Dealing with Dealers During Covid-19: Equipment Repurchase
Equipment obligations can be expensive and often there is no workaround. Equipment repurchase can also become the source of costly litigation. (iStock/RomoloTavani)
The COVID-19 pandemic is causing an uptick in dealer terminations, which can trigger unexpected and costly equipment repurchase obligations. It is important that manufacturers and suppliers keep aware of applicable equipment repurchase requirements.
An unexpected notice of termination from a struggling dealer — even where the split is amicable — can put a manufacturer or supplier on the hook for millions of dollars. Part of a series, this article focuses on the issue of equipment repurchase after termination.
If your company manufactures products and sells them to a network of authorized third-party retail dealers, most states regulate your relationship with those dealers. These regulations often apply to dealers of motor vehicles, construction equipment, utility equipment, agricultural equipment, powersports equipment and outdoor power equipment. All 50 states have dealer laws for at least one of these regulated industries, and all 50 states have equipment repurchase obligations in at least one dealer law. These regulations can apply to your business, no matter what your dealer contract says, because state dealer regulations typically contain anti-waiver provisions.
Each state groups dealer laws in a different fashion. California groups all non-motor vehicle industries together into a single dealer law applicable to “equipment,” defined broadly to include machinery used in lawn, garden, landscaping, agricultural, forestry, industrial, construction, maintenance, mining or utility activities. In contrast, Florida groups agricultural equipment into one dealer law, outdoor power and forestry equipment into another dealer law, but does not have a dealer law for the heavy construction equipment industry.
Some states have broadly applicable dealer laws that are not industry specific, the most well-known being the Wisconsin Fair Dealership Law (WFDL). The WFDL applies to a whole host “dealerships” — in 2017 the Wisconsin Supreme Court concluded it applied to the relationship between the city of Madison and the golf pros that were contracted to manage and operate the municipal golf courses.
The type of relationship most dealer laws are intended to regulate involves a dealer that purchases products from a manufacturer or supplier, which the dealer resells to the consuming public. Manufacturers and suppliers often impose on dealerships an obligation to maintain a minimum level of whole goods stock, or parts stock for repairs, which presents a major expense to dealers. Dealers responded through state legislatures, enacting dealer laws mandating manufacturers and suppliers repurchase new and unsold equipment in a dealer’s inventory at the time of termination.
Because of the policy purpose behind equipment repurchase obligations, most dealer laws mandate repurchase no matter who terminates, and no matter the reason for termination. Both Florida and California’s dealer laws, for example, mandate repurchase no matter the terminating party. The WFDL, however, only imposes the obligation on manufacturers and suppliers if they are the terminating party. Some dealer laws waive equipment repurchase obligations if a supplier has “good cause” or “just cause” to terminate the dealer.
The Repurchase Obligation
As for the repurchase obligation, it can be varied and comprehensive. It may cover whole goods, attachments or accessories, and even repair parts. Some states require the repurchase of “new” or “undamaged” products at 100% of the dealer’s cost, including any shipping and setup costs.
Others further mandate repurchase of “demonstrator” or other products at depreciated rates. In addition to resalable products, the repurchase obligations can extend to special repair tools and equipment, special computer equipment and even signage utilizing a manufacturer’s trademark. States may add on an additional “fee” (e.g., 5%) that a supplier must pay dealers for the handling and packing of repair parts or accessories. Many states mandate return freight reimbursement, often imposing 50-50 cost sharing.
Setting aside the myriad ways in which the dealer laws are drafted, there are two major practical considerations a business must face. First, equipment obligations can be expensive and often there is no workaround. These are state law mandates that cannot be waived or contracted-around. You may have a dealer in California with a $3 million floor plan that closes its doors, and no matter how amicable the termination you will still have to cut a large check to that dealer for equipment repurchase. This is the cost of doing business utilizing a dealership model — one that is easily forgotten, but it rears its head in an economic downturn.
The second practical issue facing manufacturers and suppliers is that these equipment repurchase obligations alone can become the source of costly litigation. These dealer laws often flip burdens to apply to a manufacturer or supplier, and many include fee-shifting provisions or other penalties so that, if you lose a dispute over equipment repurchase, you may have to pay the dealer’s attorneys’ fees and also pay 110% of the dealer’s equipment cost.
This incentivizes dealer litigation, which can become a quagmire — a dispute over whether equipment is “undamaged” is a question of fact, not law, and therefore cannot be resolved through early dispositive motions practice. That kind of dispute will only be resolved at a trial with several fact witnesses. Due to the cost of drawn out litigation and the added risk of fee-shifting, many dealers can become quite aggressive in their repurchase demands.
Whether you are thinking of terminating an underperforming dealer, or hear rumors one of your own dealers is struggling, it is important that you research applicable equipment repurchase obligations early on. Arming yourself with this information will allow you to make more informed decisions as you navigate your company through the pandemic.
Connor A. Sabatino, Senior Counsel at Foley & Lardner LLP, is a litigator and member of the firm’s Distribution and Franchise practice group. He advises clients on compliance issues under state dealer relationship laws and franchise laws, and serves as litigation counsel for manufacturers and suppliers facing dealership disputes or state regulatory actions.