Will the Inventory Shortages Hinder Automakers Future Actions?

By Nicholas A. Bader 

All dealers have heard stories of automakers sending notices of default, termination, or those regarding add-points. When such issues are litigated, the motor vehicle franchise laws typically attempt to balance the equities of the situation against the grounds asserted by the automaker. That balance  involves some consideration of the market circumstances in which the dealer has been operating. Since March 2020, when the world seemed to come to a screeching halt due to the COVID-19 pandemic, the circumstances facing most dealers have been dynamic and turbulent. In particular, supply chain issues have greatly constrained dealer inventory and the days’ supply of inventory for dealers as a whole has taken a nose dive.   

We believe this factor should greatly impact the automakers’ ability to add dealerships in the near future. Typically, in order to add a protested dealership, the automaker must prove there is a deficiency in the existing dealer network and that sales are being missed. Dealers who protest add points in 2021 and 2022 should be able to credibly assert that any deficiency in their market is caused by or exacerbated by product shortages.   

Similar issues exist in the context of a proposed termination. In order to prevail in a protested termination, the automakers have to show they are acting reasonably and any performance measurements account for local market circumstances. One does not have to strain to conceive arguments that an extreme shortage of product creates an environment in which it would be unreasonable to terminate a dealership for deficient sales. A dealer cannot sell what he or she does not have in inventory. Additionally, we expect arguments will be made in such cases that the measurements used to calculate sales performance fail to adequately account for deficient inventory levels.  

In essence, the unusual dynamics of the past year and half should greatly impair an automaker’s ability to prove the deficient performance of dealers or markets in the near-term. We expect this issue to find its way into litigation to the benefit of dealers who choose to assert their rights and file protests during that time period. In the interim, it is critically important for dealers to maintain written records of their vehicle inventory struggles to include repeated requests to the manufacturer for additional product.