NMVB 2014 Attorney Roundtable Dealership Facilities Programs

1. NMVB 2014 Attorney Roundtable Dealership Facilities Programs Presented by Michael J. Flanagan, Ryan S. Mauck, Colm A. Moran, and Halbert B. Rasmussen

2. Facilities Programs • Facility Upgrades and the Mercer Report: Dealer vs. Manufacturer Perspectives • Growth of Statutes Nationwide • California Law: Vehicle Code Sec. 11713.13 • Retroactivity • Burden of Proof • What is “Reasonable” • Amendment to Vehicle Code Effective January 1, 2014

3. Goals of Facilities Programs • Size, Image and Location Issues • Aging Facilities • Interbrand Competition • Perception that facilities are important to attracting retail customers

4. Goals of Facilities Programs • Expansions • Upgrades, renovations and customer friendly atmosphere/amenities • Brand Imaging

5. Goals of Facilities Programs GM Essential Brand Elements • Designed as a “Tool” to motivate Dealers to have the: • RIGHT Facility Image • RIGHT Location • RIGHT Customer Communication • RIGHT Customer Digital Interface • RIGHT Training • GM’s focus it to incentivize dealers to have modern, imaged facilities – since it is GM’s view that it is good business for both parties

8. Dealer vs. Manufacturer Perspectives

9. Dealer Perspective: The Mercer Report Issues: • Expansion • Modernization • Standardization

10. Dealer Perspective: The Mercer Report “…the facility investment decision is often based on subjective factors such as opinions, assertions, and anecdotes, which is no way to guide such massive spending.” “The required expenditures can be very significant: it is hard to imagine a program whose cost is under $100,000, and it is common to see outlays exceeding $5,000,000.”

11. Dealer Perspective: The Mercer Report “The OEMs are understandably enthusiastic about the programs, but approach them in very different ways. And consumers, if what they are telling us reflects their actual behavior, are mostly indifferent.”

12. Dealer Perspective: The Mercer Report “The Expansionaspect of a facility program generated the least argument and OEM/dealer tension among our interviewees, partly because it is the only layer where hard numbers are very often available.” “The Modernizationaspect of a facility program generated a great deal of controversy, because while the costs are painfully clear, the benefits are at worst minimal (the view of the most skeptical dealers and experts) and a best unquantified.” “Finally, we came to the Standardizationlayer of factory facility programs. This layer of spending generated the most controversy, because Standardization's benefits are very unclear.”

13. Dealer Perspective: The Mercer Report “Boiling it all down to one sentence: ‘Renovating a dilapidated store pays off, and while one should not expect much of a return from maintenance spending, service expansion can pay off well, whereas modernization investments tend to depend on how much assistance the OEM offers and standardization spending is almost always a pure deadweight loss.’”

14. Manufacturer Perspective: Flaws in Mercer Report • Ignores the franchise laws • State legislation mandates the nature of the “Dealership of the Future” • Quantify the ROI? • Consumer reaction • Employee reaction

15. Impact of Mercer Report on State Legislation • Already being felt on the state level • Expect much more activity • Moratoriums on “mandatory facility upgrades” (“No more than once every ??? years”) • The “Dealership of the Future” argument • Unfair to smaller dealers • Scrutiny of facility incentive programs

16. Facility Amendments 2009 www.hoganlovells.com 16

17. Facility Amendments 2010 www.hoganlovells.com 17

18. Facility Amendments 2011 www.hoganlovells.com 18

19. Facility Amendments 2012 www.hoganlovells.com 19

20. Facility Amendments 2013 www.hoganlovells.com 20

21. Mandatory Facility Upgrades • Most states either restrict or bar a franchisor from requiring dealers to relocate or renovate their facilities. For example: • Prohibitions on conditioning continuation of a franchise, or the approval of a relocation or sale proposal, on facility upgrades • Requirements that the franchisor demonstrate the need for the upgrade and/or offer funds or supplemental allocations to support the requirement • Limits on the use of facility upgrade requirements as qualifiers for an incentive program

22. Mandatory Facility Upgrades (cont’d) • Examples From Key States: • California: cannot require dealer to materially alter or expand facility unless requirement is reasonable in light of existing circumstances/economic conditions • Florida: cannot require dealer to substantially modify or replace facilities unless requirement is justifiable in light of economic conditions, financial expectations, and dealer's market. Voluntary upgrade agreements are permitted but only where franchisor provides money and/or cars and similar terms are available to other FL dealers

23. Mandatory Facility Upgrades (cont’d) • Examples (cont’d) • New Jersey: cannot require relocations or facility changes, or award benefits/penalties based on dealer’s refusal to agree to make such changes, unless “funds are available” to the dealer and the dealer will “earn a reasonable return” and “the full return of the total investment” within 10 years • Texas: cannot force dealer to build new store, or renovate existing store, within 10 years after construction/renovation that complied with standards or plans approved by franchisor

24. Incentivizing Facility Upgrades • Approximately 16 states have statutory provisions that either prohibit or substantially regulate facility-based incentives • e.g., Alabama (2010), Colorado, Idaho(2011), Missouri, Montana(2009), North Dakota (2011), Washington(2010) bar a franchisor from requiring exclusive facilities or “site control” as a condition to participation in incentive programs

25. Incentivizing Facility Upgrades (cont’d) • Certain states that appear to permit a facility support program either expressly or arguably require that it be made available to all dealers within the state • e.g., Colorado (requiring any incentive or other “benefit” to be “practically available to all dealers”); Connecticut(offering of funds to upgrade facilities must be practically available to all CT dealers); Kansas (barring discrimination in availability of “incentive” programs); Kentucky (any facility payment must be available to each dealer on proportionally equal terms); Louisiana (barring discrimination among similarly-situated dealers in terms of incentive programs or “other similar programs”)

