PA 15-191—HB 6820

Transportation Committee

General Law Committee

AN ACT CONCERNING PROVISIONS OF THE FRANCHISE ACT GOVERNING AGREEMENTS BETWEEN AUTOMOBILE MANUFACTURERS OR DISTRIBUTORS AND AUTOMOBILE DEALERS

SUMMARY: This act makes changes in and clarifies some of the legal duties that motor vehicle manufacturers and distributors owe to the motor vehicle dealers with whom they have franchise agreements. Specifically, it:

1. specifies what a motor vehicle manufacturer or distributor must do to exercise its right of first refusal to acquire a motor vehicle franchise from a dealer;

2. reduces, from two years to one year, the amount of time that a manufacturer or distributor may “charge back” a dealer for a false or unsubstantiated claim;

3. sets compensation levels that manufacturers and distributors must pay for certain inventory when they terminate or fail to renew a franchise; and

4. makes other changes to these obligations and responsibilities.

EFFECTIVE DATE: October 1, 2015

4 ─ RIGHT OF FIRST REFUSAL

A right of first refusal gives someone the right to be the first person to buy something (in this case a motor vehicle franchise or dealership) if it is offered for sale. The act prohibits a manufacturer or distributor from exercising a right of first refusal to buy, or other right to acquire, a dealership unless it:

1. notifies, in writing, the dealer and the person to whom the dealership would otherwise be sold (“proposed transferee”) that it intends to exercise its right to acquire the dealership within 60 days after receiving notice of the proposed transfer from the dealer or proposed transferee;

2. pays at least as much for the dealership as the proposed transferee was to pay;

3. assumes all the duties, obligations, and liabilities that the proposed transferee was to assume; and

4. reimburses the proposed transferee for all of its reasonable expenses, including those for evaluating, investigating, negotiating, and pursuing the acquisition of the dealership.

The sections below describe these requirements in more detail.

Notice

The act requires the manufacturer or distributor to send written notice to the dealer and proposed transferee that it intends to exercise its right to acquire the dealership within 60 days after learning of the proposed transfer from the dealer or proposed transferee. Notice from the dealer or proposed transferee must include all the information and documents supporting the proposed transfer that the manufacturer customarily requires.

Under the act, a manufacturer or distributor cannot exercise a right of first refusal if the proposed transferee is:

1. the franchise owner's spouse, child, grandchild, parent, or sibling;

2. a current owner of the dealership;

3. a dealership manager continuously employed by the dealership for at least four years who is otherwise qualified as a dealer operator according to the manufacturer's or distributor's usual standards; or

4. a partnership, trust, or corporation controlled by, or for the benefit of, any of the above individuals.

Payment

The manufacturer or distributor must pay the dealer at least the same amount the dealer was to have received from the proposed transferee in connection with the proposed transfer or sale of all or substantially all of the dealership assets, stock, or other ownership interest, including the purchase or lease of all real property, leasehold, or improvements related to the transfer or sale. Once the manufacturer or distributor exercises its right of first refusal, it may assign the lease or convey the real property.

Assumption of Duties

The manufacturer or distributor must assume all the duties, obligations, and liabilities that the proposed transferee was to assume.

Reimbursement of Reasonable Expenses

The manufacturer or distributor must reimburse the proposed transferee for all reasonable expenses the transferee incurred in evaluating, investigating, negotiating, and pursuing acquisition of the dealership. Under the act, reasonable expenses include the usual and customary legal and accounting fees charged for similar work, as well as expenses associated with evaluating and investigating any real property on which the dealership is located.

The proposed transferee must submit an itemized list of these expenses to the manufacturer or distributor within 30 days after the manufacturer or distributor exercises its right of first refusal or other right to acquire the franchise. The manufacturer or distributor must reimburse the proposed transferee within 30 days of getting this list.

1 ─ CHARGE BACKS

Charge Backs

By law, manufacturers and distributors must pay dealers' claims to be reimbursed for the costs of labor, parts, and any sales incentive within 30 days after approving them. The act requires manufacturers and distributors to also pay dealers' claims for the costs of marketing and advertising programs within this 30-day period.

By law, manufacturers and distributors retain the right to audit these claims and, under prior law, could “charge-back” the dealers for false or unsubstantiated claims within two years after paying the dealer for those claims. The act reduces this charge-back period to one year from payment and also applies this deadline to the claims for marketing and advertising.

Prohibitions Against Denying a Claim

The act prohibits manufacturers and distributors, after conducting a timely audit, from denying a dealer's claim or charging back such a payment solely because (1) the dealer failed to comply with a claim processing procedure or (2) of a clerical error or other administrative technicality.

