Articles Posted in Franchise Litigation

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The warranty rate has been the same for so long that nobody in the store questions it anymore. The service department books warranty labor at a number the factory set years ago, posts parts at the manufacturer’s cost-plus formula, and moves on to the next repair order. Customer-pay work runs at the dealer’s real retail rate, the one the market actually supports, and warranty work runs at something lower because that is simply how it has always been done. Across a busy fixed-operations department, the gap between those two numbers, repeated over thousands of repair orders a year, is not a rounding error. It is a six-figure subsidy the dealer is handing the manufacturer without realizing it.

Illinois law does not require dealers to provide that subsidy. The Illinois Motor Vehicle Franchise Act, at 815 ILCS 710/6, says the opposite. It requires manufacturers to compensate dealers for warranty parts and labor at the dealer’s retail rate, gives the dealer a defined process to establish that rate, and forbids the factory from clawing the increase back through surcharges. Most dealers have the right. Far fewer have exercised it. The store that understands the statute can convert a long-running giveaway into recurring gross profit, and the conversion is built into the law.

Start with the rule itself, because it is broader than most service managers assume. Section 6 provides that adequate and fair compensation requires the manufacturer to pay each dealer no less than the amount the retail customer pays for the same services, with regard to both rate and time. That single sentence covers two distinct fights, the labor rate and the labor time, and it ties both to what real customers actually pay rather than to what the factory prefers. The statute reinforces the point at the back end by adding that in no event shall compensation for labor times and labor rates be less than the rates the dealer charges retail customers for like nonwarranty service.

On labor, the statute is specific about how the rate is set. The manufacturer must pay the dealer the same effective labor rate the dealer earns on customer-pay work, calculated from 100 sequential repair orders chosen and submitted by the dealer, less simple maintenance repair orders. Excluding routine maintenance from the sample matters, because oil changes and tire rotations drag the effective rate down, and the law lets the dealer leave them out. The statute also closes the usual factory escape hatches. It requires full compensation for diagnostic work, and it requires that time allowances for warranty work be no less than what is charged to retail customers for the same work. Where no time guide has been agreed for a warranty repair, the manufacturer’s time guide applies multiplied by 1.5. And if a technician has to call a technical assistance center, engineering, or another manufacturer source to complete a warranty repair, the manufacturer must pay for that time, including time on hold.

On parts, the statute defines the markup the dealer is owed and the method to prove it. The dealer is entitled to the prevailing retail price it charges for the same parts, which the Act defines as the dealer’s cost, including shipping, multiplied by one plus the dealer’s average percentage markup. To establish that markup, the dealer submits 100 sequential customer-paid repair orders, or 90 days of customer-paid repair orders, whichever is less, covering repairs made within the prior 180 days, and declares the average percentage markup. The declared markup takes effect 30 days later, subject to the manufacturer’s right to audit the submitted orders within those 30 days and adjust based on the audit. Only retail sales count toward the calculation, not warranty work or routine maintenance parts, and the manufacturer cannot force the dealer into an unduly burdensome part-by-part methodology. There are limits on frequency. A dealer may request a warranty labor rate increase once per calendar year and may seek to change the parts markup no more than twice per calendar year.

The statute also protects the increase once the dealer earns it. Manufacturers are not permitted to impose any cost-recovery fee or surcharge against the dealer for payments made under Section 6. That provision is the difference between a real rate increase and a shell game, because without it a factory could grant the higher warranty rate with one hand and take it back through a parity surcharge with the other. Illinois forecloses that move. The statute likewise bars reductions based on preestablished market norms or averages, and it prohibits manufacturers from limiting customer repair frequency through failure-rate indexes or national averages.

