Truck Dealers: The Forgotten Child – Why Encroachment Protection Is Not a One-Size-Fits-All

Franchise laws, indeed, the entire automotive industry, are focused primarily on the passenger motor vehicle market – and nowhere is this more obvious than in the area of encroachment protection. The commercial truck industry, particularly truck dealers, receive little attention or special consideration. State franchise statutes are clearly focused on the protection of “car” dealers. When one reads through the automotive media (e.g., Automotive News), they will find little regarding the retail truck business. The truck dealer has truly become the forgotten child in our industry.

The simple reality is that the truck industry is not synonymous with its “car” counterpart. To be sure, there is much overlap. However, there are peculiar aspects of the retail truck business that deserve special legal protection.

Encroachment protection is one of these critical areas for truck dealers. This area of law endeavors to protect an existing franchise from a franchisor’s attempt to establish an additional franchisee of the same line-make (e.g., Mack Trucks), or to allow another franchisee of that line-make to relocate to a location that can possibly injure its operations and investment. This becomes particularly important for a truck dealer that has spent years developing a market, building a customer base (both sales and service) and expending millions of dollars on dealership property and facilities. For a truck manufacturer to place another, competitive dealer near the pre-existing dealer would be clearly unjust. State encroachment statues are intended to prevent this. Unfortunately, for the most part, these fall far short in the truck arena.

State franchise statutes are clearly and primarily focused on the car dealer. In this regard, the geographical protective area they establish does little or nothing to protect a truck dealer’s substantial investment in their franchise and market. Clearly, these statutes have only the car dealer in mind.

Indeed, the protected area in most of these statutes is far too small to provide any real protection for the trust dealer. For example:

  • California: 10 miles
  • Michigan: 9 miles or 15 miles (depending on population)
  • New Jersey: 8 miles or 14 miles (depending on circumstances)
  • New York: 6 miles or 10 miles (depending on population)
  • Ohio: 10 miles
  • Texas: 15 miles

Needless to say, a truck dealer’s market vastly exceeds those designed for the retail car dealer.

In most states, a protected area of 50 miles would be more appropriate. For example, there are currently 12 Freightliner dealers in Ohio. The average distance between them is more than 60 miles. Yet, the area of encroachment protection is only 10 miles. For the Ohio truck dealer, the encroachment statute is essentially useless. To work effectively, these statutes must establish an appropriate radius based upon the nature of the franchised dealer’s operations. A truck dealer’s radius must be designed specifically for a truck dealer’s market — not a general radius that does nothing to protect the dealer. The same should apply to other dealers, such as motorcycle and ATV dealers.

Unfortunately, there are only a limited number of states that provide special encroachment protection for the truck dealer. For example:

  • Oregon (trucks of 8,500 lbs. or more): Greater of 25 miles or area of responsibility.
  • Pennsylvania: (medium duty or heavy trucks): Greater of relevant market area (5, 10 or 20 miles, depending on population and circumstances) or area of responsibility (applies only to service facilities).
  • Virginia (trucks of 26,000 lbs. or more): 25 miles or 50 miles (depending on population)

The need for encroachment protection for truck dealers is acutely important for another reason. Dealership development and networking in the truck space, as it has evolved, is vastly different from the car industry. In the car segment, franchisors place restrictions on the number of like-kind franchises a dealer may own and operate in a particular market. The car manufacturers also frown upon adjacent locations. The trend in the truck business in recent years is to promote and foster scenarios in which a single dealership group monopolizes a single market – if not an entire region. The truck manufacturers go to great lengths and costs to achieve this result. These include a program of rejecting qualified dealership buyers (perhaps, upon legally suspect grounds) or exercising their right of first approval under the dealer agreement to eliminate the contract buyer and assigning the deal to one of their favored dealers, especially for that particular market or region.

This type of networking makes encroachment protection in the retail truck space that much more important and that much more unique. For the truck dealer that is not in the manufacturer’s “inner circle,” protection against a conglomerate retail group coming into its market and dangerously too close to its pre-existing operations is critical. No dealer wants the “gorilla in the market” to be next door.

Conversely, the large retail group that has the privilege of the new acquisition or relocation opportunity deserves protection as well. These deals involve an enormous investment of “blue sky,” land acquisition costs, facility costs and working capital. For this investment to be impaired by the establishment or relocation of a competitive dealership into that market is also inequitable.

As the old saying goes, one size does not fit all, and motorcycle and ATV dealers face many of these same inequities. Franchise laws that purport to protect the dealers with the notion that the geographic protection for a Chevrolet franchise will not provide the same protection for a Peterbilt dealer (or a Harley dealer). That’s simply an illusion. These laws must be reexamined by state legislatures and state dealer associations to develop a flexible and realistic format that will provide all dealers of varied product lines with equal protection.

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Read More: Truck Dealers: The Forgotten Child – Why Encroachment Protection Is Not a One-Size-Fits-All

2023-12-08 18:44:38

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