The federal ban on mandatory binding arbitration faces its first legal tests.
In separate federal lawsuits filed in Indiana and Washington state, General Motors has asked the courts to require two dealers suing the automaker over the Oldsmobile phase-out to enter binding arbitration.
The dealers claim protection under the Motor Vehicle Franchise Contract Arbitration Fairness Act. That law bars manufacturers from requiring binding arbitration in new franchise agreements, or franchise agreements that have been altered or extended since the legislation took effect Nov. 2.
"To my knowledge these are the first cases testing whether the federal arbitration law does or does not apply," says Jim Moors, an attorney for the National Automobile Dealers Association, which shepherded the measure through Congress.
The rulings will determine if the federal ban applies when a manufacturer enters a side agreement with a mandatory binding arbitration provision. Some manufacturers enter contracts - in addition to the franchise agreement - when a dealer makes a major change, such as moving or adding a franchise. Some automakers also enter side agreements with large dealership groups that exceed set caps on market share or number of franchises.
The two dealers embroiled in the arbitration controversy, J. Thad Naquin, owner of Tom Naquin Chevrolet Inc., in Elkhart, Ind., and Charles Haselwood, owner of Today Chevrolet Co., of Bremerton, Wash., received financial assistance from GM to acquire other GM dealerships and relocate their operations. To get the funds, they had to sign deals requiring binding arbitration to settle disputes.
The dealers argue that these side agreements are part of the franchise agreements, which are governed by the arbitration ban, and that GM modified its sales and service agreement, causing the ban to kick in. "These side agreements are addenda to the sales and service agreements," says Loula Fuller, a Tallahassee, Fla., lawyer who represents the dealers in each case. "GM can't circumvent the law by saying these are separate agreements."
GM paid Today Chevrolet $250,000 in 2000 to help purchase Hoover Oldsmobile-Cadillac Inc. and relocate to Bremerton. The manufacturer paid Tom Naquin Chevrolet $400,000 in 2000 to help purchase Linvilles' Olds-Cadillac Inc. and relocate to Elkhart.
The dealers separately argue that GM modified its sales and service agreement shortly after the arbitration ban took effect by redrawing their sales territories.
A GM spokes woman declined to comment about either case.
The company's court filings assert that the dealers' arguments ignore past court decisions on arbitration, as well as their franchise agreements.
GM argues that the dealers "cannot use an alleged subsequent modification of the dealer sales and service agreement to trump or negate the provisions of the relocation agreement and exclusive use agreement."