Getting Back to Business: Considerations for Motor Vehicle Manufacturers in the COVID-19 Environment

The White House recently issued guidelines for “Opening Up America Again” in anticipation that the COVID-19 pandemic may soon begin to recede, at least in some areas of the country. These guidelines recommend that state officials take a three-stage approach to reopening businesses using state and regional “gating criteria” that consider a number of local factors, including the prevalence and trend of active COVID-19 cases and the availability of testing and treatment capabilities. Even now, automobile dealers are permitted to operate their facilities to provide “essential services” like vehicle repairs, and manufacturers have the right to insist that they do so. At present, over 40 states and local jurisdictions have imposed public health restrictions that prohibit dealers from conducting retail operations or severely limit their ability to do so, but as conditions improve and officials relax these restrictions, dealers will be permitted to open their facilities to provide consumers the full panoply of retail and repair services, and manufacturers again will have the right to insist that they do so.

With decisions about whether, when, and how dealers will be able to conduct all dealership operations driven by local conditions, manufacturers should anticipate an uneven enforcement environment for dealer agreements in the coming months. And regardless of government directives and contractual rights, manufacturers should anticipate that the COVID-19 pandemic has brought permanent change to the retail landscape, including an increased demand from consumers for access to online sales. Manufacturers will need to decide whether to lead or follow their dealers in responding to these changing consumer demands. And manufacturers should anticipate increased dealership failures and litigation in the coming months, especially in states where officials continue to maintain restrictions on retail operations.

Dealers Should Operate to the Fullest Extent Permitted. The COVID-19 pandemic has caused economic challenges across the industry, but automobile dealers have a contractual obligation to represent their brand to the best of their ability. Early in the response to the COVID-19 pandemic, the U.S. Department of Homeland Security (DHS) and the Cybersecurity and Infrastructure Security Agency (CISA) issued guidance on the “Identification of Essential Critical Workers During COVID-19 Response” that listed auto maintenance and repair facilities as “essential services,” and this guidance was widely used by state authorities when drafting their shutdown orders. Most dealers have kept their service departments open during the COVID-19 pandemic, using valet pickup and delivery services and other social distancing and limited contact procedures to protect employees and customers. 

As for retail sales operations, some dealers developed ways to promote remote and internet sales transactions, but others did not, and many simply closed.  Several states explicitly authorize sales activities so long as conducted remotely or over the internet.  For example, on March 30, 2020 New Jersey governor Phil Murphy modified that state’s Executive Order 107 imposing COVID-19 restrictions to provide that “[c]ar dealers may continue to conduct online sales or remote sales that can be completed by phone, text, or email, and are consistent with current law . . . . In the event of such a sale, the car may be delivered to the purchaser or the purchaser can pick up the car curbside or in the dealership service lane.” Michigan and Pennsylvania also recently relaxed their stay at home orders to permit remote deliveries and execution of transactional documents in an effort to facilitate online sales.

Given these developments, dealers should be currently operating to the fullest extent permitted and actively preparing to scale up to full operations as COVID-19 restrictions are eased and/or lifted. Manufacturers should monitor and document the current state of dealer operations on a state-by-state basis to ensure that dealers are doing so, and take care to ensure that communications with dealers cannot be construed as a waiver of the dealer’s contractual obligation to operate and represent the brand to the fullest extent possible. Because different states will be easing and/or lifting COVID-19 restrictions at different times, the ability of manufacturers to enforce their contract rights under dealer agreements will vary on a state-by-state basis; a one-size-fits-all approach to dealer network issues may not be best way for manufacturers to protect their rights.

Dealers Should Comply With All State And Local Health Regulations.  As independently owned and operated businesses, automobile dealers are responsible for ensuring that they comply with all state and local health regulations, including COVID-19 specific restrictions that have been imposed in response to the current public health emergency. Consumers no doubt will be wary of simply jumping back into traditional automobile retailing, and dealers must take appropriate steps to restore consumer confidence in the consumer experience.

