The Fight for Choice: F&I Products and the Rise of the OEMs

“What is up with that Toyota store? Why aren’t we knocking on that door?” asked the hungry, young agent while making sales calls with his mentor. 

“Because it’s a waste of time,” came the quick reply from the wily, experienced agent.

“How could that kind of volume be a waste of time?” asked the young guy.

“Toyota makes it nearly impossible for its dealers to sell anything other than Toyota contracts,” cautioned the veteran agent. “I have spent years getting jacked around by Toyota. I am done with them.”

OEMs in Search of Revenue

Vehicle service contracts and GAP contracts represent a valuable stream of revenue for administrators, agents, and dealers. They offer the potential to exponentially increase the bottom-line profit on each vehicle sold. Given this fact, it shouldn’t be surprisingthat OEMs are seeking to capture some of these monies through their own factory-branded VSC and GAP programs. 

Indeed, this is nothing new; factory-branded VSC and GAP programs have been around for decades. Independent providers have been able to successfully compete with OEMs by offering superior products, better service, and a smoother, fairer customer-claims experience. 

The problem now is that some OEMs have resorted to questionable business practices to keep independent providers out of factory-authorized dealerships. It’s no longer a fair fight. This article discusses some of these practices and potential remedies.

Ties Between OEMs and Franchisees

Technically speaking, dealerships are independent businesses. Your dealer clients can run their businesses however they choose, subject only to the restrictions of their franchise agreements and the laws of the states in which they operate. But dealers depend on OEMs to allocate the appropriate type and number of vehicles for the markets in which they operate, so they aren’t squeezed for inventory when customers are looking to buy or, alternatively, left with rows of vehicles they cannot sell because customers don’t want them. 

Dealers depend on OEMs for floorplan and consumer financing. And then there are incentives — financial inducements OEMs offer dealers to help move vehicles even at times when customer traffic has slowed. These various ties between dealerships and OEMs give rise to a symbiotic relationship in which dealers may feel compelled to follow OEM guidance on matters not addressed by the franchise agreement to avoid being disadvantaged in vehicle allocation or to qualify for particular financing or incentive programs.

Issues With Toyota

At least one OEM purportedly has seized on this dynamic to push its factory-branded VSCs and GAP contracts to the forefront at franchise dealerships while keeping independent providers on the periphery. Independent administrators report anemic penetration in Toyota stores compared to other franchised stores. 

Toyota Motor Credit Corp. provides wholesale and retail financing to Toyota dealerships nationwide. At the same time, TMCC markets GAP contracts to those same dealerships, and TMCC’s wholly-owned subsidiary, Toyota Motor Insurance Services, markets vehicle service contracts (referred to as Vehicle Service Agreements or VSAs) to those dealerships under the “Toyota Extra Care” banner. TMCC and TMIS both do business under the service mark of Toyota Financial Services. 

TMCC does not expressly require Toyota dealerships to sell only Toyota-branded GAP contracts and VSAs; to impose this requirement would violate U.S. antitrust law. However, TMCC readily offers retail financing in connection with Toyota-branded products. In sharp contrast, TMCC will only finance vehicle service contracts and GAP contracts from independent providers if those contracts are approved by TMCC in advance. 

TMCC’s approval process is reportedly time-consuming and expensive, beyond industry norms. Independent providers must have a dealer “sponsor” to begin the process, the dealer must pay a significant fee (reportedly $500 per new contract), and TMCC only will communicate with the dealer — not the independent agent or administrator — about problematic contract terms, drastically reducing the likelihood an independent provider will make it through the approval process. 

If anecdotal reports are to be believed, TMCC intentionally delays providing dealers with feedback on the contracts they submit, and routinely rejects contracts for seemingly arbitrary reasons. Contracts may be rejected multiple times with only a perfunctory explanation of the reasons for rejection. Reportedly, it can take 90 days or longer for a vehicle service contract or GAP contract from an independent provider to be approved at a Toyota dealership. While approval remains pending, TMCC and TMIS can make a hard push to convince the dealer to sell primarily or exclusively Toyota-branded products. The hope, it seems, is that independent agents and dealers will just throw up their hands and give up.

To be clear, it is technically possible for the dealer to avoid going through this lengthy process. Approval by TMCC is only necessary if the dealer desires to make TMCC financing available to customers who purchase non-OEM vehicle service contracts or GAP contracts. Rather than making available TMCC financing to those customers, the dealer could offer those customers alternative financing from other sources already comfortable with non-OEM products. 

There are at least two problems with this, however. First, other finance sources may be unable to match the rates offered by TMCC on Toyota vehicles. TMCC may offer below-market rates for the sake of moving more vehicles, as occurred during the recession, in the belief it can make up the money on the sale of the vehicles themselves or on factory-branded F&I products which may accompany those vehicles. 