Two related protections are worth keeping in the same conversation, because they put money in the dealer’s pocket on the same ledger. When a manufacturer imposes a recall or stop sale on a new vehicle in the dealer’s inventory that prevents its sale, the Act requires the factory to compensate the dealer for interest and storage until the vehicle is repaired and made ready for sale. And on the audit side, the statute bars any debit reduction or chargeback of an item on a warranty repair order absent a finding of fraud or illegal conduct by the dealer, while limiting the factory’s audit window to one year from the date the claim was paid or the credit issued. A dealer pursuing a rate increase should expect a closer look at claims, and should know that the look has legal boundaries. Continue reading ›

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The allocation spreadsheet arrives on a Monday morning. Two crosstown competitors received the inventory the dealer ordered months ago. The factory’s stair-step bonus program pays a per-unit kicker the dealer cannot possibly hit because the dealer cannot get the cars to sell. Then the region manager calls to explain that the dealer’s “minimum sales responsibility” number is slipping, and unless volume climbs, the incentives the dealer does receive will be clawed back.

Illinois dealers should not accept this as the cost of doing business. The Illinois Motor Vehicle Franchise Act does not tolerate arbitrary allocation, price discrimination across dealers, or the use of new-vehicle sales performance as a lever to cut a dealer out of used-vehicle and certified pre-owned programs. The statute is specific. The remedies are serious. And in our experience, the dealers who document these practices in real time are the dealers who get paid.

The central Illinois statute on allocation is 815 ILCS 710/4(d)(1), which prohibits a manufacturer, distributor, or wholesaler from adopting or implementing “a plan or system for the allocation and distribution of new motor vehicles to motor vehicle dealers which is arbitrary or capricious.” 815 ILCS 710/4(d)(1). The statute goes further. Under 815 ILCS 710/4(d)(2), a dealer may submit a written request and compel the manufacturer to disclose “the basis upon which new motor vehicles of the same line make are allocated or distributed to motor vehicle dealers in the State and the basis upon which the current allocation or distribution is being made or will be made to such motor vehicle dealer.” 815 ILCS 710/4(d)(2). Factories hate that request. They are required to answer it.

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When a manufacturer announces a new point or a relocation, the first reaction inside most dealerships is frustration. The second is resignation. The factory says the market can support another store. The decision must already be made. There is no point in fighting it. That reaction is exactly what gets dealers hurt. In Illinois, a proposed additional same-line franchise or a relocation into the relevant market area of an existing dealer is not supposed to be a fait accompli.

The Illinois Motor Vehicle Franchise Act gives dealers a real protest process, and that process has teeth. If a manufacturer wants to grant an additional franchise in the relevant market area of an existing same-line dealer, or relocate an existing dealership within or into that market area, the manufacturer must send notice by certified mail at least 60 days before taking the proposed action. The notice is supposed to state the specific grounds for the proposal, and the dealer has only 30 days from receipt to file a written protest. Those deadlines are unforgiving. A strong case can become a lost case if the store treats the notice like ordinary correspondence.

If the protest is timely filed, the matter does not remain in the manufacturer’s hands. The Act requires a hearing schedule, and the manufacturer bears the burden of proving good cause to allow the additional franchise or relocation. Just as importantly, the manufacturer may not grant the additional franchise or complete the relocation before the hearing process is over and the manufacturer has prevailed. That point gets lost in the panic. A timely protest is not just symbolic. It can stop the move from becoming operational while the dispute is still being decided.

That shifts the leverage in a meaningful way. The dealer does not have to prove that the sky will fall if another point opens. The manufacturer has to prove that the proposed move is justified under the statutory standards. Illinois law directs the Board or arbitrators to consider a detailed list of factors, not just the manufacturer’s business preference. Those factors include whether economic and marketing conditions warrant the move, the retail sales and service business already being transacted in the market over the prior five years compared with the business available, the investments already made by existing dealers, the permanency of those investments, whether the public welfare would be helped or harmed, whether existing dealers are already providing adequate competition and convenient consumer care, whether those dealers have adequate facilities, parts, and qualified personnel, and the effect the new point or relocation would have on existing same-line dealers.

One statutory phrase is especially important. Illinois says good cause is not shown solely by a desire for further market penetration. That matters because “we want more penetration” is often the manufacturer’s real theme, even when the written notice uses more polished language. If existing dealers are serving customers well, carrying the capital burden, staffing the service department, and covering the market responsibly, a raw desire to sell more metal by putting another roof nearby is not supposed to end the analysis.

