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Dealer Associations Get Into the Ring with the Majors

The North American Equipment Dealers Assn. and its affiliates are pushing to improve dealer franchise laws and iron out major-line contract-approval issues.

John Dobberstein, Associate Editor

Poor communication and a lack of clarity about the process often makes it difficult for ag equipment dealers and mainline suppliers to see eye to eye on contract approvals, says Paul Kindinger, president and CEO of the North American Equipment Dealers Assn. (NAEDA).

The 30 states shown in red have statutes that afford some rights to equipment dealers in securing manufacturer approval of dealership transfers. Source: Seigfreid, Bingham, Levy, Selzer & Gee

Equipment dealers unhappy about their treatment at the hands of the majors find that legal protections vary from state to state, and court cases have not produced a sweeping legal solution.

NAEDA is caught in the middle, trying to keep the lines of communication open between their member dealerships and major-line equipment suppliers. The organization fields questions daily from equipment dealers and regional affiliate associations about succession planning, selling a business, or whether a dealer's facilities should or shouldn't be acceptable to its suppliers, Kindinger tells Farm Equipment.

NAEDA's Industry Relations Task Force meets once or twice a year with virtually all major manufacturers to discuss issues like transparency, and flexibility with the criteria for contract approvals. The association is also keeping an eye out for legal precedents that could protect dealerships and keep shortliners in showrooms.

"We've made it a point on many occasions that manufacturers should just be open and honest with dealers in the consolidation process," Kindinger says. "If they would just let dealerships know if they're not part of the future, dealers could make solid business decisions. Then we can help dealers get out of the business with as much dignity and equity as possible."

Clarity is Needed
Kindinger says NAEDA understands that major manufacturers should have input on who sells their equipment and represents their brand. And he acknowledges that some major manufacturers have allowed NAEDA to offer comments and suggested language on original contracts with dealerships.

Kindinger

But he still sees contracts as something that are written by major suppliers and handed to dealerships without much negotiation. The only checks and balances are contract law or dealer protection laws on the books in most states.

Kindinger sees plenty for dealer-principals to be upset about, especially when they're selling their business to another investor. Consistency is a big problem.

"There's a huge variation in how much time it takes for the approval process with some of the majors. We have some that go through without a glitch and others that seem to drag on for months and months," he says. "If there is a problem in the transfer of a business, what's the criteria that they're basing it on?

"In most cases they say they have criteria, but it's not written down. We continually push to have these things clarified," Kindinger says. "Sometimes we need to go in and talk to a dealer about what's realistic in a situation, and in the marketplace, and what's fair to their employees.

"I won't say I'm always right any more than manufacturers say they're always right. In most instances, they probably end up being reasonable. But there have been situations where it's also been ludicrous. And we really push them on that."

The Legal Arena

NAEDA's legal counsel, Jack Selzer, says 47 of 50 states have laws, covering a variety of legal and business issues, that offer some protection for equipment dealers. Some of the laws have anti-purity provisions that prohibit a manufacturer from coercing a dealer to drop a product of another manufacturer. Others prevent a manufacturer from terminating a contract without cause.

Selzer

But when it comes to the transfer of ownership, the picture is much cloudier. Thirty states have laws that give some rights to dealers in securing manufacturer approval of dealership transfers. Some laws give a manufacturer a certain number of days to inform the dealer why a potential buyer wasn't approved. Or the law says a manufacturer's decision must be based on objective criteria like financial resources, industry experience or moral character. But not every state has such stringent requirements, making dealerships victims of their geography.

In hopes of improving legal protections for dealerships across the U.S., the SouthWestern Assn. drafted a 16-page "model statute" that covers a host of legal and business issues, including ownership transfers. The goal of the statute, which is supported by NAEDA's board of directors, is for the regional dealership associations to get the legislation passed in all 50 states.

Selzer says 4 major manufacturers — who he declined to identify — have signed off on the statute, meaning they will not lobby against it when a regional association attempts to get a state to pass it.

The model statute has been enacted in several states, including California.

When it comes to a transfer of ownership, the proposed statue provides some protection, Selzer says, in that:

• The supplier can't postpone the decision indefinitely;
• The dealer is required to submit relevant information with the inference that the decision should be based on objective criteria;
• The supplier must state in writing the reasons for denial;

The supplier must be even-handed and impose only "reasonable requirements" that are consistently used in approving transfers to new dealers.

"It still leaves manufacturers with some power. It's realistic, not overbearing," Selzer says of the proposed statute.

For some independent ag equipment dealers, the situation isn't too dissimilar to what car dealerships are going through with struggling U.S. automakers, which are whittling down their number of dealerships or shedding brands altogether.

In Indiana, a trio of bills were introduced that would have strengthened state franchising laws for auto dealers. One measure would have made it an unfair business practice for an automaker to prohibit a dealer from representing more than one brand of vehicles at a site. Another would have required automakers, in some cases, to buy back new vehicles, special tools and other equipment from a dealer that was terminated.

But the bills, backed by the Automobile Dealers Assn. of Indiana, failed to emerge from the state senate, even though the businesses are important to many communities in rural Indiana.

The Kubota Case
Some recent court cases have directly affected ag equipment dealers. The Illinois Supreme Court recently reversed two court judgments that held a dealership is not allowed to sue a tractor company on the basis of promises it allegedly made. Justices unanimously sided with Newton Tractor Sales, an ag equipment dealership in Newton, Ill., that wanted to acquire another Kubota dealer in the state.

