Alteration of a Dealer’s Market Area (“Community”)

New motor vehicle dealers in Iowa periodically receive notices from manufacturers telling the dealer that the manufacturer has decided to alter the dealer’s protected sales area. Different manufacturers refer to this area by different names. For example, Ford Motor Company calls it the “Sales Locality”, General Motors LLC calls it the “Area of Primary Responsibility”, and Fiat Chrysler Automobiles LLC calls it the “Sales Area Responsibility”. Iowa law refers to a dealer’s protected sales area as the dealer’s “community”. See Iowa Code § 322A.1(2).

Despite the language manufacturers generally include in such notices, changes to a dealer’s protected sales area (“community”) is not a fait accompli. Dealers generally have rights under the franchise agreements and state law with respect to their communities. Most franchise agreements contain policies and procedures that enable a dealer to challenge an alteration to its community. These policies and procedures usually give the manufacturer the right to use its own business judgement in evaluating and changing its dealership network and lend little actual protection to the dealer. In many cases the dealer must ask the same manufacturer personnel to review and reverse their own prior decision to alter the dealer’s community.

Notwithstanding the terms of the franchise agreement, Iowa law specifically (1) requires a manufacturer to show good cause before reducing the geographic area of a dealer’s community, see Iowa Code § 322A.1(11) and (2) provides dealers with the additional right to challenge proposed alterations to their communities, see Iowa Code § 322A.3A.

Whether to invoke these rights depends upon whether the dealer believes that the change in its community will benefit or harm the dealer’s interests. For example, a change may reduce the dealership’s sale targets under various manufacturer programs, making it easier to qualify for benefits from the manufacturer. Conversely, a change may remove an important population center or potential future dealership location from the dealer’s community. This may create the opportunity for another same-line-make dealership to relocate closer to the dealership’s location or primary population center, thereby harming the dealership. If a dealer believes the proposed alteration to its community is harmful, it is important the dealer takes quick action to protect its rights under the franchise agreements and Iowa law.

First, if the proposed alteration will reduce the geographic area of the Iowa dealer’s community, Iowa law protects the dealer from the alteration to the same extent as if the manufacturer had attempted to terminate the dealer’s franchise agreements. In other words, a manufacturer must ask the Iowa Department of Transportation (“IDOT”) for permission before reducing the geographic area of an Iowa dealer’s community. See Iowa Code § 322A.2(1). In determining whether the manufacturer has good cause to reduce the geographic area of the dealer’s community, the IDOT should consider the statutory termination factors, see Iowa Code § 322A.15, as limited to the geographic area removed from the dealer’s community, but shall not consider prohibited factors, see Iowa Code § 322A.11. The manufacturer has the burden to establish in a hearing before the IDOT, subject to the rules of civil procedure, see Iowa Code § 322A.10, that the statutory factors support reducing the dealer’s geographic area, see Iowa Code § 322A.9.

Second, if the proposed alteration will not reduce the geographic area of the Iowa dealer’s community, the dealer still has the right to challenge the proposed alteration. See Iowa Code § 322A.3A. In such a case, the manufacturer must allow the dealer to object to the proposed alteration prior to the effective date. See Iowa Code § 322A.3A(3). Once the manufacturer provides its final decision, the dealer has only fifteen days to challenge the proposed alteration. See Iowa Code § 322A.3A(4). If the dealer timely objects, the IDOT will send notice to all affected surrounding dealers. See Iowa Code § 322A.7(1).

Therefore, it is essential that an Iowa dealer carefully reviews every proposed alteration to its community as soon as it receives notice from the manufacturer. If you receive a notice from the manufacturer that it will alter your community and you think the alteration may harm your dealership, you should seek legal assistance as quickly as possible in order to preserve your rights. The time to challenge the manufacturer’s actions may be short.

The Cedar Rapids auto dealership lawyers with Arenson Law Group, PC have helped dealerships who have faced harmful changes in their communities protect their rights. If your market area is being tinkered with by your manufacturer, contact our law firm at (319) 363-8199 to learn more about your options.

Note: Wisconsin law refers to a dealer’s protected sales area as the “relevant market area”, which also includes a 10-mile radius around the dealership. See Wisc. Stat. § 218.101(30).