84TH CONGRESS 2d Session } HOUSE OF REPRESENTATIVES REPORT No. 2850 AUTOMOBILE DEALER FRANCHISES JULY 20, 1956.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. ROGERS of Colorado, from the Committee on the Judiciary, submitted the following REPORT [To accompany S. 3879] The Committee on the Judiciary, to whom was referred the bill (S. 3879) to supplement the antitrust laws of the United States, in order to balance the power now heavily weighted in favor of automobile manufacturers, by enabling franchise automobile dealers to bring suit in the district courts of the United States to recover compensatory damages sustained by reason of the failure of automobile manufacturers to act in good faith in complying with the terms of franchises or in terminating or not renewing franchises with their dealers, having considered the same, report favorably thereon with amendments and recommend that the bill do pass. The amendments are as follows: 1. Strike all of the language following the enacting clause and insert in lieu thereof the following: SECTION. 1. As used in this Act (a) The term "automobile manufacturer" shall mean any person, partnership, corporation, association, or other form of business enterprise engaged in the manufacturing or assembling of passenger cars, trucks, or station wagons, including any person, partnership, or corporation which acts for and is under the control of such manufacturer or assembler in connection with the distribution of said automotive vehicles. (b) The term "franchise" shall mean the written agreement or contract between any automobile manufacturer engaged in commerce and any automobile dealer which purports to fix the legal rights and liabilities of the parties to such agreement or contract. (c) The term "automobile dealer" shall mean any person, partnership, corporation, association, or other form of business enterprise resident in the United States or in any Territory thereof or in the District of Columbia operating under the terms of a franchise and engaged in the sale or distribution of passenger cars, trucks, or station wagons. (d) The term "commerce" shall mean commerce among the several States of the United States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or among the Territories or between any Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation. (e) The term "good faith" shall mean the duty of each party to any franchise, and all officers, employees, or agents thereof to act in a fair and equitable manner toward each other so as to guarantee the one party freedom from coercion, intimidation, or threats of coercion or intimidation from the other party: Provided, That recommendation, endorsement, exposition, persuasion, urging, or argument shall not be deemed to constitute a lack of good faith. SEC. 2. An automobile dealer may bring suit against any automobile manufacturer engaged in commerce, in any district court of the United States in the district in which said manufacturer resides, or is found, or has an agent, without respect to the amount in controversy, and shall recover the damages by him sustained and the cost of suit by reason of the failure of said automobile manufacturer from and after the passage of this Act to act in good faith in performing or complying with any of the terms or provisions of the franchise, or in terminating, canceling, or not renewing the franchise with said dealer: Provided, That in any such suit the manufacturer shall not be barred from asserting in defense of any such action the failure of the dealer to act in good faith. SEC. 3. Any action brought pursuant to this Act shall be forever barred unless commenced within three years after the cause of action shall have accrued. SEC. 4. No provision of this Act shall repeal, modify, or supersede, directly or indirectly, any provision of the antitrust laws of the United States. SEC. 5. This Act shall not invalidate any provision of the laws of any State except insofar as there is a direct conflict between an express provision of this Act and an express provision of State law which cannot be reconciled. 2. Amend the title so as to read: A bill to supplement the antitrust laws of the United States, in order to balance the power now heavily weighted in favor of automobile manufacturers, by enabling franchise automobile dealers to bring suit in the district courts of the United States to recover damages sustained by reason of the failure of automobile manufacturers to act in good faith in complying with the terms of franchises or in terminating or not renewing franchises with their dealers. PURPOSE OF THE BILL AS AMENDED The purpose of the bill as amended by the committee is to supplement the antitrust laws of the United States so as to permit a franchised automobile dealer to bring suit for damages, without regard to the amount in controversy, in United States district courts for the failure of the automobile manufacturer to act in good faith in performing or complying with any of the terms or provisions of the franchise, or in