealer at least the acquisition cost of each new, unused, undamaged and unsold part or accessory if the part or accessory is in the current catalog and still properly packaged;
  • Pay the dealer at least the fair market value of each undamaged sign if it was purchased from or at the request of the manufacturer;
  • Pay the dealer at least the fair market value of special tools and automotive service equipment recommended and designated as such by the manufacturer if they are in useable and good condition except for wear and tear; and
  • Pay the dealer for at least the reasonable cost of transporting, handling, packing and loading the items subject to repurchase.