In such a case, and provided the dealer's failure does not call into question the claim's legitimacy, the manufacturer or distributor must allow a dealer to resubmit the claim, according to reasonable manufacturer or distributor guidelines, within 30 days after its denial of the initial claim or charge back.

2 ─ FRANCHISE TERMINATION, NONRENEWAL, OR CANCELLATION

Compensation of Dealer

The law requires manufacturers and distributors to provide dealers fair and reasonable compensation for unsold vehicles, parts, tools, equipment, supplies, and furnishings when the manufacturer or distributor terminates, cancels, or does not renew a franchise.

The act sets compensation levels for (1) motor vehicles, (2) supplies and furnishings, (3) special tools and equipment offered for sale during the previous three years, and (4) signs bearing a trademark or trade name. (The law already set compensation levels for certain new, unused, and undamaged parts. )

Motor Vehicles

For a dealer to receive compensation for new current model year and prior model year vehicles, the law requires the vehicles to (1) have been acquired from a manufacturer, distributor, or another dealer in the ordinary course of business within the 12 months preceding the termination and have less than 300 miles on their odometers and (2) be (a) undamaged and (b) unaltered, except for customary manufacturer-approved accessories. The act requires that compensation for these vehicles be set at least at the dealer's net acquisition price, including transportation or destination charges, minus any allowances the manufacturer or distributor paid the dealer.

Supplies, Furnishings, Special Tools, Equipment, and Trademark or Trade Name-Bearing Signs

The act requires manufacturers and distributors to pay a dealer an amount equal to the dealer's costs, minus a 33% straight-line depreciation for each year after the dealer purchased (1) supplies and furnishings bought from a manufacturer, distributor, or an approved source; (2) special tools and equipment offered for sale in the three years before termination; and (3) trademark or trade name-bearing signs the manufacturer required. It is not clear how this will affect the compensation level for (1) special tools and equipment offered for sale in the three years before termination and (2) trademark or trade name-bearing signs, because existing law sets their compensation level at their fair market value at the time the franchise received notice of termination.

3 ─ EFFECTS OF FRANCHISE TERMINATION

The law imposes certain requirements on a manufacturer or distributor when it terminates, cancels, or does not renew a franchise agreement for poor dealer sales or service performance when the manufacturer or distributor terminates a “line make” (i. e. , a brand of vehicle, such as “Chevrolet” or “Mazda”). The act explicitly splits the reasons for termination, cancellation, or nonrenewal into two separate components: (1) poor dealer sales or service performance or (2) discontinuance of a line make. And it adds to a manufacturer's or dealer's responsibilities when it terminates, cancels, or fails to renew a franchise because it discontinues a line make.

Specifically, it requires a manufacturer or distributor, when terminating, cancelling, or not renewing a franchise agreement for such discontinuance, and in addition to the compensation the law already requires, to compensate the dealer for the lesser of (1) the amount of money remaining on the lease or contract for the dealer management computer system or (2) one year of lease payments. But this compensation need only be paid if the (1) manufacturer or distributor required the dealer to use the computer system and (2) discontinuance of the line make means the dealer will no longer use it.

Where a manufacturer or distributor discontinues a line make, the act also voids, regardless of the terms of a franchise agreement, a site control or exclusivity provision governing any or all of the dealership facilities that operate from the location to which the site control or exclusivity provision applies. (A site control agreement gives a particular manufacturer the sole right to a particular piece of property; an exclusivity provision prohibits a dealer from housing more than one line make under one roof. )

BACKGROUND

(For purposes of the following definitions, state law defines “person” to mean a natural person, partnership, corporation, limited liability company, association, trust, estate, or any other legal entity. )

Manufacturer

By law, a manufacturer is a person who manufactures or assembles new motor vehicles, or imports motor vehicles for distribution to dealers or through distributors, or factory branches (CGS 42-133r).

Distributor

A distributor is a person who offers for sale, sells, or distributes any new motor vehicle to dealers or who maintains factory representatives or who controls any person, firm, association, joint venture corporation, or trust, who offers for sale, sells, or distributes any new motor vehicle to dealers (CGS 42-133r).

Dealer

A dealer is a person engaged in the business of selling, offering to sell, soliciting, or advertising the sale of new motor vehicles and who holds a valid sales and service agreement, franchise, or contract, granted by a manufacturer or distributor for the retail sale of the manufacturer's or distributor's new motor vehicles (CGS 42-133r).

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