Newton began negotiations in 2002 to buy Vandalia Tractor and Equipment in Vandalia, Ill. Vandalia Tractor, owned by brothers Tim and Ron Emerick, already sold Kubota tractors. Newton signed a purchase agreement in 2003 that, in part, allowed the company to back out if it couldn't get permission to sell New Holland, AGCO or Kubota products. To sell Kubota products, Newton was required to submit an application to Kubota's local representative, Michael Jacobson.

After the application was submitted, Newton officials met with Tim Emerick and Jacobson. In 2003, Jacobson informed Newton that he could not approve the sale of Kubota products unless the Emericks terminated their agreement with the company. Tim Emerick agreed to sign the termination agreement — but only if Newton became an authorized dealer, according to court records.

"Newton alleges Jacobson responded by saying, '(Newton) will be the dealer,' " the opinion authored by Justice Rita Garman states. Although Newton's application was approved at Kubota's division level a few weeks later, it was denied by Kubota's corporate office.

Newton sued Kubota and Jacobson in Fayette County Circuit Court, and later in appellate court, claiming Kubota had reneged on their promise to make Newton an authorized dealer. Newton lost both court decisions. But the Illinois Supreme Court reversed both rulings and remanded the issue back to circuit court.

Selzer says he follows legal cases closely, but he isn't sure whether more judges are siding with ag equipment dealers. While he does legal work and analysis for NAEDA, he does not represent dealerships that have filed suit against manufacturers.

He says a lot of manufacturers are starting to include "mandatory arbitration" clauses in dealership agreements where grievances are handled in private instead of in a courtroom. An advantage he sees with arbitration for dealers is that a grievance can be filed and heard fairly quickly, and the decision can't be appealed. "But it's less likely for them to hit a home run, and that's one reason manufacturers may like arbitration," he says.

Make a Battle Plan

Jeff Flora, CEO of the SouthWestern Assn., says there are dealer protection laws in 4 of the 5 states he represents — Kansas, Oklahoma, Texas and Missouri — with the exception being New Mexico.

Jeff Flora

The laws generally cover the buyback of equipment and inventory if a contract is terminated, as well as warranty reimbursement and other fair-practice issues. But dealers are still powerless to fight a manufacturer on where dealerships will be located or how a dealership is being sold or transferred to a different owner, especially when there are multiple brands involved.

"We say if that's the way it's going to be, make sure you are communicating with dealers and that you treat them all the same," Flora says. "With very few exceptions, it seems to be working OK."

When deciding about a dealership's future, manufacturers are looking closely at market share, but also the depth and continuity of management and the education levels of potential buyers, he says.

Many manufacturers have long-term plans on how many dealerships they want to have and what their dealership network should look like, and Flora argues that Deere & Co. and Case IH are more up-front about this. A few other majors — which he declined to identify — appear satisfied that there are no established policies and processes regarding their dealership network, who the dealers will be, and where they will be located. "It seems like they would want good citizens in the industry and to have those dealers located where they want them. So it's hard to help the dealerships transition to where a manufacturer wants them to be," Flora says.

When a dealership that's up for sale has multiple, competing brands, it's not likely the business will be sold intact. And if the situation isn't handled properly, it could hurt both the dealership and the manufacturer. "The shortliners might go down the road to another competitor and then customers follow them, and the next thing you know they're buying tractors there," Flora says.

It's tough for an equipment dealership to hear that they aren't the "chosen one" to grow with a manufacturer, especially when a family has been in the business for decades. Flora tells dealerships to have regular conversations with their manufacturer about where everything stands and not be afraid of what they might hear.

Some dealerships have used such events for motivation and have rolled up their sleeves and gone to work, improving their market share and proving a mainline supplier wrong.

If that's not possible, "clean your business up and make it saleable," Flora says. "You want to make darn sure whatever you do goes as smoothly as possible. Don't wait until your market share declines to get ready. I know dealers that waited too long and it cost them money."

Dealers who are selling, or thinking about it, should also ask their regional association if they have certified analysts who can do a valuation of the business, Flora says. Such a move could give the outgoing owners some piece of mind and placate a manufacturer who worries a potential buyer is paying too much.

Many manufacturers are saying dealerships should use association services to come up with a price. "But I'm guessing appraisals are done less than one-third of the time," Flora says.

What the Future Holds
It's unclear if the court system or lobbying efforts of the associations will ever give equipment dealers a cut-and-dried solution to their contract battles.

Some observers worry as the consolidation movement trudges on that there won't be room for a 1- or 2-store operation anymore.

"My response to that is that I don't think every manufacturer is interested in multi-store models," says Kindinger. "The dealers that aren't part of the plan can work for someone else or work with the shortliners. We have some dealers who, after they get over the issue of not being part of the plan, find working for a shortliner more gratifying and more profitable than what they were dealing with before.

"My ultimate sense of where this is going is that some opportunities will open up for other manufacturers to take these solid dealers. The last chapter has not been written yet."

Some may wonder if NAEDA is influential enough with the majors, who have the power to back up their decisions with a cadre of lawyers. One dealer complained privately earlier this year, after an ownership transfer went sour, that NAEDA sometimes falls under the spell of the majors.

Kindinger denies that and defends his organization's work and that of the regional associations.

"Time and time again, NAEDA has gotten involved with a dealer and we've come out with a much better result than where the case was headed when we first heard about it. I'll let our record speak for itself."

Tips for Dealerships

• Have regular conversations with your mainline supplier on where you stand with them
• Know what's in your dealership agreement and your state's dealer protection laws
• If you're not a "chosen one," clean up your business and get it ready for sale, well before your market starts to decline
• Do some pre-planning and get legal counsel before you approach a mainline supplier about your plan to sell

Contract Approval: The 'Big Hammer' in Dealer Consolidation

Strategies for Dealing with Ownership Transfer Issues

Dealer Associations Get Into the Ring with the Majors

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