House Bill 5554 as passed by the House

Sponsor: Rep. Nancy Cassis

Committee: Transportation

Senate Bill 1197 (Substitute H-1)

Sponsor: Sen. Mat Dunaskiss

Senate Committee: Transportation and

Tourism

House Committee: Transportation

First Analysis (6-6-00)

THE APPARENT PROBLEM:

In response to automobile dealers' concerns, legislation has been enacted over the years, beginning with Public Act 331 of 1978, which defined the term "fair dealing" as applied to agreements between vehicle manufacturers and dealers. In 1981, Public Act 118 replaced Public Act 331 of 1978 and created a new "auto dealers franchise act" to regulate agreements between motor vehicle manufacturers and new vehicle dealers. The 1981 act incorporated and expanded upon many of the 1978 law's provisions, especially provisions stipulating actions prohibited to vehicle manufacturers and outlining what constitutes "good cause" for the termination of agreements between manufacturers and dealers. The auto dealers franchise act has been amended a number of times since its enactment in 1981, most recently by Public Act 456 of 1998 (which gave vehicle distributors and importers the same protections under the act as those provided for dealers).

Dealers have been concerned about the interest expressed by some vehicle manufacturers in the last several years in owning and operating dealerships and warranty repair facilities on a permanent basis. Dealers were particularly alarmed by the actions of one of the major manufacturers last year when the manufacturer reorganized its field staff, disbanded local dealer advertising groups (which once controlled local advertising funds), and created a company with the announced intention of planning to own and operate up to 770 dealerships nationwide.

In addition, the use of the Internet by on-line automobile brokers also has concerned automobile dealers. Although the vehicle manufacturers reportedly have policies that require dealers to sell new vehicles only to "end users" - individual consumers and fleets that have no intention of reselling the vehicles - some dealers are cooperating with on-line brokers, selling new vehicles to the brokers who then sell them to end users over the Internet.

Although the manufacturer eventually abandoned its project to own up to 770 dealerships nationally (reportedly due to dealership complaints) - and the manufacturer reportedly vowed not to operate factory-owned dealerships or to sell to customers over the Internet without dealer involvement - dealers still fear competing directly with factory-owned dealerships and with possible direct sales over the Internet. At the request of the automobile dealers, legislation has been introduced to prohibit vehicle manufacturers from owning dealerships and from selling new vehicles directly to consumers over the Internet.

THE CONTENT OF THE BILLS:

Senate Bill 1197 and House Bill 5554 together would amend Public Act 118 of 1981, which regulates motor vehicle manufacturers, distributors, wholesalers, dealers, and their representatives, to prohibit manufacturer ownership of new vehicle dealerships, with some exceptions, and from direct sales of vehicles to retail customers other than governmental or nonprofit customers. The bills are tie-barred to each other; neither would take effect unless both were enacted.

Senate Bill 1197. Under current law, a manufacturer, importer, or distributor cannot establish a dealership which would unfairly compete with a new motor vehicle dealer of the same line make operating under a dealer agreement with the manufacturer or distributor in the relevant market area. The law specifies that a manufacturer or distributor is not considered to be unfairly competing if a) operating a dealership temporarily for a reasonable period; b) operating a dealership which is for sale at a reasonable price; and, c) operating a dealership with another person who has made a significant investment in the dealership and who will acquire full ownership of the dealership under reasonable terms and conditions.

Ban on manufacturer dealerships. The bill would amend the act (MCL 445.1574) to delete these provisions and instead would prohibit a manufacturer, importer, or distributor from directly or indirectly owning, operating or controlling a new motor vehicle dealership, including (but not limited to) a dealership engaged primarily in performing warranty repair work. However, the prohibition would not apply to:

the ownership, operation, or control by a manufacturer or distributor of a dealership for a period of not more than two years during the transition from one owner or operator to another (and, the bill would provide that a circuit court could extend the two-year time period for an additional one year upon a showing of good cause by a manufacturer);

the ownership, operation, or control of a dealership by a manufacturer or distributor while the dealership was being sold under a bona fide contract or purchase option to the operator of the dealership; or,

the direct or indirect ownership by a manufacturer of an entity that owns, operates, or controls a new motor vehicle dealer of the same line make franchised by the manufacturer, if all of the following conditions were met: (a) as of May 1, 2000, the manufacturer had continuously owned, for a period of at least 12 months, one or more dealerships in the state; (b) all of the dealers selling that manufacturer's vehicles in the state traded exclusively in that manufacturer's line make; (c) as of January 1, 2000, at least half of the dealers in the state trading in that line make owned and operated two or more dealerships in the geographic territory or area covered by the franchise agreement with the manufacturer; and (d) for a manufacturer or any entity in which the manufacturer has more than a 45 percent ownership interest, the manufacturer or entity had not acquired, operated, or controlled a dealership that it did not own as of May 1, 2000.

