5 states now ban forced sale of factory contracts

Donna Harris
Automotive News -- November 10, 2010 - 12:01 am ET

A small, but growing, number of states have made it illegal for auto manufacturers to require dealers to sell their proprietary vehicle service contracts and other products.

Pennsylvania is the latest state to ban the forced sale of factory-sponsored aftermarket contracts. That brings the total to five states with similar restrictions, says Jim Moors, franchise attorney for the National Automobile Dealers Association.

Moors says Alabama, Nebraska and Virginia prohibit factories from coercing dealers to sell their vehicle service contracts. Louisiana and Pennsylvania also bar auto manufacturers from making dealers sell other products, such as prepaid maintenance plans, as well.

In recent years, dealers say some automakers have pressured them to offer proprietary aftermarket contracts and meet specific sales targets. Sometimes their finance arms have refused to finance independent contracts.

Dealers want to choose the products they offer for sale.

“Dealers should have the ability to sell whatever service contract or aftermarket products they want to without pressure from the manufacturer,” says Skip Jennings, chairman of the Pennsylvania Automotive Association and president of Jennings Chevrolet-Cadillac Inc. in Chambersburg, Pa.

Pennsylvania's new law says it's unlawful for auto manufacturers and distributors to force a dealer to sell an “extended service contract, extended maintenance plan or similar product, such as GAP products, offered, endorsed or sponsored by the manufacturer or distributor.”

Jennings says dealers in other states have shown an interest in the legislation. Pennsylvania dealers decided to lobby for the restriction because some factories were rating dealer performance based on sales of their proprietary aftermarket contracts.

The law bans contractual requirements to sell factory-sponsored aftermarket contracts -- such as in a dealer agreement -- as well as actions or statements made by factory representatives. It also forbids using the sale of factory-endorsed products to grade the dealership's performance under the franchise.

The ban does not apply to incentive programs designed to boost sales of the auto manufacturer's aftermarket service plans as long as the dealership sells the product voluntarily.

The Pennsylvania law takes effect in December.