In practice, these protests are won or lost with facts. Dealers should immediately assemble a package that tells the market story better than the factory’s notice does. That usually means five years of sales and service history, facility investment records, staffing levels, parts and service capacity, appointment lead times, customer draw patterns, and evidence of the store’s permanency in the market. It may also mean showing the risks the factory’s plan creates: weakened fixed-operations absorption, unnecessary duplication of facilities, reduced investment incentives, and harm to service convenience if the move destabilizes the stores already serving the area. Continue reading ›

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The debit memo usually arrives after the money has already been booked. A warranty claim that looked closed suddenly comes back to life. An incentive payment from months ago is now being “reviewed.” The factory’s spreadsheet says the store owes money, so accounting assumes the store owes money. That reaction is understandable. It is also often too quick. In Illinois, warranty and incentive chargebacks are governed by statute, and the process matters every bit as much as the manufacturer’s conclusion.

Dealers should start with the basic timing rules. Under the Illinois Motor Vehicle Franchise Act, a warranty claim submitted by a franchised dealer must be approved or disapproved within 30 days after submission in the manner and on the forms the manufacturer reasonably prescribes. Approved claims must be paid within 30 days after approval. If the manufacturer does not specifically disapprove the claim in writing or by electronic transmission within that 30-day period, the claim is deemed approved and payment must follow within 30 days. That is a powerful starting point, because it means the manufacturer is not supposed to sit on claims indefinitely and then rewrite history after the fact.

The disapproval rules matter too. When a claim is disapproved, the dealer is entitled to written notice stating the specific grounds for the disapproval. The dealer then has 30 days to correct and resubmit the claim. In practice, that means a vague after-the-fact accusation is not enough. Dealers should be asking basic questions immediately. When was the claim submitted? When was it disapproved? What exactly was the stated reason? Was the objection timely? Was the store given a real chance to cure? Those are not technicalities. They are often the difference between a legitimate adjustment and an overreach.

Manufacturers do have audit rights, but those rights are not open-ended. The statute allows the manufacturer to require reasonable documentation and to audit warranty claims within one year from the date the claim was paid or the credit was issued. For other incentive and reimbursement programs, the audit and chargeback window is also one year after the claim was paid or the credit was issued. That should change how dealers evaluate old debits. If the factory is reaching back beyond the statutory window, the conversation is already different.

The Illinois statute is also more protective than many dealers realize when it comes to warranty repair orders themselves. The Act states that no debit reduction or chargeback of any item on a warranty repair order may be made absent a finding of fraud or illegal actions by the dealer. At the same time, the manufacturer retains the ability to audit claims and to charge back false or unsubstantiated claims within the statutory period. The practical takeaway is not that every audit disappears. The takeaway is that a chargeback should not be treated as self-proving. Dealers should separate truly false claims from documentation disputes, coding disagreements, or hindsight second-guessing about repair-order detail.

That distinction becomes even more important because manufacturers sometimes use audits as a backdoor cost-control device. Illinois law addresses that problem directly in several ways. It requires compensation for diagnostic work and warranty labor at no less than the dealer’s retail customer rate for like work. It requires payment for time spent communicating with a technical assistance center, engineering group, or other outside manufacturer source when that communication is necessary to perform a warranty repair. It bars manufacturers from imposing cost-recovery fees or surcharges on franchised dealers for payments made under the warranty-compensation section. In other words, the statute does not just talk about what the manufacturer may recover. It also talks about what the dealer must be paid. Continue reading ›

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A facility demand from the factory usually arrives dressed up as a business plan. The renderings look polished. The timeline looks urgent. The number looks painful. Sometimes the message is explicit. Rebuild the showroom. Replace the signs. Rework the service drive. Carve out exclusive space. Use our vendor. Do it now or your renewal will become a problem. Dealers hear that kind of message and often conclude the fight is over before it starts.

That is a mistake. Illinois law does not turn every manufacturer preference into a legal obligation. Some facility demands are legitimate. Some are commercially sensible. But some are leverage plays designed to extract capital on the theory that the dealer is too busy running the store to challenge the premise. In our experience, the dealers who pause, pull the documents, and evaluate the statutory timeline usually negotiate from a much stronger position than the dealers who assume the factory has already won.

