Amendments to Ohio’s Law Governing Motor Vehicle Franchise Agreements Take Effect on September 14, 2016

Effective September 14, 2016, the laws of the State of Ohio governing motor vehicle franchise agreements and the relationship between franchisors and franchisees will change. Sub. Senate Bill 242, passed by the 131^st Ohio General Assembly on May 25, 2016, modifies the process by which a franchisee (motor vehicle dealer) may calculate its retail labor rate and the retail parts markup percentage for purposes of its reimbursement for warranty and recall obligations. In addition, the amendments to Ohio Revised Code Section 4517.55 add new “local market conditions” and other evidentiary burdens on a franchisor seeking to terminate or not renew a motor vehicle dealer franchise agreement in Ohio.

Compensating Franchisees for Warranty and Recall Obligations

Under existing law, the reimbursement rates that a franchisor pays to a motor vehicle dealer were required to be not less that the rates charged by the franchisee to its retail customers for like service and parts for non-warranty work. The amendments to Ohio Revised Code Section 4517.52 will require the franchisor to compensate each of its motor vehicle dealers at rates charged by the franchisee to its retail customers for warranty-like labor and parts for non-warranty work. The amendments do not apply to a franchisee that deals in recreational vehicles. Below is a general summary of the amendments:

• Establishes a method by which a franchisee (motor vehicle dealer) may calculate its retail labor rate and the retail parts markup percentage for purposes of its reimbursement for warranty and recall obligations.

• Establishes a process by which a franchisor (motor vehicle manufacturer) may contest a retail labor rate or retail parts markup percentage calculated by a franchisee.

• Requires a franchisor to use a specified method when calculating the compensation that must be provided to a franchisee for labor and parts used to fulfill warranty and recall obligations.

Cause to Terminate or Fail to Continue a Motor Vehicle Franchise Agreement

Under existing law, a franchisor must prove that there is good cause to terminate, cancel, or fail to continue a motor vehicle franchise agreement based on a number of factors. The amendments will now require a franchisor to allow a motor vehicle dealer to present evidence demonstrating the effect of local market conditions prior to terminating or cancelling a franchise agreement because the franchisee failed to meet performance criteria established by the franchisor. The term “local market conditions” includes, but is not limited to: (1) demographics in the franchisee’s area; (2) geographical and market characteristics in the franchisee’s area; (3) local economic circumstances; (4) the proximity of other motor vehicle dealers of the same line-make; (5) the proximity of motor vehicle manufacturing facilities; (6) the buying patterns of motor vehicle purchasers; and (7) customer drive time and drive distances.

Prohibited Actions by a Franchisor

The amendments also modify several existing prohibited actions by a franchisor and establish additional prohibited actions. Below is a general summary of the prohibited actions:

• Prohibits a franchisor from changing a franchisee's geographic area of responsibility without reasonable cause.

• Expands the prohibition against a franchisor initiating a charge back without an audit or performing an audit more than 12 months after submission by the franchisee, so that it also applies to recall repairs, service incentives, and other forms of incentive compensation.

• Generally prohibits a franchisor from assessing any penalty or taking any other adverse action against a motor vehicle dealer with regard to a warranty repair or recall reimbursement, sales incentive or rebate, service incentive, or other form of incentive compensation claim.

• Modifies the law that allows a franchisor to reduce the amount to be paid to a new motor vehicle dealer or impose a charge back after paying any claim if the dealer knew or should have known a new motor vehicle was sold for export to a foreign country.

• Prohibits a franchisor from refusing to pay warranty repair or recall reimbursements until the new motor vehicle dealer has had notice and an opportunity to participate in all franchisor internal appeal processes and all available legal processes.

• Generally prohibits a franchisor from requiring, coercing, or attempting to coerce any new motor vehicle dealer to change the location of the dealership or make substantial alterations to the dealership premises if the change or alteration is proposed within seven years after the premises was constructed or altered.

• Prohibits a franchisor from using the failure of a franchisee to meet a performance standard as the basis to prevent or deny the franchisee the opportunity to name a successor or otherwise engage in succession planning.

• Prohibits a franchisor from using the inability of a franchisee to meet a performance standard as a justification to exclude the franchisee from programs offered by the franchisor if both of the following apply:
  • The failure to meet the performance standard was based on whether the franchisee is selling an adequate number of vehicles; and
  • The failure to meet the performance standard was based on whether the franchisee is selling an adequate number of vehicles; and
  • The franchisee can demonstrate that it was unable to purchase enough vehicles from the franchisor due to the franchisor's actions.

• Prohibits a franchisor from unreasonably requiring or coercing a franchisee to use a specified vendor for purposes of expanding, constructing, or significantly modifying a facility without allowing the franchisee to choose a vendor that provides a substantially similar good or service and that is approved by the franchisor.

• Prohibits a franchisor from requiring a franchisee to conduct research on prospective vehicle purchasers.

• Prohibits a franchisor from coercing or requiring a franchisee to provide nonpublic information concerning any consumer or customer of the franchisee unless certain exceptions apply.

• Prohibits a franchisor from failing to comply with the requirements of any state or federal law that pertains to the use or disclosure of information, including the federal "Gramm-Leach-Bliley Act."

• Prohibits a franchisor from failing to indemnify a franchisee or its successor from damages related to any claim made against the franchisee or successor if the claim resulted directly from the improper use or disclosure of nonpublic personal information.

Time will tell if the amendments to Ohio’s motor vehicle franchise laws have a meaningful impact on the rights and obligations of motor vehicle manufactures and the franchisees that sell and repair their motor vehicles.