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March 22, 2016

Old is New:  History Repeats Itself

by Barbara Darkes and Stephen Moore

You may recall that in late 2011, we published the article, “Five Persistent Trends Affecting Automobile Dealers.”  While the specifics may have changed, many of the trends continue to persist and affect dealers.  This is a “refresh” of the article, brought forward to March, 2016.

As we close the first quarter of 2016, the financial markets continue to be volatile and rates continue near historical lows.  Consumer confidence in the economy has improved, but trust in government is at an all time low.  The amount of oversight and regulation on motor vehicle dealers continues to increase as both manufacturers and government agencies increase scrutiny of dealership operations.  Below are six trends currently affecting motor vehicle dealers throughout the country and showing no sign of quickly abating:

1.     Increased severity and numbers of recalls;

2.     Increased sales incentive and warranty audits by manufacturers;

3.     Increased regulatory activity by state and federal agencies;

4.     Product availability and allocation issues;

5.     Increased pressure by manufacturers on dealers to achieve sales performance objectives; and

6.     Continued and accelerated demands for new or upgraded stand-alone facilities.


Recalls have always been with us.  However, the pace and intensity of recalls has dramatically increased in the last few years.  Honda and Volkswagen have recently issued stop-sale orders leaving inventory that cannot be sold.  The situation with Takata airbags has been further aggravated with replacement equipment being declared defective and leading to additional recalls of previously repaired vehicles.

Dealers have been left with no good alternatives, particularly where manufacturers are providing no financial support.  Your attorneys will tell you – the safest course of action is to not sell vehicles subject to recalls, especially safety recalls.  Doing so avoids potential claims by injured drivers and passengers.  As a result, however, the dealer is left with depreciating inventory on which floor plan interest and insurance continues to become due.

Disclosure to customers and disclaimers (where there is not a stop-sale order) is an alternative that some dealers have chosen.  Of course, this practice comes with significant risks.  For example, no matter how well drafted the disclosure and disclaimer, and even if signed by the customer, there is no guaranty that a court would uphold the disclosure in a suit by an injured consumer.  Dealers need to be aware of and carefully consider the risks if they choose to sell vehicles subject to recalls.  It only takes one catastrophic event to ruin a business.  For the public, and they will be your jurors, the word “recall” means, “My vehicle isn’t safe.”  Anticipate that jurors will have little sympathy for the dealer who sold a vehicle subject to a recall because the dealer business could not have survived without moving forward with sales.

Dealers should also be mindful that lenders are beginning to add recall concerns to lender agreements.  Specifically, some lender agreements now state that the dealer is representing that the vehicle being sold is not subject to a recall.  What does this mean?  Well, if a dealer sells a vehicle subject to a recall (safety or non-safety) and a lender with that provision in its Lender Agreement purchases that RISC (Retail Installment Sale Contract), the dealer could be forced to repurchase the deal.

 Sales incentive and warranty audit issues

Manufacturers continue to increase both the frequency and intensity of audit activity.  Sales incentives and warranty charges are receiving substantial attention.  Despite the protections afforded by the Pennsylvania Board of Vehicles Act and the Court’s interpretation, manufacturers still insist on absolute, technical compliance with their policies and procedures.  As a result, it is not uncommon for a dealer to see proposed chargebacks by a manufacturer in the range of $50,000 to $100,000 for a mid-sized dealership.  The good news is that Pennsylvania law now requires the manufacturer to provide notice of a chargeback at least 30 days prior to its effectiveness.  This affords a dealer the chance to file a protest and secure a stay of the chargeback while it is challenged.  So, the dealer is fighting to keep money rather than getting it back.

While these types of audits have always been employed by manufacturers, they can be overzealous, draconian attempts to recoup monies from dealers.  Dealers need to take audits very seriously and provide any and all documents that can support the warranty or sales incentive while the audit is ongoing.  Also, dealers need to remember that in the rare event that audit results appear to indicate some underlying fraud or falsification of records, dealers must be prepared to take steps to mitigate the possible consequences.  A look back of up to two years is possible if fraud is found.  Otherwise, the audit period is limited to nine months.

