State Automobile Dealer Franchise Laws: Have They Become the Proverbial Snake in the Grass?

Abstract

Bankruptcy is imminent for General Motors Corporation (GM). If GM does not restructure and prove it can run a viable business by June 1, 2009, the federal government will force GM into “surgical” bankruptcy proceedings. When analyzing why GM has not yet proved it can restructure to the extent necessary to avoid bankruptcy, many have recognized the United Auto Workers and the bondholders as the significant impediments. One major group, however, has been largely overlooked: the auto dealers. In a recent interview with Automotive News, Fritz Henderson, GM’s new CEO, acknowledged that GM must consolidate brands to remain viable, but was resigned to the fact that consolidation would be very difficult due to the numerous state dealer franchise laws that protect auto dealers in every state. These laws exist because the auto dealers have considerable political clout at the state level, which they have used to get such laws passed in their favor. Not only have these very laws contributed to the demise of the domestic auto manufacturers, but they also are now severely hindering the auto manufacturers’ ability to navigate through the economic crisis. What is worse is that the auto dealers have continued to lobby for even more onerous state franchise laws in 2009, as the auto manufacturers struggle to remain viable. The proposed legislation sitting before roughly two-thirds of the state legislatures, if enacted, will favor the dealers to an even greater extent, therefore effectively preventing the manufacturers from streamlining their business operations, and potentially involving billions of taxpayer money going straight into the hands of the dealers. This paper discusses the history of the relationship between the auto manufacturers and their dealers and the reason why franchise laws now exist in every state. After examining a few of the state franchise laws and their impact on the auto industry, this paper focuses on current state legislation that is particularly overreaching and questions whether it is irresponsible for the dealers to continue to push for these laws - and for state legislatures to continue to pass these laws - in light of the economic crisis and failing auto industry. Finally, this paper concludes that state regulation is necessary to the extent it neutralizes the disparity in bargaining power between the automakers and the dealers, but that current legislation no longer achieves this and only benefits the auto dealers. Based upon these conclusions, this paper proposes that the dealers focus their resources and efforts on lobbying for laws that will benefit the entire auto industry, not just a select few.