State Franchise Laws

Today I’m fielding last-minute questions from students about the exam, so I’ll be brief. On Monday, GM proposed its 438th restructuring plan. One sticking point is that GM has far too many dealerships given its future production (brands are being eliminated) and as compared to its competitors. The problem with cutting those excess dealerships, though, is that state franchise statutes make it very difficult for firms to close some dealerships rather than others within a state and gives dealers a cause of action for damages if they are closed wrongfully.

My question is this: Are these laws vulnerable to a Dormant Commerce Clause challenge? It seems like a plausible argument can be made that they place a substantial burden on interstate commerce, but I am unaware of any case law on the issue. I’d be interested to hear your thoughts.

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4 Responses

  1. BDG says:

    So, the theory would be…what? That manufacturers have to sell in states on a whole-state, take-it-or-leave-it basis, and so this serves as some kind of capital lock-in? And that lock-in results in inefficient allocation of national capital?

    That’s a tough one. Presumably, an in-state manufacturer would face the same limits. Also, I can think of a lot of regulation that, at a guess, the Supreme Court would never want to throw into question that would look pretty similar. Take California regulation of auto safety standards. That’s an extra cost of gaining access to the California market, much like the lock-in cost of gaining access to the best dealerships in a state.

  2. AAP says:

    Will not ever get to the dormant commerce clause. I thought these laws (and the cause of action they give dealers) were the primary reason that a “quick” bankruptcy was being contemplated. i.e. the bankruptcy code is built to dispose of en masse the thousands(?)of potential dealer claims by having the debtor reject the executory dealer contracts and end up with an unsecured claim for their damages. My question is whether they will be able to muster enough strength in numbers to have a voice in the plan of reorganization.

    Most of the state laws impose a good faith negotiation requirement and most of the complaints were about manufacturer unfair or discriminatory practices e.g. forcing inventory, or poor selling models on dealers or favoritism to some competing dealer, etc.; that the factory is why we failed and I want a jury trial under the state act. Bankruptcy keeps you from having to sort out all of these (thousands?)different factual claims or at least it forces them into a pattern and they are disposed of en masse and GM moves on with fewer dealers in the big cities and the same number in their more rural locations.

  3. Merlund Atturnee says:

    I don’t think these types of laws typically violate the dormant Commerce Clause. The Fourth Circuit has dealt with this issue extensively. See Yamaha Motor Corp. v. Jim’s Motorcycle, Inc., 401 F.3d 560(4th Cir. 2005). The statute in Yamaha was held to be unconstitutional because it was overbroad and served no real purpose. States are generally allowed to regulate their local market as they see fit. The Supreme Court has rejected the notion that the Commerce Clause protects the particular structure or methods of operation in a . . . market. Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 127 (1978).

  4. Tom Page says:

    Can you answer this question about pricing in a franchise.
    Can the Franchiser dictate a pricing policy on the franchises in a given area.

    Thanks
    Tom