least of which is the possibility that the business by inheritance or sale may fall into hands of disinterested or incompetent individuals. A manufacturer who has committed itself not to appoint another dealer in such an area (not unusual in many industries) will fast find his market dwindling when faced with such a situation. The only alternatives to retention of such a dealer are payment of an unreasonable penalty or protracted and expensive litigation. BILLS FAIL TO DISTINGUISH AMONG THE MANY KINDS OF FRANCHISE RELATIONSHIPS What has been said of the capital goods marketing system may not necessarily be true of all franchise relationships. In some situations there may be some justification for the proposed legislation. This, however, is one of the defects in the Bills-they treat alike the great variety of franchise systems (estimated by one Bill to involve 400,000 franchisees) including many that have nothing to sell but a trade name or a so-called system of doing business. DISCRIMINATES IN FAVOR OF FRANCHISEES These Bills single out franchisees for insulation against termination of their employment and from loss of profits arising out of any such termination. To our knowledge this protection has not been extended to any other group and we know of no reason why franchisees should be singled out for such favors. On the same theory manufacturers should be protected from going out of business because of lack of demand for its product; perhaps because its distribution system failed. Should the public be obliged to pay for his buildings, his equipment, his unsaleable inventory and his "good will"? We would oppose any such treatment, whether it be for manufacturers or distributors and we also suggest that most franchisees really do not want this kind of protection either. SPECIAL PROBLEMS OF S. 2507 S. 2507 creates many special problems. One in particular is that it fails to take into account a situation where by necessity the manufacturer is forced to operate retail branches in certain areas. It also loses sight of the fact that many customers operate on a nation-wide basis. Each time a retail branch sells to a nationwide organization, which is also a customer of one of our distributors, we would be exposed to a potential liability under this Bill. BILLS ENCROACH ON FREEDOM OF CONTRACT Finally, and to us perhaps the most important, these Bills represent yet another encroachment upon the freedom of contract. The justification advanced for such encroachment is that the Bills will preserve and protect certain "small business" by equalizing the present disparity in the power to bargain. Again, both of these factors may be true in some fields, but we believe they have no meaning or merit in our field. Most significantly the Bills will limit the ability of small non-integrated manufacturer with limited financing to compete with integrated manufacturer-distributor. These are also small businesses and we believe they are at least as important to our free competitive system as the small franchisee. It is also true that when there are a number of competing products available to the distributors, as in our industry, the bargaining power is often greater in the hands of the distributor. While we naturally believe our product to be the best available, we also recognize that in each locality or distribution area, the local distributor plays a key factor in determining how much of the market we obtain. This is self-evident from the way our market share varies from area to area. In this situation it frequently is the distributor who has the choice, not the manufacturer. The distributor that properly performs his function rarely has difficulty in finding a product line; it is the manufacturer that must search for adequate representation. ADVERSE EFFECT ON OVERSEAS MARKETING Hyster sells its products in the world-wide market greatly to the benefit of the United States balance of trade. In many foreign countries it must rely heavily upon the local distributor and here again the balance of power is usually in the hands of the local distributor. In most countries we are faced with a variety of laws which restrict our right to contract with the dealer. In some, the laws go as far as the proposed legislation but in most the laws merely require some reasonable period to effect the termination. These latter kinds of law we can live with, although they are usually a "one-way street"-the dealer seldom bothering to give us notice if it decides to take on another manufacturer. The enactment of the proposed legislation by the United States will be an incentive for similar legislation in the foreign countries. Obviously such laws would put U.S. manufacturers under the domination of their foreign dealers who more than every would be able to control the market for our products in such countries. Respectfully submitted. WILLIAM H. KILKENNY. JANUARY 3, 1968. Mr. WILLIAM H. KILKENNY, Executive Vice President, Hyster Co., DEAR MR. KILKENNY: Thank you very much for your letter of December 7 and the accompanying memorandum, in which you register your company's opposition to S. 2321 and S. 2507, the Hart and Eastland bills on franchise protection. While I have not had an opportunity to follow the matter as closely as I should have liked, I know that Senator Hart's bill (S. 2321) was introduced in response to a need that seemed to him to have been well developed during a lengthy series of hearings on franchise distribution before his subcommittee during the 89th Congress. I also know, however, that he is well aware of the complexity of the subject and the pitfalls that exist in any attempts to legislate a “better” relationship between franchisors and franchisees. The Eastland bill (S. 2507), as you probably know, was drafted by the National Automobile Dealers Association and introduced by Senator Eastland at the request of that association. It is my impression that there is general recognition within the Judiciary Committee and the Judiciary Subcommittee on Antitrust and Monopoly that a bill written by automobile dealers, with their own industry in mind, may not be applicable to all of the hundreds of other industries in which franchising plays an important part. I have myself