2019 NADC Conference - Legal Updates for Dealers

May 29, 2019

After attending the National Association of Dealer Counsel (“NADC”) Annual Meeting in April, our auto dealership team compiled the following update summarizing important legal issues impacting auto dealers throughout the United States. NADC retained national experts who focused on employment matters, dealership buy-sells, tax matters, manufacturer issues, and evolutions of dealership transactions. 

Key topics that were covered include:

National Automobile Dealers Association Update
As is customary, the initial speakers at the NADC conference were the in-house attorneys from the National Automobile Dealers Association (NADA), who provided an update on the national issues that NADA is handling on behalf of its dealers and the industry.  The key takeaway is that NADA is continuing its advocacy on various fronts for the benefit of dealers. Specifically, NADA is working with Congress and rule makers to address the various trade agreements, including the North American Trade Agreement. Separately, they confirmed that there remains no resolution to the problems caused by the Department of Defense's interpretation of GAP products under the Military Lending Act.  The resolution of this matter continues at a very slow pace; however, NADA is confident that the Department of Defense will withdraw its interpretation of the Military Lending Act, opening the door for dealers to again sell GAP products to military personnel and their families.  Lastly, NADA provided its latest "model policy" for voluntary protection products. Nationally, lawmakers and regulators continue to raise concerns regarding the voluntary protection products offered to consumers. Specifically, regulators are concerned with inconsistent pricing and allege that consumers are being overcharged for products they may not understand.  In response to these concerns, NADA proposes that dealers consider adopting the NADA-drafted “Model Dealership Policy” to show that dealers are self-regulating these matters, addressing regulators’ concerns, and that further legislation and rulemaking is unwarranted. If you have not reviewed the NADA “Voluntary Protection Products: A Model Dealership Policy,” contact NADA.

Employment Matters and Workplace Investigations
The next panel presented on employment matters and workplace investigations. As you can imagine, we heard colorful stories regarding employment matters, bad actions, sexual harassment and related employment concerns. Regarding workplace investigations, the bottom line is that when dealership management learns of employee misconduct, it must take prompt action to investigate the allegations, facts and circumstances of the incident, let the applicable employees know that the dealership is taking action, communicate the results of the investigation to the complaining party and show that the complaints were addressed in a timely and effective manner. Workplace investigations should be conducted by qualified individuals when management learns of employee complaints and alleged misconduct, and the dealership should consult with its attorneys to determine the proper course of action.

Manufacturer Vehicle Allocations
Next, national experts presented on the impact of manufacturer allocations of new vehicles on dealerships and their manufacturer relations.  Nationally, manufactures provide some dealers with the exact inventory they are looking for, and not for other dealers. Clearly, this can create direct implications on sales and market penetration. It is important for dealers to stay on top of their inventory allocations and promptly communicate with the manufacturers when allocations do not properly address the market and opportunities for sales. Additionally, if dealers are provided written notice from manufacturers alleging poor sales effectiveness, market penetration, and similar sales standards, dealers must promptly respond to these notifications, in writing, and consider whether the new vehicle inventory allocations may be responsible for the alleged problems. Dealers must remain vigilant in their dealer/manufacturer communications, advising the manufacturers on what inventory they need, how the inventory allocation will help sell more new vehicles, and the implication on dealers when the inventory allocation is not suited for the market.

Top Legal Issues for Dealers
The next presentation addressed the top legal issues for dealers in 2019. The presenters listed and reviewed 25 legal trends from automobile dealers.  Although all the trends are important, the following are the top issues directly impacting dealers - (i) manufacturer sales performance standards and addressing the inherent inequity of those standards; (ii) employment issues in the current “#MeToo" era; (iii) heightened regulatory oversight and the impact on dealership operations; (iv) outside threats to the auto dealer franchise model; and (v) cyber security, data protection, and personal privacy. The number one legal issue remains dealer/manufacturer relations and dealers’ use of inequitable performance standards which continue to challenge dealers on their sales penetration, require dealers to make unnecessary investments in their dealerships and pressure dealers to satisfy their sales performance standards, as opposed to maximize dealer profits. The speakers also discussed the need for good compliance practices. Compliance checklists are highly recommended so that at the end of each transaction, the salesperson can confirm that he/she has all the applicable paperwork, disclosures and necessary compliance documentation signed by the consumer. Separately, it is important for dealers to establish guidelines for their employees. Various written dealership policies were recommended, including on new and developing issues like social media use and other technology that have compliance implications.

Electronic Transactions
The next presentation focused on closing sales through electronic documentation and the associated benefits and concerns. Most states currently permit the entirety of the sales transaction to occur electronically. That said, certain lenders require "wet ink" signatures, which may create some conflict with a dealer's ability to convert to electronic transactions. Many dealers are investing significant resources in their transition to electronic documentation, believing that in the long run electronic documentation will save costs, and increase effectiveness and compliance. It is worth noting that many federal and state laws are currently written for “paper” transactions; however, the laws are slowly changing and inevitably, these transactions will move more and more toward electronic only. A significant concern for electronic transactions is the possibility of unfair or deceptive trade practices, primarily from a state law perspective. Training on electronic documentation, required disclosures and a compliance checklist will help reduce the threat of unwarranted deceptive practice claims. 

Subscription Programs
The final presentation dealt with subscription programs and their place in the retail market.  Currently, nearly all of the manufacturers have commenced some form of subscription program. Primarily, these subscription programs are in their pilot phases, and are being launched through local dealerships; however, a few of the manufacturers are proposing direct-to-consumer subscription programs.  The primary concern was whether the subscription programs are an effort to sidestep state dealer franchise laws and the dealerships system in order to provide vehicles to consumers directly. Of note was the current direct to consumer Volvo subscription program, which is using advertising such as: "Car by Volvo: Subscribe, Don't Buy." Clearly, there is an effort here by the manufacturer to reduce new vehicle sales by offering the alternative subscription program directly, cutting out the dealer franchise system. Dealers, and their attorneys, are concerned that this is the first step on a path to factory-direct sales, and dealers’ vigilance in protecting the state franchise laws and the franchise system must continue, specifically addressing the manufacturers’ direct consumer programs.

If you are interested in discussing any of the legal trends and topics mentioned above, or other matters relating to your dealership and its operations, please contact Randy Earnest, Craig Joyce, or any other members of our Automotive Industry Practice Group at Fairfield and Woods, P.C.