The first question is whether the demand is really a condition of renewal or continuation of the franchise. Under the Illinois Motor Vehicle Franchise Act, if a manufacturer intends to change substantially or modify a dealer’s sales and service obligations or capital requirements as a condition to extending or renewing the existing franchise, the manufacturer has to follow a process. That process matters. It is not just paperwork. It is where leverage starts.

The statute requires the manufacturer to send a certified notice at least 60 days before the franchise expires. The notice is supposed to state the specific grounds for the proposed action, and the dealer has only 30 days from receipt to file a protest. If the dealer timely protests, the manufacturer carries the burden of proving good cause, and the manufacturer cannot force the new obligations into place before the hearing process is finished. Depending on the parties’ agreement, the dispute may proceed through arbitration or through the Motor Vehicle Review Board. Either way, the calendar matters. A “friendly” facility conversation can harden into a deadline-driven legal dispute very quickly.

That is why dealers should be careful about informal pressure. The factory representative may present the demand as collaborative. The email may say the program is “expected” rather than “required.” The dealer may be told there is still time to “work it out.” Then the renewal papers show up with a new capital requirement baked in. At that point, the store is no longer negotiating about branding. It is defending the franchise itself. The legal issue is not whether the manufacturer would prefer a shinier building. The issue is whether the manufacturer can prove a lawful basis to impose the obligation on the schedule it has chosen. Continue reading ›

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Dealers invest millions of dollars in facilities, inventory, people, and goodwill. Yet when a manufacturer pushes back on a transfer, a succession plan, or even the renewal of a franchise, it can feel like the factory is the real owner and the dealer is just renting the right to do business.

Illinois law does not accept that premise. The Illinois Motor Vehicle Franchise Act sets rules for how manufacturers can behave, and it gives dealers procedural and substantive protections that can be the difference between keeping your store and losing it. The Act is not a magic shield, but it is a set of tools. The dealer who understands those tools is not negotiating from a position of weakness.

Transfer approval is not supposed to be a black box. In a sale or ownership transfer, the manufacturer often acts like it holds absolute veto power. Illinois law pushes back. The Act contemplates a process and timelines for approval decisions once a dealer submits the manufacturer’s completed application materials along with the agreements for the proposed transaction. If a manufacturer refuses approval, it is expected to state the grounds and the criteria used to evaluate the proposed transferee, and the dealer has a path to protest. Just as importantly, a timely protest can stop the manufacturer from treating a refusal as final while the dispute is still being heard.

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In the world of franchising, the termination of a franchise agreement can be a complex and contentious issue. Franchisees facing termination must understand their rights and the defenses available to them. Equally important is choosing the right legal representation to navigate these challenging waters.

Defenses to Franchise Termination

  1. Breach of Contract by Franchisor: If the franchisor has failed to uphold their end of the franchise agreement, this can be a strong defense. Examples include not providing agreed-upon support or infringing on the territory rights of the franchisee.
  2. Lack of Proper Notice: Franchise agreements typically require the franchisor to provide notice before termination. If this procedure is not followed, it can be a valid defense.
  3. Unreasonable or Unjust Termination: Franchisees can argue that the termination is unreasonable or unjust. This might be the case if the franchisor terminates the agreement without a valid reason or for a minor infraction that could have been resolved.
  4. Good Faith and Fair Dealing: Franchisees can contend that the franchisor did not act in good faith or deal fairly. This is a broader defense that encompasses various actions by the franchisor that might be deemed unfair or oppressive.
  5. Discrimination: If the termination is based on discriminatory reasons, this can be a legal defense, especially if it violates state or federal laws.
  6. Retaliation: If the termination is in retaliation for the franchisee exercising a legal right, such as reporting violations, it can be contested legally.

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A manufacturer of dairy silos and a distributor of such silos entered into an exclusive distribution agreement covering 13 Latin American countries. The agreement specified that the manufacturer would refrain from selling silos to third parties in the covered countries. Despite this, the manufacturer completed almost $4 million in direct sales in the covered countries during the time of the agreement. When the distributor sued, the manufacturer argued that the agreement expressly prohibited recovery of lost profits. The district court and appellate court found that this portion of the contract was unconscionable under Wisconsin’s interpretation of the Uniform Commercial Code, and awarded damages to the distributor as a result.

