Diligently Responding to OEM Deficiency/Poor Performance Claims

By Micah A. Andrews 

As a regular practice, OEMs commonly calendar and send letters to franchisees summarizing the dealership’s past sales, service, and customer satisfaction performance as well as any asserted issues the OEM has with the dealership’s facility compliance or staff training qualifications. These letters commonly take a positive tone but are careful to memorialize deficiencies the OEM believes exist with the dealership’s operations. While these annual or quarterly letters are often disregarded, a dealer, especially a dealer that the OEM has alleged is underperforming, should make sure to review and institute a practice of responding to the OEM letters.

Some of these letters will include one-sided summaries of prior meetings as well as assertions about where the dealership is underperforming operationally and representations the OEM claims it has made about their willingness to assist the dealership in improving its performance.

Responding to these letters is critical as the OEM letter will regularly be used against a dealership if/when the OEM eventually makes the decision to attempt to find the dealership in default of its franchise agreement, or worse, to terminate that dealer. While statutes exist in every state preventing a manufacturer from terminating a dealer without just cause, OEMs will point to their periodic letters as documented evidence that there were deficiencies with the dealership’s operations that were not resolved and that the OEM gave the franchisee an opportunity to fix the issues. Dealers are then put in the difficult position of having to challenge the assertions made in the past letters well after the fact.

Alternatively, a Dealer who makes a habit of responding to OEM performance summary letters will have a written record of the dealership: (1) disputing the accuracy of the OEMs asserted problems with the dealership’s operations; and (2) highlighting OEM actions that have undermined the ability of the dealership to perform. Response letters are a good time to highlight problems like OEM allocation failures, the OEMs use of inherently unfair performance measurements, improperly assigned sales territories, flawed customer satisfaction review procedures, or the failure of the OEM to consider unique market circumstances affecting a specific dealer.

If the OEM does decide to take action and attempt to terminate this Dealer in the future, the franchisee will be well positioned to fight against the asserted breach of the Dealer Agreement and prove that any alleged performance issues were the result of the OEM’s failures, not the dealership.

For this reason, a dealer should consider instituting a practice of promptly responding to OEM periodic letters, being careful to note what statements they believe are accurate and which statements are not. If an OEM asserts that the dealership needs to make more new vehicle sales but is failing to allocate new motor vehicles in an appropriate mix of models, this should be highlighted. If the OEM later attempts to pursue termination based on an alleged failure to make sufficient new motor vehicle sales, the dealer will be prepared to point to their prior letters to show that sales issues were the result of allocation failures, not a problem with the franchisee. This will equip the dealership to be able to tell the whole story to the Judge, Jury, or Hearing Officer tasked with evaluating whether the dealership has breached its franchise agreement.

Questions about statements or claims made in a periodic performance letter or questions as to how to appropriately respond should be directed to your dealer lawyer.