Two-Tier Pricing Hidden by Incentives

The Program:

Over the last decade, manufacturers have attempted to standardize each customer’s buying experience by requiring consistent brand imaging for dealerships. Thanks to favorable franchise laws in Iowa, manufacturers generally cannot terminate a franchise because a dealer failed to satisfy the latest factory image requirements. But what if the failure to satisfy the image requirements only costs a bonus? This bonus, or “factory-mandated dealership franchise upgrade program,” is an attempt to get around strong franchise laws such as Iowa law.

For example, GM introduced the Essential Brand Elements (“EBE”) program in 2009, shortly after its bankruptcy. This program, “rewards dealers who voluntarily meet customer experience standards.” Currently, nearly every manufacturer has a similar program, and, because of the lucrative bonuses, the programs have a high level of participation. However, some argue that this incentive program is actually a two-tier pricing system that is structured to avoid the Robinson-Patman Act, which offers protections against price discrimination.

The Update:

Meeting the image requirements can be very expensive for dealers. Take Norman Braman of Braman Management in Florida for example. He was informed that in order to meet GM’s brand image requirement, he would need to cover the exterior walls of his showroom with limestone. Unfortunately, his current structure would not support the weight, and due to local zoning and building laws, he would have to demolish his showroom and rebuild in order to comply. Braman suggested that he put in an alternative material that looked like limestone, but GM refused to allow this alteration.

Braman sued in Florida, claiming that the EBE program was a violation of the Robinson Patman Act. This suit was the first of its kind and could have resulted in big changes for incentive programs. However, the parties delayed trial at the end of May and reached a settlement agreement instead.

What does that mean for me?

Since the Braman case settled, there is no court decisions and the uncertainty for Iowa dealers continues. Incentive programs will likely continue until there is another test case.

What can I do?

Keep an eye on the legal news, IADA, and NADA updates. The Arenson Law Group, PC, blog at www.arensonlaw.com/blog is a good place to check for emerging legal developments. If the incentive program is creating a significant financial burden for you or if you have legal questions, contact experienced auto-dealer counsel.