Dealers win big against forced arbitration
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In 2002, the National Automobile Dealers Association successfully lobbied Congress to approve a federal ban on mandatory arbitration to settle franchise disputes. Lawmakers did not apply the ban to franchise agreements in effect before the law was enacted.
It also does not apply to supplemental contracts between factories and dealers. Still, the law gives dealers substantial protection.
NADA argues that it is illegal for automakers to force dealers to resolve franchise quarrels through arbitration. State laws typically allow dealers to take complaints to court or to state boards and commissions. The federal Automobile Dealer's Day in Court Act also provides court remedies.
But for years, automakers tried to require arbitration in their dealer agreements. Some succeeded. Arbitration requirements became an issue in the 1980s, when Saturn and Ferrari included mandatory arbitration in their dealer agreements.
Saturn required dealers to submit factory conflicts to mediation. If that failed, the dispute would go to binding arbitration. In 1991, the U.S. Supreme Court upheld the binding-arbitration provision in Saturn's franchise agreement by refusing to review a federal appellate decision.
The appeals court had agreed with Saturn that the Federal Arbitration Act pre-empted the Virginia Dealer Day in Court Act - the law dealers in that state had used to challenge Saturn's dealer agreement.
Saturn dropped its mandatory arbitration provision after the federal ban passed. But it still seeks to use mediation to resolve disputes with dealers.
After Chrysler Corp. acquired American Motors in 1987, the company said it would require binding arbitration in its Jeep-Eagle franchise agreements. Chrysler backed off a year later after dealers objected.
Although automakers now are barred from mandating arbitration in new franchise agreements, they increasingly have come to rely on supplemental contracts to govern their relations with individual dealers. Such side agreements are especially likely when dealers have multiple franchises or get financial aid from the factory.
Some of the new supplemental contracts mandate binding arbitration. Those agreements generally have survived court challenges. In one case, however, a federal court ruled that the ban on binding arbitration applied to a GM side agreement.
The overall ban on mandatory arbitration in franchise agreements has not been tested in court. But the issue likely isn't dead.
You may e-mail Donna Harris at dharris@crain.com
