Reading Room

HOW TO AVOID FRANCHISE PROBLEMS

by Paul Norman

Your dealership's franchises are some of the most valuable, if not the most valuable, assets that it owns. A franchise is what allows you to buy new motor vehicles, parts and accessories of a particular brand from the manufacturer or distributor ("franchiser") to resell to the public. It also permits you to perform service under the franchiser's warranty and to hold the dealership out to be an authorized dealer for that brand. A franchise is a substantial part of your dealership's "blue sky" value. The cancellation or non-renewal of a franchise is a damaging blow to any new car or truck dealership.

Wisconsin has a strong motor vehicle franchise protection law, but it does not guarantee that a dealer can keep a franchise regardless of its performance. In order to utilize the protection of the Wisconsin law, dealers need to pay close attention to their franchise relationships and to take action to protect those relationships before it is too late. Here are some practical tips that all dealers should follow:

Read and Understand Your Dealer Agreement

Dealers often sign a Dealer Agreement without reading it carefully and then put it in a file and forget about it or, even worse, misplace it. Although the Wisconsin franchise protection law overrides contract provisions that are inconsistent with that law, the Dealer Agreement remains the starting point in determining the rights and obligations of both the dealer and the franchiser. A good understanding of your franchise obligations is a good start toward protecting your franchise.

Have a Basic Understanding of the Franchise Protection Law

A good source of information regarding the laws regulating your franchise relationship is the WATDA Franchise Manual. While you needn't become a legal expert, knowing the various provisions of the relevant laws will help you understand when you should consider obtaining legal advice on an issue.

Retain Franchise-Related Documents

You should keep in a readily-available file all documents relevant to your franchise, including:

• The Dealer Agreement, all Addenda (AOR, Facility, Ownership, Product, etc.) and all Amendments to that agreement
• Franchiser policy statements
• Terms of sale bulletins
• Operations and policies/procedures manuals (sales, service, warranty, etc.)
• Other communications from and to the franchiser (excluding communications relating to day-to-day transactions such as vehicle and parts orders, warranty claims, etc.), including letters, notices, e-mails and documentation of oral communications with Franchiser representatives (see below).
• Performance evaluations received from the franchiser (sales and registration performance, CSI, etc.)

Being able to review these documents will help your attorney get a clear understanding of the franchise relationship and enable him or her to give you the proper advice, if and when a legal problem with the franchiser occurs. There is no bright line standard for how long franchise-related documents should be retained. The longer the better. Events or communications that are many years old may sometimes be important in developing a defense against an alleged breach of the Dealer Agreement.

Carefully and Accurately Document Oral Communications with Franchiser Representatives

Your recollection of an important communication with a franchiser representative and the credibility of that recollection in the eyes of a judge or a jury will be strengthened by a memo of the communication made by you immediately following it. It is important that the memo be carefully prepared to accurately and fully summarize the communication (whether in person or by telephone). A vague or partial summary may be misconstrued later in a way that is harmful to your case. Consider providing a draft of the document that you prepare to your attorney for review before you finalize it.

Watch What Is Said in E-Mail and Other Internal Dealership Communications

E-mails and other communications between you and your dealership management team and other persons (except privileged communications with your attorney) may have to be produced in litigation regarding the franchise. People tend to be less cautious in what is said in e-mail communications. Flippant remarks about the franchiser or its representatives, profanity, admissions of deficiencies, and other careless remarks in e-mail or other internal communications may lead to embarrassment or even adverse factual findings at a trial or hearing. Instruct your dealership personnel to avoid making potentially embarrassing or damaging statements in internal communications that relate to the dealership's franchise relationships.

Carefully Read Every Communication from the Franchiser

Make sure that an important notice does not get ignored because you failed to read and understand it at the time it was received. There are strict time limits under the Wisconsin franchise protection law for taking action to protect a franchise in certain circumstances, such as cancellation, non-renewal, modification of the Dealer Agreement by the franchiser or the establishment or relocation of another same brand dealer in your territory. Be alert for any notice of these or other important events and consult immediately with your attorney to determine whether affirmative action needs to be taken to protect your rights.

Don't Rely on Oral Representations by Franchiser Representatives

If a franchiser representative's statement or promise isn't documented in writing or an electronic communication, you shouldn't rely on it in taking or not taking an important action regarding your franchise. Ask that any statement or promise on which you intend to rely be documented. If the representative won't do it, proceed as if the statement or promise had never been made.

