MANUFACTURER INCENTIVE PROGRAMS: CONCERNS OVER DIMINISHED DEALER INDEPENDENCE & PRICE DISCRIMINATION
Spring 2017- Illinois franchised new car dealers are among the most industrious, hard-working, community-oriented business executives in today’s economy. Franchised dealers are committed to their status as independent businesses. Indeed, in Illinois, under the Motor Vehicle Franchise Act (815 ILCS 710/1 et seq.), with certain, very narrow and limited exceptions, manufacturers and distributors are prohibited directly or indirectly from owning or operating a motor vehicle franchise. However, with the increase over the past several years of manufacturer incentive programs, the dealership’s ability to maintain its operating independence has been diminished.
Many dealers in recent years have experienced reduced margins on new vehicle sales and increasing factory program incentives or payments to supposedly account for the difference. In some cases, dealers rely on these incentives and programs in the quest to be competitive, however, these programs tend to allot to the manufacturers more influence over dealership operations. While, at one time, these programs may have been arguably voluntary in nature, they have gained a lifeblood prominence which some suggest is as integral as the terms of the franchise agreement itself. The net effect for many dealers is that to achieve competitive grosses, they must participate in the incentive programs and thereby realize a diminution of their dealership operational control.
Factory incentive programs have been the subject of state and federal legal challenges. For example, in recent years, there has been an increased prevalence of legal challenges against many of the manufacturers, foreign and domestic alike, under the provisions of the federal Robinson-Patman Act, which amended the Clayton Act enacted in 1936. The Robinson-Patman Act has been criticized by some commentators as having narrow application. Yet, in some cases, dealers have withstood dismissal of their claims due to their meticulous compilation and preservation of evidence in support of their claims and their ability to satisfy the elements necessary to establish a prima facie violation of price discrimination under the federal law. The analysis of these claims is beyond the scope of this article due to space limitations. It is important, however, to note that individual dealers have challenged these programs with varying outcomes and degrees of success.
Under state law, the Illinois Motor Vehicle Franchise Act proscribes price discrimination by prohibiting manufacturers from discriminating in price between dealers. For example, Section 4(e)(2) deems it a violation for a manufacturer, distributor, wholesaler, distributor branch or division, or officer, agent or representative thereof:
“(2) to offer to sell or lease, or to sell or lease, any new motor vehicle to any motor vehicle dealer at a lower actual price therefor than the actual price offered to any other motor vehicle dealer for the same model vehicle similarly equipped or to utilize any device including, but not limited to, sales promotion plans or programs which result in such lesser actual price or fail to make available to any motor vehicle dealer any preferential pricing, incentive, rebate, finance rate, or low interest loan program offered to competing motor vehicle dealers in other contiguous states.”
(815 ILCS 710/4(e)(2)).
Similarly, under Section 4(e)(3), it is a violation for the manufacturer or distributor “to offer to sell or lease, or to sell or lease any new motor vehicle to any person, except a wholesaler, distributor or manufacturer's employees at a lower actual price therefor than the actual price offered and charged to a motor vehicle dealer for the same model vehicle similarly equipped or to utilize any device which results in such lesser actual price.” (815 ILCS 710/4(e)(3)).
Not all manufacturer incentive programs contravene the law. Several programs, however, use the lure of a lower wholesale price for a new vehicle to enforce compliance with operational objectives. The unlawful nature of certain incentive programs has been suggested by some where the program connects the manipulation of gross margins to operational objectives, resulting in a non-participating dealer indirectly paying more for a vehicle purchased from the manufacturer than a dealer who is fully participating in the incentive program.
While the Illinois law discussed above attempts to address unlawful incentive programs, few dealers are willing to risk confrontation and incur the expenses associated with challenging the manufacturer over such programs. Some manufacturer representatives may tell dealers the programs are “voluntary”. They assert that, as such, these programs treat participating dealers non-discriminatorily, notwithstanding the reality of many dealers who cannot earn the full available margin under the incentive program and have to purchase vehicles from the manufacturer, in effect, at a higher price. Dealers should assess their factory incentive programs with an eye towards evaluating, in consultation with their business and legal advisors, whether near-term rewards of participation outweigh possible long-term diminution of dealership operational independence and control.