Walker Stainless Equipment, Co., LLC, and its affiliates, manufacture dairy silos. Sanchelima International, Inc. and its affiliate, sell dairy silos in Latin America. After decades of doing business together, Walker and Sanchelima entered into an agreement in 2013 providing that Sanchelima would be the exclusive distributor of Walker’s products in 13 Latin American countries. Walker agreed not to sell silos directly to third parties in those thirteen countries. Continue reading ›

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Where a beverage distributor fell behind on license payments and failed to hit required annual sales targets, the trial court did not err at trial when it admitted evidence of threats made by a manager at beverage distributor and declined to interrupt jury deliberations.

Playboy Enterprises International, Inc. is a corporation with its principal place of business in California. Playboy derives substantial revenue from licensing its name and bunny-head logo to entities who sell products as varied as apparel, handbags, luggage, and fragrances. PlayBev is a limited liability company based in Utah, which was formed in 2006 for the purpose of creating and selling a non-alcoholic drink.

PlayBev and Playboy entered into an exclusive license agreement in December 2006. Playboy agreed to license the Playboy marks to PlayBev for use on the Playboy Energy Drink. The license agreement provided that PlayBev would pay Playboy minimum annual royalties, beginning at $1 million and later increasing to $2 million, for the use of the marks. The agreement also required PlayBev to achieve certain annual sales. The original principals of PlayBev did not have experience with beverage marketing or distribution. In 2007, the PlayBev principals sold their interest in PlayBev to Iehab Hawatmeh, the CEO of Cirtran Beverage Corporation. CTB had experience in marketing consumer products. PlayBev subsequently contracted with CTB to manufacture and distribute the Playboy Energy Drink. Continue reading ›

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DiTommaso Lubin represents clients from many industries who operate all kinds of businesses, including both franchisors and franchisees. Our Aurora business attorneys came across an appellate decision from the Fourth District here in Illinois that involves a dispute that arose out of a franchise agreement between a heavy-duty truck manufacturer and a truck dealer.

Crossroads Ford Truck Sales, Inc. v. Sterling Truck Corp. is a disagreement that came about after the two parties entered into a sales and service agreement where Plaintiff Crossroads had the right to purchase Sterling Trucks and vehicle parts from Defendants and Defendants “reserved the right to discontinue at any time the manufacture or sale” of their parts or change the design or specs of any products without prior notice to Plaintiff. Several years after entering the agreement, Defendants allegedly announced that they were discontinuing the production of Sterling trucks and that Detroit Diesel Corporation (the truck’s engine manufacturer) would cease accepting orders as well. Defendant sent written notice of these decisions to Plaintiffs. Defendants decided to discontinue manufacture of the Sterling vehicles allegedly because they were duplicative of other vehicles manufactured by Sterling’s parent company.

In response to this notice, Plaintiff filed suit alleging violations of the Motor Vehicle Franchise Act, fraud, and tortious interference with contract. Defendants filed a motion to dismiss on all counts, which was granted in part by the trial court because Defendants’ discontinuance and re-branding of the Sterling brand constituted good cause for terminating the contract. Plaintiff then filed an interlocutory appeal for the trial court’s partial dismissal.

The Appellate Court affirmed the trial court’s dismissal of the violations of sections 4(d)(1) of the Franchise Act because Plaintiffs failed to allege specific facts supporting each element of violation under the Act and instead merely made conclusory allegations for each violation. The Court also found that the allegations under section 9 of the Act were improperly plead, as Plaintiff’s allegations contained only conclusions without the specific facts required by the Act. The Court then upheld the lower court’s ruling as to the allegations under section 9.5 of the Act because the sales and service agreement remained in effect and had not been terminated. Next the Court found the dismissal of the fraud claims to be proper because Plaintiff failed to allege a misrepresentation of a present fact and dismissed the claims under section 4(b) of the act because Defendant’s conduct was neither arbitrary nor in bad faith. Finally, the Court did not address the alleged 4(d)(6) violations due to a lack of subject-matter jurisdiction, as such violations are within the purview of the Review Board under section 12(d) of the Act.

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