Respond Promptly to Franchiser Allegations of Inadequate Performance or Breach of the Dealer Agreement

Whenever a franchiser accuses you of not fulfilling your obligations under the Dealer Agreement that should be a red-flag that affirmative action may be required to protect the franchise. This is the time to consult with an experienced franchise attorney to determine whether a formal response to the accusation should be sent and whether other actions need to be taken. A carefully drafted response often will prevent the franchiser initiating an adverse action later on.

Ask the Franchiser to Provide You with the Information It Uses to Determine That You Are Not Meeting a Performance Standard

The Wisconsin franchise protection law requires franchisers to tell dealers, if they ask, how a particular performance standard has been applied to them and to provide the information used in that application. It helps to know from the start whether the franchiser's accusations will stand up in court, and this can best be accomplished by asking for this information.

Consider Obtaining Your Own Analysis of the Franchiser's Accusation

Franchiser accusations of non-performance often stem from market conditions beyond the dealership's control. A good example is an incorrectly drawn area of sales responsibility which results in the dealership's expected sales being calculated based on registrations in areas that are more convenient to other same brand dealers. An experienced franchise attorney will be able to help you obtain your own analysis of whether an alleged performance deficiency is the result of market conditions beyond the dealership's control. You may want to consider obtaining such an analysis even before the franchiser threatens cancellation or non-renewal of the franchise, especially if the franchiser has incentive programs that are tied to your meeting the performance standard.

Critique Your Dealership's Performance and Take All Reasonable Steps Within Your Control to Correct Any Deficiencies

Franchiser accusations sometimes do have merit. When a franchiser accuses you of not fulfilling your obligations, avoid the trap of self-denial. Scrutinize your dealership operations and determine if there is something you are doing or not doing that is causing a performance problem. If there is, fix the problem before it is too late and document the steps you took to do so.

Maintain a Positive Relationship with Franchiser Representatives

Franchise problems are often made worse by personality conflicts between dealer principals and the franchiser representatives with whom they have to deal. It is good business to maintain a positive relationship with the franchiser, even if you feel it is wrongly accusing you of non-performance. This doesn't mean that you agree with everything the franchiser representatives say. On the contrary, you should never admit that you are failing to do the job required by the Dealer Agreement. However, be cordial even when refuting their allegations.

Ask the Franchiser to Suggest How to Fix an Alleged Problem

Even if you don't agree with a franchiser's accusation of non-performance, you should let it know that you are committed to improving your performance wherever possible and ask for its suggestions. In franchise litigation, you always want the record to reflect that you are committed to doing the best job that is reasonably possible for the franchiser.

Do Not Undertake Certain Actions without Getting Required Franchiser Approvals

Dealer Agreements normally require the franchiser's prior written approval of any change in the dealer's ownership or executive management, the relocation of a franchise or changing the use of the dealership facility by adding another franchise. Don't get yourself in a bind by taking an action before you get the required approval from the franchiser. Even if you miss an opportunity by waiting for the action to be approved, this usually will be better than putting your franchise at risk. Wisconsin law allows dealers to recover damages caused by a franchiser's disapproval of a proposed action unless there is good cause for not permitting the action to occur. In planning a significant change in the dealership, consult with an experienced franchise attorney, who can advise you how to expedite the franchiser approval process and how best to present the approval request to the franchiser.

Instruct Dealership Personnel That Fraud or Other Misrepresentations to the Franchiser Will Not Be Tolerated

The most difficult franchise dispute to resolve involves fraudulent claims (warranty, incentive, etc.) or other misrepresentations to the franchiser. There probably won't be much opportunity to resolve the dispute if the dealer principal has participated in a fraudulent act that has materially harmed the franchiser and benefited the dealership. However, a strongly worded policy statement against this activity issued periodically to dealership personnel will help protect the franchise in the event one or more employees submit fraudulent claims without the dealer principal's knowledge. If you become aware of any fraudulent activities by your employees directed toward the franchiser, you should take immediate action to rectify the situation, which usually involves notifying the franchiser and offering to reimburse it for any losses.

Don't Be Afraid to Assert Your Legal Rights

Dealers sometimes fail to stand up to a franchiser, even when they know they are right, because they think the franchiser will retaliate against them in some fashion. In my experience, the opposite is true. If a dealer stands up for its rights, a franchiser typically is very careful to avoid retaliation in future dealings with that dealer.