Second, TMCC may offer dealers significant volume-based incentives for convincing customers to finance with TMCC. This may operate as both a carrot and a stick: It’s a carrot in that a dealer may receive additional compensation and recognition for meeting predetermined sales requirements. It’s a stick in that a dealer otherwise able to meet those sales requirements may lose out on additional compensation if its customers choose to finance with a lender other than TMCC. 

The thrust of all of this is that dealers feel compelled to obtain TMCC approval for any non-OEM vehicle service contract or GAP contract they desire to carry, and if reports are true, TMCC’s approval process has been structured and applied in such a manner as to hamper the ability of independent providers to compete with TMCC and TMIS in Toyota dealerships. 

And while Toyota may be the best example of these practices, it is not alone. Other OEMs, such as General Motors and Volkswagen, have enacted or openly explored measures to keep independent providers on the sidelines so they can capture more of the income flowing from dealerships’ F&I offices.

Fighting to Keep Non-OEM Products on Shelves

Do independent providers have any real recourse? They do. Independent providers do not have to sit idly by and worry about what OEM stores will gradually become off-limits. 

The first place to look for help is the dealer’s contracts. There can be a marked difference between what an OEM tells its franchisees and the actual terms of its franchise agreements. While an OEM may push franchisees to sell factory-branded vehicle service contracts and GAP contracts — and may offer franchisees additional incentive compensation for doing so — the franchise agreements establish the real “rules of the road.” Whenever it appears an OEM is trying to thwart efforts to install a non-OEM product at a dealership, the independent provider should ask to see the dealer’s franchise agreement. It may address whether the OEM is entitled to take the actions it’s taking and give the dealer a basis to tell the OEM to back off.

There also is U.S. antitrust law. While a comprehensive discussion of U.S. antitrust law is beyond the scope of this article, it is worth pointing out that Section One of the Sherman Act prohibits tying arrangements. In a tying arrangement, a seller requires buyers of a product over which it has market power (the “tying product”) to also purchase a product over which it seeks to gain market power (the “tied product”). A tie can be explicit or can be enforced through informal constraints or pricing policies. 

With proof that an OEM conditioned the allocation of particular vehicles or the availability of vehicle financing on a dealer agreeing to sell factory-branded vehicle service contracts or GAP contracts, there is a likely basis for a tying claim. A tying claim requires a plaintiff to demonstrate that the seller has market power. In situations where a buyer has readily available alternatives to the tying product, market power can be difficult to demonstrate. 

Here, it is easy to imagine an OEM pointing to the fact that dealers have other vehicles they can sell and other lenders that will provide financing for those vehicles, so the OEM does not have market power as required for an antitrust violation. But of course, those would be other vehicles, and not the particular vehicles offered by the OEM. The key for the plaintiff is to define the market narrowly enough so that there are no alternatives to the tying product or at least no other economically viable ones.

OEM Dealers Needed

Legal recourse of any kind will be heavily fact-dependent. There is no one-size-fits-all answer that will level the playing field for OEMs and non-OEMs alike. A lot will depend on the dealer and the compulsion the dealer feels (or does not feel) to carry factory-branded products to the exclusion of VSCs and GAP contracts offered by independent providers. 

Any successful effort to push back would require OEM dealers ready and willing to testify about OEM pressure to push factory-sponsored F&I products — that they felt they really did not have an option. If the dealer characterizes his or her decision to carry the factory-branded product to the exclusion independent products as purely voluntary, his or her testimony will not help the cause. Likewise, dealers who view the OEM approval process as something other than an effort by the OEM to forbid the sale of independent products will not be helpful. 

On the other hand, where a dealer wants to carry non-OEM products but feels precluded from doing so by policies or procedures put in place by their franchisor, there may be grounds for relief.

Taking a Stand

The more OEMs succeed in capturing revenue from dealers’ F&I offices, the more they will push to increase that revenue year-over-year and the less concerned they will be about stepping on the toes of independent providers. While OEMs would be hard-pressed to push independent providers out of the marketplace altogether, it isn’t difficult to imagine a future in which non-OEM VSCs and GAP contracts are reserved primarily for pre-owned vehicles, while virtually all new vehicles enjoy the perceived benefits of “factory” coverage. 

Only time will tell whether this imagined future becomes reality, or whether independent providers can maintain a significant foothold in an industry they largely built. If the Toyota model becomes the norm, the future of the entire industry will be in peril. 

Independent agents and administrators may need to unite in a legal effort to push back. Lawsuits are expensive, time-consuming and risky. However, legal action offers one form of recourse against bullies with lots of market power. When the harm is spread widely and the victims are many, the bully is betting his victims will not unite, pool resources, and push back. At some point, the victims, including dealers willing to testify about the pressure, need to push back.

 

David Marcus and Matt Bartle are attorneys and partners in the Kansas, Mo.-based law firm of Bartle & Marcus LLC. They have handled lawsuits and arbitrations in the F&I industry for the past 13 years. Contact them at [email protected] and [email protected].