Internet provisions. The bill also would prohibit a manufacturer, importer, or distributor from selling any new vehicle directly from a retail customer other than through its franchised dealers, unless the customer was a nonprofit organization or a federal, state, or local government or agency. This provision would not, however, prohibit a manufacturer from providing information to a consumer for the purpose of marketing or facilitating the sale of vehicles, or from establishing a program to sell or offer to sell vehicles through its dealerships.

House Bill 5554 would amend section 4 of the act (MCL 445.164) to update language referring to the Uniform Commercial Code in the act's definition of "good faith" and to the Michigan Vehicle Code in the definition of "motor vehicle."

FISCAL IMPLICATIONS:

Fiscal information is not available.

ARGUMENTS:

For:

The bills would update the auto dealers franchise act to reflect the changes in technology and the retail automotive market that have taken place over the past several years.

First, by prohibiting manufacturers from owning dealerships or warranty service facilities, the bills would forestall a number of possible manufacturer actions that could favor their factory-owned dealerships over independent franchised dealerships. For example, because manufacturers require franchised dealers to submit monthly detailed financial information - including prices, gross profit margins, and cash flow - a manufacturer could unfairly use this information on behalf of factory-owned dealerships to undercut the prices of vehicles and services sold at franchised dealerships. Manufacturers also could restrict employee purchase programs to factory-owned dealerships, and since reportedly in many markets in the state (including metropolitan Detroit) a majority of the new vehicles sold are sold to employees of the manufacturers (and other eligible people) as an employment benefit, this, too, would hurt independent franchised dealers. Manufacturers could require that warranty, service, or recalls for consumers be done only at factory-owned dealerships, which obviously would hurt the independent dealerships, and could disadvantage independent dealerships by allocating a disproportionate number of popular vehicles (such as "sports utility vehicles") to their factory-owned dealerships, as well as give their dealerships preference in the timely distribution of consumer orders.

Secondly, however, by prohibiting the sale of any new motor vehicle directly to a retail customer other than through franchised dealers, the bill also would protect independent franchised dealerships from manufacturers directing Internet sales of new vehicles to factory-owned dealers. At a time when there is so much potential for new marketing routes, such as the burgeoning of marketing over the Internet, automobile dealers believe that it ought to be made clear in statute that vehicle manufacturers cannot act as dealers, either through ownership of dealerships or through sales over the Internet.

According to the dealers, at least one manufacturer reportedly has indicated that it is not interested in owning dealerships or selling vehicles over the Internet, and the dealers believe that this should be put into state law for all manufacturers. The bill would do this, thereby ensuring that manufacturers couldn't own dealerships or sell over the Internet, but would have to sell the vehicles they manufactured through a dealership and refer Internet inquiries they received to dealers. At the same time, the bill would allow the nine current Saturn dealerships to remain directly under the manufacturer's control, as well as allow manufacturers to own dealerships under certain limited circumstances that ultimately would benefit independent dealerships, including in order to facilitate the smooth transfer of ownership of a dealership from one independent dealer to another, and to allow for dealer development programs.

According to the automobile dealers, 14 other states currently have similar laws that either substantially restrict or completely ban the ownership of dealerships by manufacturers, and Michigan should enact similar legislation to protect the 766 independently-owned franchised dealerships in the state, that reportedly employ 42,000 people, from unfair competition by factory-owned dealerships.

Response:

Rather than banning manufacturer-owned dealerships outright, why not simply enact provisions that would protect independently-owned franchised dealerships from the potentially unfair competitive practices mentioned? For example, why not simply prohibit manufacturers from using confidential financial information they require from their franchised dealers, or from engaging in unfair vehicle allocation and distribution among factory-owned and independent dealerships, or from restricting employee purchase programs only to factory-owned dealerships? It seems that all of the independent dealers concerns could be dealt with in this way, which would increase competition to the potential benefit of customers currently disadvantaged by the current franchise system.

Against:

The bill would make an already anti-competitive, anti-consumer law even worse by further locking in the state-protected monopoly on the sales of new vehicles that the automobile dealers have manage to get codified into state law over the past two decades. Of course all businesses would like to monopolize their markets, but in general, the government does not help them do this, and in fact there are federal anti-monopoly laws (such as most recently used in the high-profile case of Microsoft). Why should the state promote this monopoly to the detriment of a free and open market? The bill, like the original auto dealers franchise legislation, is an unwarranted governmental intrusion into private business dealings that will continue to result in higher costs to consumers. Rather than amend the act to increase protections for dealers, the act ought to be repealed outright and the full play of market forces should be allowed.

POSITIONS:

The Michigan Automobile Dealers Association supports the bills. (6-1-00)

The Detroit Auto Dealers Association supports the bills. (6-1-000

Analyst: S. Ekstrom

This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.