shared the view that franchisees may need some measure of additional legislative protection, for certainly many of them have been treated quite shabbily by their franchisors in instances of abrupt termination without reference to performance. But my mind is completely open on the nature of the relief that should be provided; in fact, I appreciate that it may ultimately be determined by the Congress that this is not a subject on which it is possible to write any further legislation without doing more harm than good. Nevertheless, the demand for such legislation, and the political "muscle" behind that demand, are powerful, will not disappear, and must be reckoned with. While I think it is unlikely that either S. 2321 or S. 2507 will be reported by the Senate Subcommittee on Antitrust and Monopoly and the Senate Judiciary Committee in its present form, I think it is quite likely that some form of "franchise protection" legislation will be reported before the end of the 90th Congress. My respectful suggestion to franchisors, accordingly, is that, instead of taking a purely negative stand of total opposition, they consider alternatives of their own to put forward. I am myself toying with the idea of an approach to the problem patterned after the Securities Act of 1933. Such an approach would be based on the premise that franchisors and franchisees ought to be free to make whatever kind of contract they wish, including whatever kind of termination provisions they wish, but with a recognition that franchisees are entitled, before signing, to the same kind of full and fair disclosure of what they are getting into that prospective purchasers of a new securities issue are now entitled to receive, under the Securities Act. What would your opinion of that idea be, as an alternative to S. 2321 and S. 2507? This letter may seem to you to be a défense, at least in part, of the Hart and Eastland bills; but I hope you will be quite clear that I am not committed to support either of them. All that I am committed to do-and I have made this promise to many franchisees who have contacted me is to seek diligently for a more equitable formula than now exists "to make them whole" when they are terminated for reasons that have nothing to do with inadequacies in their performance. In that search, the Congress, and I personally, will require a great deal of help from franchisors. You have given me valuable assistance of the sort I need and want, with your letter and memorandum. Those documents set forth, clearly and forcefully, the arguments against the two bills presently under discussion. I think that many of your points are well taken. But the question remains: are franchisees sometimes terminated by their franchisors in a way and under circumstances that amount virtually to theft of their established, going businesses, not because they have failed to produce for their franchisor but because they have produced so well that the franchisor wishes to enrich himself unjustly by taking over the business? In my best judgment, the answer to that question is almost certainly yes, and, if it is, a further question presents itself: is additional legislation needed to even up the balance in the scales, which presently favors franchisors? I am sending copies of your letter and is accompanying memorandum to Chairman Hart, together with a copy of this letter, with the request that, if the record of the hearings on the Hart and Eastland bills has not yet been closed, they be inserted in the record. I do this because I think that some of your arguments are so telling that they should be shared with the public through the printed hearings on the bills. If for any reason you do not want your letter and memorandum to be in the public printed record, please let me know promptly and I shall so inform Senator Hart. Again, my thanks for your creative and thought-provoking contribution to the dialogue on the franchisor-franchisee relationship and the quest for legislation to improve that relationship. With kindest regards, Sincerely, WAYNE MORSE. ADDITIONAL STATEMENTS Hon. PHILIP HART, AUTOMOBILE DEALERS METROPOLITAN INDEPENDENT DODGE-CHRYSLER GENTLEMEN: We of the Metropolitan Independent Dodge-Chrysler Dealer Association Inc. welcome the opportunity of entering upon the record of your Committee the following facts and opinions on proposed legislation S2321 and S2507. It is regretable that we were unable to appear in person during your hearings. However, we will appear anytime, anywhere, at the request of your Committee, Counsel, or any individual member, to answer any questions that may arise from the material we are about to present. Very briefly allow us to explain what the MIDCDA is and the purpose of its formation. It is an organization of privately capitalized Chrysler Corporation Dealers whose cash investments are in no way connected with the manufacturer. That is to say that its' monies are provided by the Franchisee and not the Franchiser. There are those Franchises, which are wholly owned branches of the manufacturer, and others that begin with large cash investment by the manufacturer and much less substantial investment on the part of the so-called "operator." The dealers in our group felt the heavy hand of our supplier taking substantial portions of our retail market, lessening and endangering our investments. By underwriting loses in these retail dealerships, the manufacturer was able to eliminate dealers it desired without actually resorting to termination. We realize that this fact will be denied, as well it has been before this Committee, by saying check our Dealer Development, or Dealer Enterprise or Motor Holding and you will find these operations showing as fine a profit as our most successfully fully independent dealers. By underwriting the large loses brought about in the initial and formulative stages of these special franchises the manufacturer is able to transfer large segments of the retail market from one operator to another. In many instances initial operators fail even with the special advantages and after these poor sheep lose their entire investment and even a small or large portion of the Franchiser's investment. A fresh operator is then brought