Protecting profitable partnerships: What you need to know before signing with your suppliers

By Gary L. Antoniewicz

Last October, I had the pleasure of speaking to outdoor power equipment dealers at the Green Industry and Equipment Expo (GIE+EXPO) in Louisville. As is typically the case, speaking is also a learning opportunity for me. Through dialogue and questions, I get the chance to hear dealers address what is on their minds. For this, I am thankful, especially as I have now been asked to follow up with an article on topics addressed at GIE+EXPO. While I addressed several legal topics in my seminar, which was sponsored by the North American Equipment Dealers Association (NAEDA), I want to concentrate now on the distribution and franchise issues faced by OPE dealers.

Historical background on dealer protection

Dealer protection statutes are primarily state issues and date back to 1935 when my own home state of Wisconsin passed the first motor vehicle dealer franchise law regulating coercive acts by motor vehicle manufacturers. Since then, nearly every state has passed some form of franchise or dealer protection statute. The problem is that dealership protections vary widely from state to state, and protections available in one state may not be available in a neighboring state. Many states have statutes that are very industry specific such as “motor vehicles” or “farm implements.” Some statutes deal only with inventory repurchase upon termination, while approximately 20 states have dealer statutes requiring “good cause” for termination. Even then, the “good cause” requirement may not apply to every industry or type of product distributed.

The hodgepodge of state laws has been of limited help to OPE dealers and even when “outdoor power equipment” is specifically enumerated in a statute, there can still be questions as to how it is defined.1 Does OPE include power sports equipment and vice versa? Can some OPE be considered farm implements? The lack of a clear definition of OPE has been a detriment to protection in those states that do not have general across-the-board protection for “dealers” of all products. There are no current federal standards, and dealer rights have to be determined on a state-by-state analysis of the law.

Issues in the industry beyond termination

In states offering dealership protections for termination without good cause, the statutes may still not cover all of the fundamental issues important to dealers. These include sale of product by big box stores; territorial protections; warranty reimbursement; and other matters threatening dealership survival. Even if a dealer is protected from unfair termination, the protection may be of limited value if its territory is nonexclusive and the manufacturer can unilaterally add a competitor nearby.

Volume and other discount programs can also impact dealership survival, especially if the discounts are of sufficient size and give one dealer a competitive edge over another. Some companies require dealers to purchase packages that may include unwanted stock items in order to receive favorable price terms. Few, if any, dealership protection statutes address all of these concerns.

As the OPE industry moves forward, one of its most important concerns will be to work on industry definitions and to strengthen associations so that the industry, as a whole, can obtain stronger identity and statutory protections.

Address concerns up front with your manufacturer

Understanding your dealer contract up front and addressing key issues in writing is the number one dealer protection. If a dealer signs a “nonexclusive” contract to represent a product in a particular territory, there is little protection to a dealer if the manufacturer appoints another dealer in the same area, or decides to market through big box stores. After all, isn’t that what nonexclusive means? Similarly, if a dealer agreement provides for stocking and ordering of a full line of products, this is a standard the dealer will likely have to adhere to or risk termination. Dealer contracts do have meaning and need to be carefully looked at before they are signed.

The rights you have under your dealer agreement should be a major consideration in the plans you make for facilities and other investments in a line. Too many times, dealers have made major investments only to see those investments disappear when a manufacturer decides to change marketing strategies.

Dealership agreements are two-way streets. Both the manufacturer and dealer are making commitments to each other to distribute a product. If a manufacturer expects a dealer to make a major financial commitment, the manufacturer should also provide the dealer an opportunity to obtain a return on the investment.

I am often told that in discussing agreements, a dealer may object to a provision only to be told by a manufacturer representative to “not worry, that provision is never enforced.” If it is never enforced, why is it there? Is the manufacturer representative willing to put such an assurance in writing? If not, there is cause for concern.

Obligation to deal in good faith

Many courts have determined that dealership agreements are covered by the Uniform Commercial Code (UCC), which in some form exists and is applicable in all states. One of the basic provisions of the UCC is that “Every contract…imposes an obligation of good faith in its performance and enforcement.” (Article 1-304) Regardless of whether a particular state has a specific dealership protection statute, the UCC imposes an obligation on both the dealer and the manufacturer to deal honestly and fairly with each other. Dealers are expected to use their “best efforts” under their contract to promote a manufacturer’s product. At the same time, manufacturers are expected to provide the dealer with necessary inventory and pricing in a non-discriminatory manner to permit the dealer to meet its objectives. Both parties need to operate with the duty of good faith in mind. In some instances, the UCC may be the best dealer recourse when a manufacturer dispute arises.

Conclusion

For most dealers I work with, their dealership is their livelihood, largest investment and their retirement plan. The inherent risks to the dealer are directly related to the good faith of the manufacturer/supplier. In entering into such major financial investments, dealers need to be aware of state protections available and all of the contractual obligations of both parties. The time to review and understand the commitments and protections is when the dealer agreement is entered, not when problems occur. Manufacturers and dealers also need to recognize that they are in business together for a common purpose, and each should understand the needs of the other.

1 See Middle Tennessee Associates v. Leeville Motors (TN, 1991), raising the question of whether lawn and garden equipment are farm implements. Also, Deere & Company v. Ford (MA 2001), where dealer asserted lawn tractors were under the “motor vehicle” dealer law.

 Gary L. Antoniewicz is a partner with Boardman & Clark LLP in Madison, Wis. Antoniewicz has practiced in dealership law for more than 34 years, including serving as general counsel for the Midwest Equipment Dealers Association since 1982. He has presented numerous seminars for dealers throughout the country and has written many articles for various trade publications. For further information, visit his website at www.boardmanclark.com.