Dealers Should Review Changes to the Territory Assigned by Manufacturers to Determine Whether They Should Take Legal Action
Paul R. Norman | 07.05.22
Manufacturers have received updated census tract information from the 2020 Census. As a result, the territories being assigned to dealers (which, depending on the manufacturer, are referred to as Primary Market Areas, Areas of Primary Responsibility, Dealer or Sales Localities, etc.) are being updated. Changes in your assigned territory can have material consequences. A reduction in your assigned territory may affect your right to protest the establishment or relocation of another same brand dealer at a location competitively harmful to you. An expansion of your assigned territory may significantly increase the number of expected sales that you must make to be regarded as sales effective by the manufacturer and affect your eligibility to acquire other dealerships, receive incentives, and even subject you to termination threats.
Dealers Should Determine Whether Changes to Assigned Territory Are Harmful
Changes to assigned territory based solely on census tract changes resulting from the 2020 Census normally will be minimal and have little impact on your dealership. However, some manufacturers may, while making census-driven adjustments, take the opportunity to adjust territory boundaries for other reasons. Therefore, when you receive a letter or other communication from your manufacturer notifying you that your assigned territory is being changed, you should examine the changes closely and determine what territory is being added and what territory is being taken away from you. Is the territory being taken away one in which the manufacturer might someday seek to establish or relocate another dealer that would be harmful to your dealership? If so, you may want to contest the change to avoid losing your right to protest another dealership being established or relocated to that area. Under many manufacturer policies, you also may no longer be allowed to display vehicles or hold promotional events in the “lost” territory.
On the other hand, if the territory being added contains a significant number of residents who buy new vehicles, the addition will increase the number of competitive registrations in your assigned territory and increase the number of new vehicles your manufacturer will expect you to sell. If this is a material concern, there are consulting firms that can conduct an analysis to determine how the assigned territory change will affect your expected sales and sales effectiveness ratings.
Dealers May Challenge Inappropriate Changes to Assigned Territory
If you believe that a change in your assigned territory will have detrimental effect to your dealership, you may be able to persuade or force the manufacturer not to make the change. However, you need to be able to make a case for why the change is not appropriate. Most manufacturers assign territory to dealerships based on accessibility and proximity by drive distance from the geographical centroid of the census tract to the dealership. The dealer closest to that centroid will be responsible for selling 100% of the expected brand registrations in that census tract, regardless of whether there are other same brand dealers who are almost as close to it. Accessibility cannot always be measured by drive distance. For example, in metro areas, drive time will often have a bigger impact than drive distance on where a customer chooses to shop. Natural barriers like rivers, lakes, and mountains can affect which dealership is perceived by a customer as the most convenient. Some census tracts have populations with work-related or other reasons to shop in areas closer to another dealer than the dealer closest to that census tract. Before approaching a manufacturer to contest a proposed change in your assigned territory, you should develop compelling arguments as to why the change is not appropriate based on the particular circumstances of your location and the surrounding market.
If the manufacturer insists on going through with the change and you are a Wisconsin dealer, you have the right to protest the change by filing a complaint with the state agency that hears protests of contract modifications within 60 days of when you are notified in writing of the change. At the same time you file the protest, you must demand mediation and any proceedings on the protest are stayed until that mediation is conducted, giving you and the manufacturer a chance to work on a solution. You may also demand mediation prior to filing the protest, in which case the 60 day period to file a complaint will be stayed until the mediation is completed. Other states have similar laws that might also give you the right to protest a detrimental territory change.
To prevail on a protest in Wisconsin, you will need to be able to show that the change in your assigned territory will have a material adverse effect on your dealership’s rights or investment. The burden will then shift to the manufacturer to prove that it has good cause for making the change. Litigating a protest of an assigned territory change will be costly, and, even if you prevail, you will be unable to recover your costs from the manufacturer if the agency hearing the protest finds that the manufacturer’s position was substantially justified. Therefore, you will probably only want to go through with a protest where the change will cause harm to your dealership that is both certain and substantial.
If you don’t successfully protest a territory change, you won’t be able to claim the right later on to protest new dealerships in the area that is no longer part of your territory. On the other hand, if the territory change results in the manufacturer establishing an unreasonably high sales expectation for your dealership (because portions of your assigned territory are more convenient to other same brand dealers), you can still argue that that expectation is an unfair performance standard that violates another statute in Wisconsin. Other states have similar statutes.
In summary, when a dealer is notified of a change in its assigned territory, they should look at the change closely. If it appears that the change may have a significant effect on its dealership, the dealer should contact an attorney who can help them decide the best strategy for dealing with the proposed change.
The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.