Regulatory issues

In the employment and privacy areas, federal regulators continue to step up their enforcement of existing laws and regulations against dealers to the point of insisting on technical compliance with regulations that border on nonsensical.  Closer to home, the Pennsylvania Department of Banking and Securities continues to audit dealers under the Consumer Credit Code (formerly known as the Motor Vehicles Sales Finance Act).  While these audits sometimes disclose improper practices, most dealers are cited for technical documentary failures. Regular review of deal jackets and established procedures can help mitigate the consequences of a Banking audit.  Similarly, PennDOT has heightened its review and enforcement of penalties for late submission of title work, titlework processes generally, use of dealer plates, and inspection matters.  It’s worth noting that inspection enforcement has been extremely prevalent of late.

The Pennsylvania Board of Vehicle Manufacturers, Dealers and Salespersons is also increasingly auditing its licensees, including new car and truck dealers.  Common areas where dealers are cited include failure to have salespersons properly licensed, failure to operate under the licensed name of the company, and failure to have the appropriate individuals listed as owners and officers.  In each of these areas, fines can be levied by the Board.  Additionally, Dealers can be cited criminally for Dealer Board infractions of up to $10,000 per violation.  There can also be criminal repercussions for PennDOT and Banking concerns.

Allocation issues

Historically, allocation issues did not arise for dealers unless they were selling hot brands or models.  However, manufacturers are exercising greater discipline in production (at least for the moment), resulting in greater competition by dealers for product.  Some manufacturers appear to be favoring dealers with greater allocations while providing other dealers with minimal levels, thus significantly impairing some dealers’ ability to operate profitably.

In Pennsylvania, the law requires a manufacturer to operate an allocation system that is reasonable and fair to its dealers.  While there are various justifications that a manufacturer can rely on when determining allocations, it cannot arbitrarily determine allocations.  Dealers need to pay attention to this so that it doesn’t impair their profitability and sales performance.

Sales performance issues

Sales performance continues to be, and probably always will be, a perennial issue for manufacturers.  Most manufacturers continue to criticize dealers who are performing in the bottom 10% to 20% of their peer group.  Dealers cannot ignore sales performance until the manufacturer is threatening termination.  Insufficient product allocation may significantly impair a dealer’s ability to operate profitably and to meet its sales goals; clearly it’s very circular – allocation drives sales, sales drive allocation.  Poor sales performance may also be a result of the peer group against which the dealer is being measured, the size and configuration of its area of responsibility, or a multitude of other factors.  If sales performance is an issue for a dealership, it should immediately begin to address the matter with the manufacturer, in writing and by taking meaningful steps to improve.

Facilities issues

Pressure to upgrade, renovate, or build new stand-alone facilities continues.  Several factors make facility upgrades difficult for dealers.  Most lenders view dealerships as “special purpose” facilities that are not easily renovated for other commercial uses.  Similarly, many of the manufacturers’ image programs have become more expensive in terms of the demands and, in some cases, the required finishes, which further increases the cost of renovations.  The life cycle for image programs is also shortening.

All of the above is coupled with a renewed vigor by the manufacturers to require dealers to build new and significantly renovate existing facilities.  Dealers must be careful when agreeing to renovate or improve their facilities, since the manufacturers will seek to enforce any agreements which have been made.  Additionally, as incentives or “below the line” monies continue to be tied to facility upgrades and renovations, dealers who are not compliant run the risk of not being competitive with their peers.


In addition to these six, there are another dozen current trends affecting dealers.  Dealers have legal protections and should be vigilant in exploring those before and in the event they are facing adverse action.

© 2016 McNees Wallace & Nurick LLC
AUTO NOTES is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.