26. USE OF VENDORS • A number of states have recently added restrictions on the use of mandatory vendors in connection with facility upgrades • e.g., California (2013); NewHampshire (2013); NewMexico (2013); NorthCarolina (2013); Oregon (2013); Utah (2013)

27. California Facilities Statute Vehicle Code Sec. 11713.13 Additional Unlawful Acts: Vehicle Manufacturers and Distributors: Dealers • Became law July 2, 2009 • Covers, among other things, facility exclusivity, facility upgrades and obligations upon dealer termination

28. Cal. Vehicle Code Section 11713.13 “It is unlawful and a violation of this code for any manufacturer, manufacturer branch, distributor, or distributor branch licensed under this code to do, directly or indirectly through an affiliate, any of the following: • Prevent, or attempt to prevent, by contract or otherwise, a dealer from acquiring, adding, or maintaining a sales or service operation for another line make of motor vehicles at the same or expanded facility at which the dealer currently operates a dealership if the dealer complies with any reasonable facilities and capital requirements of the manufacturer or distributor. • Require a dealer to establish or maintain exclusive facilities, personnel, or display space if the imposition of the requirement would be unreasonable in light of all existing circumstances, including economic conditions. In any proceeding under this subdivision or subdivision (a) in which the reasonableness of a facility or capital requirement is an issue, the manufacturer or distributor shall have the burden of proof. • Require, by contract or otherwise, a dealer to make a material alteration, expansion, or addition to any dealership facility, unless the required alteration, expansion, or addition is reasonable in light of all existing circumstances, including economic conditions. In any proceeding in which a required facility alteration, expansion, or addition is an issue, the manufacturer or distributor shall have the burden of proof.”

29. Burden of Proof in Protest “(B) In any proceeding under this subdivision or subdivision (a) in which the reasonableness of a facility or capital requirement is an issue, the manufacturer or distributor shall have the burden of proof. (C) In any proceeding in which a required facility alteration, expansion, or addition is an issue, the manufacturer or distributor shall have the burden of proof.”

30. Standard – “Reasonableness” “(b) Require a dealer to establish or maintain exclusive facilities, personnel, or display space if the imposition of the requirement would be unreasonable in light of all existing circumstances, including economic conditions. (c) Require, by contract or otherwise, a dealer to make a material alteration, expansion, or addition to any dealership facility, unless the required alteration, expansion, or addition is reasonable in light of all existing circumstances, including economic conditions.”

31. Retroactive Application of Statute Implications of Retroactivity of Vehicle Code Sec. 11713.13 Question: What is the “triggering event” for determining retroactivity? When the franchisor takes the action challenged by the dealer? or When the dealer agreement is signed?

32. Retroactive Application of Statute No retroactivity without clear intent Intent can be determined from either the language of the statute itself or, if the extrinsic sources are sufficiently clear, legislative history. Pro Legislative intent provides that statute is to “update laws” already regulating manufacturers. Statute’s purpose was to give dealers flexibility in running their dealerships during economic hard times. Con Legislature said intent of the bill was to ensure reasonable facility requirements are imposed. Requirements can only be imposed at the time of initial contract

33. Retroactive Application of Statute • Procedural amendments (notice periods; limitations periods; burden of proof) • “Remedial” amendments (grant of jurisdiction to agency; meet and confer requirements; attorney’s fees; calculation of retail; definitional changes) • “Clarifying” amendments (to clarify the legislature’s original intent as to the meaning of ambiguous statutory provisions)

34. U.S. Constitution (Article 1, Section 10) No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Control of the Congress.No State shall, without the Consent of Congress, lay any duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

35. CA State Constitution (Article 1, Section 9) A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed.

36. 2014 Amendments to Cal. Vehicle Code SB 155, Padilla (D-Pacoima)

37. 2014 Amendments to Cal. Vehicle Code SB 155 • Warranty Reimbursement • Incentive Program Reimbursement • Export Policy Restrictions • Facility Improvement: Dealer Choice of Goods or Services • Performance Standard Restrictions

38. SB 155 – Facility Upgrades Section 1 (of SB 155) The Legislature finds and declares all of the following: *** (f) Franchisors sometimes establish facility models that require dealers to purchase goods or services from specific vendors even if a dealer can obtain substantially similar goods or services from an alternative local vendor. (g) It is the intent of this act to ensure that new motor vehicle dealers … be allowed to obtain required goods or services through vendors of their choosing.

39. Amendment to Vehicle Code Sec. 11713.13 Vehicle Code Section 11713.13 It is unlawful … for any manufacturer … to do … any of the following: (c) Require … a dealer to make a material alteration, expansion, or addition to any dealership facility, unless the required alteration, expansion, or addition is reasonable in light of all existing circumstances…. (1) A required facility alteration, expansion, or addition shall not be deemed reasonable if it requires that the dealer purchase goods or services from a specific vendor when goods or services of substantially similar kind, quality, and general design concept are available from another vendor

40. Amendment to Vehicle Code Sec. 11713.13 Exceptions/Restrictions: • Manufacturers can require dealers to first make written request for deviation from the standard goods or services • Approval cannot be unreasonably withheld • Approval cannot be delayed beyond 20 business days – otherwise, the request will be deemed approved • Dealers may not infringe upon automaker intellectual property rights • Manufacturers can require specific goods or services if the manufacturer pays a substantial portion of the cost of those goods or services — as long as the payment is intended solely to reimburse the dealer for those goods or services