Colorado Automobile Dealers Score Big Gains in 2010 Legislative Session
May 10, 2010
By: Craig D. Joyce
Colorado, like all states, has laws to protect automobile dealers from certain abusive practices of manufacturers. Colorado’s basic dealer protection law, sometimes termed the “Dealer’s Day in Court Act” is found in Title 12, Article 6 at Section 120.
During the 2010 legislative session, Colorado’s Dealers Day in Court Act got stronger. Governor Ritter signed House Bill 10-1049 (“HB 1049”) on March 22, 2010. All provisions in this bill were effective immediately. This article summarizes some of the changes to the Dealers Day in Court Act made in HB 1049.
Exporting of Motor Vehicles
Manufacturers often fined or punished dealers if a vehicle they sold ended up being exported out of the United States. Under HB 1049, the manufacturer must prove that the dealer knew the vehicle was going to be exported before it can impose penalties, fines, or withhold future inventory. HB 1049 also creates a presumption that the dealer did not have knowledge that the vehicle might be exported.
Warranty and Sales Incentive Audits
Manufacturers have the right to audit dealers on warranty service work and sales incentive claims. In 2009, Colorado shortened the period in which manufacturers may audit to 15 months. HB 1049 reduced this period even more to 9 months.
Facility Upgrade Reimbursements
Manufacturers frequently forced dealers to spend money to upgrade their showroom and service facilities in order to comply with the manufacturer’s image requirements. Manufacturers frequently tied the requirement for facility upgrades to renewal of the dealer’s franchise agreement. Under HB 1049, if a manufacturer terminates a dealer’s franchise agreement for any reason other than fraud, misrepresentation, or other crimes, the manufacturer must reimburse the dealer for expenditures made in performing manufacturer-required upgrades to the dealer’s facility made within the previous 5 years.
Termination Assistance Payments
Colorado law requires manufacturers to provide certain financial assistance to a terminated dealer by requiring re-purchase of new inventory, parts and accessories, signs, and special tools and equipment acquired from the manufacturer. Chrysler and GM evaded this provision by terminating dealers as part of their bankruptcies in 2009. HB 1049 has altered this provision by providing that the manufacturer may not discharge its obligation to pay terminated Colorado dealers these termination assistance and payment provisions in bankruptcy.
Definition of “Franchise”
Although the relationship between dealers and manufacturers is commonly regarded as a franchisee/franchisor relationship, prior to the effective date of HB 1049, the term “franchise” had not been defined in Colorado law. The new law now defines franchise to include:
The authority to sell or service and repair motor vehicles of a designated line-make granted through a sales, service, and parts agreement with the manufacturer, distributor, or manufacturer representative.
Special Provisions Applicable to Dealers Terminated in GM or Chrysler Bankruptcies
In 2009, Chrysler and GM terminated hundreds of dealers nationwide through their respective bankruptcies. HB 1049 includes certain provisions designed to allow terminated Colorado dealers the ability to get their dealerships back or receive cash payments. Dealers who were terminated in the bankruptcies are given a right of first refusal in the event the manufacturer elects to re-enter the market previously held by the terminated dealer. HB 1049 gives dealers the option to either take back their franchise under the statutory right of first refusal or, instead, accept the termination assistance payments previously required under Colorado law but not paid by the manufacturers by virtue of their federal bankruptcies. Manufacturers who wish to re-enter a market previously held by a terminated dealer must give notice to all dealers, including a terminated dealer, within a 5 mile radius of the store the manufacturer wants to open. The right of first refusal provided under HB 1049 is retroactive, in that it applies to dealers even if that dealer’s franchise was awarded to another dealer prior to enactment of HB 1049.
Chrysler’s Reaction
Chrysler has indicated publicly its intent to defy certain provisions of HB 1049 to the extent Chrysler believes the law is inconsistent with actions taken in its bankruptcy proceeding. In fact, Chrysler sued Colorado in U. S. Bankruptcy Court for the Southern District of New York on April 23, 2010, specifically challenging those portions of HB 1049 that it claims conflict with bankruptcy court orders that allowed it to terminate dealerships. Chrysler claims that HB 1049 violates previous orders of the bankruptcy court and violates the contract clauses in both the U.S. and Colorado constitutions. In a swift and surprisingly bipartisan effort, Colorado responded to Chrysler’s announced intent not to comply with HB 1049 by promptly enacting Senate Bill 10-201 (“SB 201”) imposing civil fines of between $10,000 and $25,000 per day on manufacturers who fail to offer the right of first refusal or make the compensation payments required under HB 1049. SB 201 also provides for dealers to recover reasonable attorneys’ fees and costs if they succeed in a court action against a manufacturer who has violated the Dealers Day in Court Act. As of this writing, SB 201 has not been signed into law by the governor.
Conclusion
As of this writing, it is too early to tell the outcome of Chrysler’s legal challenge to those provisions of HB 1049 and its inevitable challenge to SB 201. Regardless whether these laws withstand challenge, however, the Colorado General Assembly is on record that it is willing to take strong, swift, decisive action against manufacturers whose actions cause economic hardships to Colorado dealers.
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This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
Copyright © 2010 Fairfield and Woods, P.C., ALL RIGHTS RESERVED.
Comments or inquiries may be directed to:
Craig D. Joyce.