Health and safety concerns have traditionally been reserved for restaurant and hospitality franchise systems, but manufacturers already impose minimum standards for how products are displayed, marketed, and promoted to protect their brands, and they may be tempted in the current environment to issue minimum health and safety standard for dealers, too. To avoid issues of vicarious liability and/or joint employer concerns, manufacturers should avoid giving dealers legal advice about how to comply with state and local public health requirements or dictating specific health and safety steps to be taken by individual dealers. Minimum health and safety guidelines and standards to protect the brand should reference reliable third party sources, such as guidance from the Center for Disease Control (CDC) or state and local health authorities.   Manufacturer guidance should reference dealer obligations to comply with federal, state, and local laws and regulations if existing dealer agreements include such provisions. Again, because different states will be easing and/or lifting COVID-19 restrictions at different times and with different heath and safety expectations, a one-size-fits-all approach to these issues may not be best way for manufacturers to protect their rights.

Manufacturers Can Take The Lead In Digital Retailing. Customer satisfaction has always been an essential aspect of dealer performance, and in the wake of COVID-19 pandemic, the “online customer experience” will be paramount.  Manufacturers can either lead the online revolution or be led. The COVID-19 pandemic has forced many consumers to rely almost exclusively on online retailing home delivery services, and that evolution is likely here to stay. That means dealers will need to have the online sales tools, virtual software, and digital retailing capabilities to facilitate customers completing online sales. Although not required to do so, manufacturers can take the lead in developing these tools and control how their brand is being promoted online, subject to state dealer statutes and regulations concerning those transactions.

While many states have statutory and regulatory provisions requiring dealers to transact business only from authorized locations, it is not clear whether those general provisions are intended to prohibit remote deliveries and digital signatures. Some states have specifically addressed internet sales. For example, in Texas, a dealer is allowed to sell a motor vehicle on the Internet to a customer that never appears at the dealer’s established place of business. See Tex. Occ. Code Ann. § 2301.362(b).  Similarly, in New York, while a dealer may only operate its business from an approved location, that limitation does not affect where a dealer may deliver a vehicle to a customer nor does it prohibit a dealer from utilizing the internet to sell vehicles.   See N.Y. Veh. & Traf. Law § 415(18).  In contrast, in Indiana, while a dealer is allowed to sell vehicles using the internet, it may only deliver vehicles to customers at the dealer’s place of business.  See Ind. Code § 9-32-11-17. 

The increased focus on home deliveries has also led to questions regarding the applicability of the FTC’s Cooling-Off Rule, which requires notice of a purchaser’s right to cancel the “door-to-door” sale, lease or rental of consumer goods that occurs at a consumer’s home or other temporary or short-term location. Because the rule does not apply to transactions conducted and consummated by mail, telephone, or over the internet, dealers should be able to avoid its application provided that the parties finalize the vehicle selection, price negotiation, and deal terms before the vehicle and paperwork are delivered to the customer.

Customers will expect robust and accurate information and a smooth, fast, user-friendly transaction. Manufacturers have the right to control the manner in which their brand is promoted digitally, and many manufacturers are already supporting online programs that allow consumers to configure and order new vehicles through the manufacturer’s website, with participating dealers finalizing the actual terms of sale and making delivery. Dealers may not wait for other manufacturers to develop similar programs, and are more likely to challenge future manufacturer online sales platforms if the dealers have made their own significant investments in internet marketing in the interim. These arguments would be inconsistent with the right of manufacturers to control the use of their trademark on the internet, but the best way to avoid these arguments is for manufacturers to develop an early and consistent approach to online marketing, taking into account variations in state dealer statutes and regulations.

Manufacturers Should Anticipate Dealer Failures And Litigation. There is little question that the U.S. auto industry is going to be impacted by the COVID-19 pandemic through the remainder of 2020 and likely beyond. Even with assistance from the U.S. Small Business Administration Paycheck Protection Program and other sources, dealers are likely to fail as a result of restrictions imposed by the COVID-19 pandemic. As detailed here, manufacturers should be proactive in monitoring their dealer network, identifying troubled dealers, and developing a comprehensive strategy for handling those dealer failures. Although manufacturers obviously cannot control the spread of COVID-19 or the regulatory response to the pandemic, distressed dealers looking for a deep pocket are likely to attack manufacturers for supposedly unreasonable performance metrics, incentive programs, inventory and allocation systems, and facility standards. Manufacturer business teams should be proactive in assessing the risks of such claims in consultation with their in-house counsel (and outside counsel, where appropriate), taking care to ensure that appropriate steps are taken to protect the attorney-client privilege.