Manufacturer manipulation forces dealers to favor OEM-branded products, lender incentives and practices, and removes their right to choose third-party products—even when those products cost less or are better for customers.
David Marcus and Matthew Bartle, attorneys with Bartle+Marcus LLC, stress these practices may be illegal and share how to combat them.
Bullies in the Business
“We are increasingly seeing aggressive tactics that are hostile to independent F&I product providers,” says Marcus. “We field calls from agents, product providers and even dealers about this growing problem.”
Marcus cites a constantly changing marketplace as the reason for more bullies in the automotive business. He says these forces are unwilling and unable to fight fair and use their “market power to push others out.”
OEMS present the greatest threat to third-party providers. “After moving away from the F&I space during the Great Recession, they’re back with a vengeance. This time with their own finance arms and strategic alliances with Wall Street firms,” he says. “And they are using their business connections and leverage to create a competitive advantage.”
The surge of M&A activity in the F&I space also poses a threat. The larger F&I conglomerates stand ready to push smaller companies out of business. “They’re the big kids now, and they’re getting bigger all the time with the wave of consolidation that has swept the country,” he says.
Bullies in the marketplace use legal and illegal tactics to get the job done, Marcus adds.
“However, what you might think is illegal may not be,” he stresses. It’s essential that dealerships, agents and product providers decipher between legal and illegal activities and take legal action when tactics appear criminal, he says.
Bartle reminds not all state laws are created equal, making it essential to know the law in your state.
California Vehicle Code (CVC) controls statues relating to the operation, ownership and registration of vehicles in the Golden State. The CVC requires dealerships to disclose whether the OEM backs service those contracts. Often, OEMS only back their products. When OEMs do not back the products, CVC requires contracts from other providers contain a clause that states, “The manufacturer of this vehicle is not responsible for repairs under this service contract.” The clause appears to protect consumers but is really a “scare tactic that suggests the third-party vehicle service contract (VSC) is not as good as the OEMs. But a consumer can have just as bad an experience with an OEM service contract as a third-party contract,” Bartle says.
Mississippi takes this law even further. Here, state law mandates OEMs require dealers to make this disclosure. Without this disclosure,” he says, “it becomes unlawful—a misdemeanor to sell a VSC that’s not backed by the OEM. Now it’s a scare tactic.”
New York law has two provisions that guide the sale of service contracts. State statutes allow OEMs to provide incentives to dealers that encourage only selling the OEM’s service contracts or extended maintenance plans.
“The statute says it’s OK to provide incentives that encourage selling the OEM’s products instead of third-party products,” he says.
New York law also allows OEMs to stipulate that dealers secure written acknowledgements from consumers showing they understand that a third-party extended service contract or maintenance plan is not “offered, endorsed or sponsored” by the OEM.
“New York law says OEMs can make dealers comply and sell their products,” he says.
OEMs also offer new vehicle financing to dealers through affiliated finance companies. Sometimes these companies will only finance OEM-branded gap and vehicle service contracts. “Often these products are at a higher price than third-party contracts, potentially resulting in greater profit for dealers,” Marcus says.
“The challenge is that it benefits dealers,” he says. “But the people it harms are third-party providers that cannot get their products financed at the same level. And it really harms consumers, who pay more because of deals between OEMs and dealers.”
Marcus calls these tactics an “obvious maneuver to gain market power,” and says they “give less freedom to dealers to choose their own product providers.” He adds, “Many dealers decide not to carry OEM products because that’s just more ties that bind and it makes them more captive to the OEM.”
When unlawful situations arise, Marcus encourages dealers, providers, and agents to contact an attorney or put their name on a lawsuit. “It’s a massive issue,” he says. “But everybody expects someone else to stand up and take on the bullies.”
What to Do?
Unsure if the competitive insurgency you see is legal or illegal? Gather the facts, says Marcus.
Know what happened to whom, who said what, and who will testify to it. “Practical solutions are highly fact specific and depend on people coming forward and saying under oath what they’re telling you face to face,” he says.
If an OEM tries to interfere with an existing relationship, review your TPA (third-party administrator) leverage. The TPA gives providers rights with dealers. But “we’ve encountered a very few agents that actually have contracts directly with dealers,” he says. “Though it would be smart if they did.”
The TPA may require a dealer to sell the product for a specified period and may protect the third-party beneficiary who put the dealer and product provider together.
If you find providers and OEMs competing unlawfully, you may hold them liable for tortious interference. This involves “any real act that independently would subject them to civil or criminal liability,” Bartle says.
California codes also say an OEM cannot unfairly discriminate against a dealer by “saying or implying the dealer will suffer negative consequences for not selling the OEM’s contracts.” Bartle adds, “If a dealer tells you they are being forced to carry the OEM’s product instead of yours, you may have a claim for tortious interference.”
Claims also may qualify for tortious interference if an OEM, its agents or affiliates make misleading statements about your product to dealers.
“Has your dealer heard from an OEM that your administrator is financially troubled? Have you had OEMs openly defame your company to convince dealers there will be claims issues?” he asks. “Do they say your contracts are bad? If the statements are false or misleading and cause you to lose business, it may be tortious interference. There is nothing improper about an OEM representative talking about legitimate differences between products. But if they say something false or misleading, there is a claim.”
Bartle encourages dealers, providers and agents to record claims in writing and try to memorialize them in an email. “OEMS will claim justification, and you will need facts that prove otherwise. Send an email confirming what he or she said,” he says.
Tactics to steal business also may fall under antitrust laws, such as the Sherman Antitrust Act or the Clayton Act. Both prohibit anti-competitive conduct that may harm the consumer. The Sherman Antitrust Act prohibits contracts, combinations and conspiracies in restraint of trade, and prohibits monopolies and attempts and conspiracies to monopolize, while the Clayton Act declares specific actions or practices are illegal.
A tying arrangement may fall under this protection. In a tying arrangement, the seller agrees to sell, lease or license a product or service on the condition that the buyer or lessee also purchases a different product. This would include an OEM tying the sale to a product, gap contract, or VSC.
Ask the following questions to determine basis for antitrust:
- Is the dealer doing things to keep you out of the market rather than compete with you in the market?
- Is what the OEM doing harming the consumer?
- Will the OEM contract increase prices or decrease options in your market?
Dealers typically have the strongest claims against competitive insurgency. Product providers have the second strongest claims, then agents. Marcus encourages all entities to have a law firm evaluate their claims for merit.
When competitive insurgency rears its ugly head, don’t stick your head in the sand, stand up to it. Get a law firm to evaluate your claim and if it has basis, stick it out to the end to stop these harmful, business-killing practices.