in and the Franchise is recapitalized. Dealer Enterprise, Chrysler Corporation, in fact started a unique practice of Escrow deals. In this type of set up the appointee need only put cash in escrow as proof of his interest and intent and the entire investment was put up by the manufacturer. This would allow the manufacturer to find people who weren't firmly convinced that the franchise was a good deal but assure them many benefits in the way of salary, cars for themselves and their families, expense accounts that they did not have in their present employment. Everything to gain, nothing to lose. No, nothing to lose for anybody but the surrounding Independent dealers who was having his retail market siphoned away. This type of deal was essentially the initial rallying point that formed our organization. We did manage to stop this and Chrysler Corporation chose the NADA Convention in Las Vegas to announce its decision on the basis of a request of NADA to stop this Sub Rosa take over of the retail business. Since we started this protest at a meeting with Byron Nichols, then General Manager of the Dodge Division and our Executive Committee, Chrysler chose this method of announcement as a means of neutralizing our effect and in an effort of eliminating our further growth. The auto manufacturer has stated that our industry is unique and in this he finds our solid agreement. The largest consumer industry in the United States is controlled by three Corporations. Over 97% of all domestic cars are sold by these three giants and any threat to their welfare seems to bring about in our present economic society the fear that an economic recession would start. In fact, if our memory serves us correctly, the head of the Ford Motor Company made statements to this effect sometime around the Auto Safety hearing, when car manufacturers were asking to be allowed to make their own correction in this area. One manufacturer, General Motors by name, controls between 52 to 54% of the domestic automotive market. In any other industry the Justice Department might move to break up this effective monopoly. But it has been prone to go easy, we believe, less they hurt the National economy. As a result the other two vie for between 43 to 45%, a very profitable portion of the business on which they can very well survive. General Motors is not forced to act, only react. As an example, Chrysler Corporation was the first to move into the factory branch operation or Broadway Manhattan. They were then followed by the Ford Motor Company. At least GM reacted and they too are now represented on Broadway. They can point to the fact they didn't start this and only stepped in after the other two made their independent operator, Don Allen Chevrolet and Pontiac, an unprofitable enterprise. From this type of cancer others will grow. Our manufacturer, as well as the other manufacturers, have stated we do not need remedial legislation to protect the franchise holder. Nothing could be further from the truth. It is impossible for the franchise holder to stand head erect and negotiate with these Giants. The immediate past ExecutiveDirector of NADA, Mr. James Moore, stated to me personally and to a meeting of the Greater New York, Long Island, Westchester Dealers Association "that to negotiate with the manufacturer was an exercise in frustration." We have found this to be an understatement. Mr. J. J. Riccardo, Chrysler Corporation Group Vice President U.S. and Canadian Automotive, stated before your Committee on October 31, 1967 "Automobile dealers today, in light of the many substantial benefits accorded to them under their selling agreements with automobile companies are in an extremely favorable position. I know of no other industry wherein dealers have so many benefits." Can the benefits he alludes to be the reason we are requesting your legislative intervention? He further stated "most important, I believe, is the fact that this agreement is for an indefinite term and cannot be terminated except for cause." One of these causes is failure to meet "Minimum Sales Responsibility". This sounds fair except when you examine it a little closer. Madsen Motors, Wheaton, Illinois VS. Chrysler Motors Corporation in the United States District Court N. D. Illinois, E. D. Dec. 7, 1966, brought out the use of this clause as a coercive tool to accomplish Chrysler Corporation's own end. In granting a permanent injunction to Madsen the judge found that the method of setting MSR would allow Chrysler Corporation to terminate 50% of all its dealers at anytime. This is possible through the system whereby a mean or average sales penetration is reached in an area and quite simply 50% fall within this average and 50% below. The other factors that enter into consideration are the areas of responsibility of each dealer. For example, I am in Yonkers, N.Y. located at the Southern End of Westchester County. My sphere according to Chrysler Corporation extends to the Boroughs of Brooklyn, Manhattan, Bronx plus most of Westchester County. In arriving at my MRS all these sectors are figured in. There are three Dodge Dealers in the Bronx. Each has another MSR, none equal to the other. Many things must be figured when trying to place a responsibility with such serious consequences. For example, a dealer can be located in the same Borough of the Bronx in a low income area where the purchaser of cars is strictly a Used Car buyer. By the figures available to MIDCDA this is not taken into consideration whatsoever. Chrysler Corporation might rebut my statements by saying they do make allowances for this factor and that is why many of their dealers who fall below MSR are not terminated. To answer this we must go into the many other uses of MSR. From time to time to stimulate lagging sales Chrysler Corporation, and the others, will come up with sales incentives programs which involve large cash incentives. In arriving at the individual quotas for each dealer the figure is based 1⁄2 MSR, % Planning Potential (closely tied in with MSR) % rate of travel of the dealer. Since these programs are based on sliding scale of attainment, that is so much for 26%, so much more for 51% etc. One dealer in close proximity to the other have |