terminating, canceling, or not renewing the dealer's franchise. The bill creates a cause of action where none previously existed in that, irrespective of contractual provisions, it grants a right of review in the Federal courts of disputes between automobile manufacturers and their dealers involving the good faith of the manufacturer in complying with, in terminating, or in not renewing the franchises. In addition to the provisions of the written agreements or contracts between automobile manufacturers and dealers, the bill in its definition of good faith imposes the duty on each party to act in a fair and equitable manner toward each other so as to guarantee the one party freedom from coercion, intimidation, or threats of coercion or intimidation from the other party. Unless the transactions between the parties involve coercion or intimidation, or threats of coercion or intimidation, the duty of good faith imposed by the bill does not prohibit recommendation, endorsement, exposition, persuasion, urging or argument normal in competitive commercial relationships. REASONS FOR BILL Concentration of economic power in the automobile manufacturing industry of the United States has developed to the point where legislation is required to remedy the manifest disparity in the ability of franchised dealers of automotive vehicles to bargain with their manufacturers. Investigations of the automobile industry, moreover, demonstrate a continuing trend toward greater concentration, as well as abuse by the manufacturers of their dominant position with respect to their dealers. These investigations have disclosed practices and conditions which require new legislative methods and a change in established concepts. The bill as amended proceeds from the conclusion that in the automobile industry concentration of economic power has increased to the degree that traditional contractual concepts are no longer adequate to protect the automobile dealers under their franchises. Since World War II, production in the automobile industry has been increasingly concentrated among the three major producers: General Motors Corp., Ford Motor Co., and the Chrysler Corp. In 1946, General Motors produced 46 percent of all passenger cars; by 1954 its share of the market had increased to 52 percent, with Ford producing 31 percent and Chrysler 13 percent. In 1954 the remaining 3 independent automobile producers accounted for only 4 percent of all passenger cars produced. Furthermore, the Department of Justice advised the committee that— figures thus far for 1956 suggest that General Motors now What is more, competition to the three major automobile producers from independents has failed to materialize in the postwar period; in fact, it has become more remote. General Motors Corp., with assets of $6,344,772,000, sales amounting to $12,443,277,000, and net profits of $1,189,477,000, in 1955, was the largest corporation in the United States. The second largest automobile producer in the United States, Ford Motor Co., in 1955 ranked third among American industrial corporations. In 1955, Ford Motor Co. had assets of $2,585,337,000, sales amounting to $5,594,022,000, and net profits of $436,991,000. Chrysler Corp., the third ranking member of the automobile industry in 1955, ranked fifth among United States industrial organizations and had assets of $1,362,883,000, sales in the amount of $3,466,222,000, and net profits of $100,063,000. Although automobile dealers are substantial businessmen in their local communities, in comparison with the automobile manufacturer, an individual dealer is a small-business man whose size makes it impossible for him to bargain effectively. In contrast with the economic power of each of the automobile manufacturers, the average dealer has an investment in the amount of $118,000. There are approximately 40,000 franchised automobile dealers in the United States. Roughly one-half, or 20,000, of these dealers have contracts with General Motors, while 9,000 are franchised by Ford Motor Co. While the individual automobile dealer may be classified as a smallbusiness man, collectively the automobile-dealer group is of great importance to the economy. Franchised automobile dealers have a total investment in their businesses in the amount of more than $5 billion and employ approximately 668,000 persons. Extensive testimony was adduced by the committee at the hearings on this bill with respect to both the contractual relationship between automobile manufacturers and their dealers, and marketing practices current in the automobile industry. Distributive conditions condemned by the Federal Trade Commission in its report on the motorvehicle industry, issued in 1939, have continued up to the present time, according to investigations made by the Subcommittee on Automobile Marketing Practices of the Senate Committee on Interstate and Foreign Commerce and by the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary. In 1939, the Federal Trade Commission after an extensive investigation of automobile marketing