Car Franchise Laws
Jan. 26, 2009
By Jerry Kopel
There are no "good people" or "bad people" here, just car makers vs. car
sellers. But one group has the state legislature on its side.
That's hardly ever mentioned. But it's a key factor in the life and
death struggle by General Motors, Ford and Chrysler: The role of dealer
franchises in a period of crisis.
The legislature has witnessed amendments to the car dealer franchise law
almost every recent year. This year's pro-car dealer bill is SB 91 by
Sen. Chris Romer (D) Denver.
Historically, it didn't have to be this way. Car makers and distributors
could have kept car dealers as their employees. That would have allowed
car makers today to have control and flexibility to close inefficient
James Surowiecki of 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 are "local", known politically to legislators both in
Colorado and other states. Whatever Lola wants, Lola gets. The same is
true for locals, especially fund-raising and fund-giving locals.
Colorado was among the first states back in 1937 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, it
has had just one section amended.
And read 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
"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
(ii) to the end that there shall be no diminution of locally
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.)
The end result is focused this century on territory control by a car
dealer (called geographic area) against anyone wanting to muscle in by
way of a second franchise. So if Chrysler merged with Ford, who gets to
sell the Chrysler cars? Does territorial integrity mean Chrysler
franchises lose out, or does Ford have to fend off lawsuits across the
SB91 by Sen. Romer is assigned to Business Affairs Committee. Among 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."
There is no downside 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
2. Temporary ownership of the franchise. Present law allows the
manufacture 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 a number 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 "good cause" requires a great deal of information for
termination to occur. The Romer bill limits the time for the
manufacturer to act--to 30 days.
Pragmatically, it is 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 a franchise from going under in South
Carolina, might offer a unique concept, perhaps a no-cost to dealer
or consumer trade-in. Under the Romer bill, that same offer HAS TO
BE MADE to every franchise of the manufacturer in Colorado.
Back in 2000 I discussed a pro-car dealer
"Why is the state legislature leaving
fingerprints all over contracts entered into between mature, adult,
business people who sell cars and their supplier, the car
"The answer is easy. If the car dealer 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."
The Dept. of Regulatory Agencies in 2006 in a
Sunset report emphasized how 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
There are only 14 states plus assorted counties which 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 loses out on possible sales tax
it 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 sales on
a monthly basis from Sundays to the dealers board. That would be
sufficient for the legislature to decide whether to do away with the
Sunday closing law.
(Jerry Kopel served 22 years in the Colorado House.)