BEYOND THE LOT (OCTOBER 2022): HIGHLIGHTS FOR DEALERS FROM THE NATIONAL ASSOCIATION OF DEALER COUNSEL FALL 2022 MEETING

The Fall Meeting of the National Association of Dealer Counsel (NADC) in Chicago is always an informative meeting for me, where I can learn about the latest legal and business issues from fellow attorneys representing dealerships nationwide and attorneys working for the National Automobile Dealers Association (NADA).

Here are some highlights of the issues from this year’s meeting that are important for dealers to be aware of and understand:

• FTC Safeguards Rule – Brad Miller from NADA highlighted several challenges for dealers that will have to comply with the amended Safeguards Rule starting December 9^th. To recap, the FTC no longer applies the broad “reasonable” standard for protecting personally identifiable information of customers, instead providing a very specific list of requirements to protect such information.  Most importantly, dealers are responsible not only for internal customer records, but also for their customer records held by DMS providers, other vendors and their OEM’s.  If a dealer has not yet reviewed their data sharing agreements with these parties, it was recommended that they work with their legal counsel soon to go over these agreements and update them to ensure they are in compliance with this amended FTC rule.

• FTC Mail, Telephone and Internet Order Rule – Brad Miller also highlighted in his presentation this older FTC rule, as it may be applied more when dealerships communicate with customers in writing on pending vehicle orders. Essentially, when dealerships sell vehicles to customers, they must have a “reasonable basis” for any statements to customers regarding estimated vehicle shipping dates, whether such statements are made initially to customers or made as updates.  Most important, if dealerships do not make any clear and conspicuous statements regarding estimated shipping times, then the FTC will hold that customers can have a reasonable belief that their vehicles will be shipped within 30 days from when orders are received by dealerships.

• Discretionary Allocation – Ted Stockton (Fontana Group) and Michael McMahan (Arent Fox Schiff) focused on how important discretionary OEM vehicle allocations are in creating winners and losers at same-brand dealerships competing against each other locally. OEM’s provide the majority of vehicles to dealers through a non-discretionary formula using inventory levels and/or vehicle sales as a primary input, with a smaller amount of vehicles provided on a discretionary basis. While this may be a seemingly reasonable way to allocate vehicles, the discretionary amount, no matter how small, provides a sufficient impact on the number of vehicles sold under the non-discretionary formula.  The end result is that dealers receiving such discretionary allocations experience consistently higher sales to trigger more vehicle allocations under non-discretionary allocation formulas.  Such a situation helps these dealers to maintain a long-term advantage on vehicle allocation over those dealers that do not get such discretionary allocations.

• Transition in Europe from the Franchise to Agency Model. Don Gould (Johnson Deluca Kurisky & Gould, P.C) and Shane Spradlin (Penske Automotive Group) gave a concerning preview of what OEM’s expect of US dealers in the future through a review of what Mercedes Benz is doing now with its UK retail dealers.  The UK Mercedes Benz dealers must now terminate their franchise agreement and become agents for Mercedes Benz.  As agents, these dealers will only get paid a fee for each vehicle rather than the typical revenue spread between what is paid and what a customer pays for a given vehicle.  The OEM is the one selling the vehicle to the customer and therefore controls much of the transaction, from price and trade-in values to F&I, marketing and distribution of vehicle models to local markets.  Such control could be viewed as counter-productive to generate profitability for the OEM and the dealers – i.e., it will disincentivize sales representatives from selling cars, fail to capture car sales for customers that may only purchase a vehicle at less than the set price and fail to provide a sufficient mix of vehicles for sale locally in any given market, as local dealers will no longer drive vehicle allocation decisions.

• Direct Sales Initiatives by OEM’s – Shawn Mercer and Richard Sox (Bass Sox Mercer) continued the examination of how OEM’s are changing business models to the detriment of franchised dealers. From challenges to state laws by Tesla and other direct-selling OEM’s, to Ford’s Model e program, many OEM efforts to take more control over customer sales relationships will likely fail because OEM’s have underestimated what customers like about the automotive franchise model.  Additionally, current state laws protect much of this model without any signs of significant changes in the near term.

• Growing a Dealership for the Future – Peter Thiel from Haig Partners provided his own take on a presentation that I have heard from Alan Haig on a recent NADA webinar about where the most growth will happen in the franchise dealership space. Contrary to conventional wisdom, much of this growth will not occur through the largest dealership groups. Instead, such growth will occur through the next tier of dealership groups with a smaller, but still significant, number of rooftops that are more concentrated in specific regional markets.  The size of the largest dealership groups can only provide so much from economies of scale.  Smaller dealership groups in the 10 to 20 rooftop range can be just as profitable.  Furthermore, these dealerships can move inventory around their stores more quickly than their larger peers and better invest and market in local communities.

 

Mr. Timson is an experienced attorney focused on franchised automobile dealerships. He is a member of Greater New York Auto Dealers Association and the National Association of Dealer Counsel.  He can be reached at ket@selawny.com or 631-777-2401 ext. 32.

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