practices stated: The Commission finds that motor-vehicle manufacturers, and, by reason of their great power, especially General Motors Corp., Chrysler Corp., and Ford Motor Co., have been, and still are, imposing on their respective dealers unfair and inequitable conditions of trade, by requiring such dealers to accept, and operate under, agreements that inadequately define the rights and obligations of the parties and are, moreover, objectionable in respect to defect of mutuality; that some dealers, in fact, report they have been subjected to rigid inspections of premises and accounts, and to arbitrary requirements by their respective motor-vehicle manufacturers to accept for resale quantities of motor vehicles or other goods, deemed excessive by the dealer, or to make investments in operating plants or equipment without adequate guaranty as to term of agreement or even supply of merchandise; and that adequate provisions are not included for an equitable method of liquidation of such investments, sometimes made at the insistence of the respective motorvehicle manufacturer.1 In connection with its study of the General Motors Corp., the staff of the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary reported on automobile distribution systems as follows: The franchise system for distribution of automobiles has been described as a system devised by the automobile manufacturers to secure maximum rights with a minimum of liability It may be defined as an agreement by which the manufacturer appoints the dealer to handle his line, and the dealer, in return for this privilege, agrees to conduct his business according to the standards and desires of the manufacturer. It is the method by which the manufacturer assures himself of control over the distribution of his product in what amounts to quasi-integration to the retail level of distribution. The manufacturer can maintain this control because of his superior economic position which he retains by threat of franchise termination. In various suits in the past, General Motors has characterized its dealer franchise as follows: 1H. Doc. 468, 76th Cong, 1st sess., Report on Motor Vehicle Industry, p. 1075. 1. That it does not constitute a legal contract; 2. That it lacks mutuality, and represents no legally enforceable obligation on the part of the seller to sell or on the part of the dealer to buy; 3. That it provides that the dealer shall perform to the satisfaction of the seller, and that the question of satisfaction is for the seller alone to determine; 4. That no damages are recoverable by the dealer since loss of profits was not contemplated by the parties; 5. That it is unenforceable and void because of indefiniteness, uncertainty, and lack of consideration; 6. That, if valid, the agreement gives the factory the right to terminate at will. With few exceptions, the courts have sustained the manufacturer's interpretation of the agreement, and the courts have held that dealers fail to state a cause of action when suit is brought on the agreement alone." The hearings of the investigations conducted during this Congress in the Senate contain numerous instances of automobile manufacturers coercing and intimidating their franchised dealers. A primary source of the manufacturers power over their dealers stems from the unilateral nature of the franchise agreements. Automobile dealers who have been subjected to economic duress and intimidation by manufacturers have been unable to obtain redress in the courts. Confronted with express provisions in the dealer's franchise, courts have been reluctant to impose a condition of good faith on the part of the manufacturer. In Bushwick-Decatur Motors, Inc., v. Ford Motor Co. (116 F. 2d 675, C. A. 2, (1940)), the court stated: With a power of termination at will here so unmistakably expressed, we certainly cannot assert that a limitation of good faith was anything the parties had in mind. Such a limitation can be read into the agreement only as an overriding requirement of public policy. In Buggs v. Ford Motor Co. (113 F. 2d 618, C. A. 7, (1940)), the court stated: An examination of its terms, which are many, indicates that it was dictated by the manufacturer at Detroit, and drawn by its counsel with the avowed purpose of protecting the manufacturer to the utmost and granting, if any, few rights to, and the smallest possible protection of, the agent. It is one which affords some support for the wisdom and the necessity of legislation which protects the weak against a strong party in situations like the instant one. In adjudicating disputes between manufacturers and dealers, application of contract law concepts by the courts has prevented relief to the dealer. In Ford Motor Co. v. Kirkmyer Motor Co. (65 F. 2d 1001, C. A. 4, (1933)), the court stated: While there is a natural impulse to be impatient with a form of contract which places the comparatively helpless 28. Rept. No. 1879, 84th Cong., 2d sess., Bigness and Concentration of Economic Power-A Case Study of General Motors Corp., p. 79. |