Like Dominoes: Vermont Follows New Hampshire’s Lead and Makes Drastic Changes to Its Equipment Dealer Statute

23 June 2016 Legal News: Distribution & Franchise Publication
Author(s): Trent M. Johnson Tim Patterson

Legal News: Distribution & Franchise

In a dealer-friendly move that is growing increasingly common, see here, Vermont recently made substantial changes to the law that governs the relationship between equipment manufacturers and dealers within the state. Much like New Hampshire’s Senate Bill 126, Vermont Senate Bill 224 amplifies restrictions already imposed on manufacturers — restrictions which apply regardless of whether a dealer agreement already exists. It is, in no uncertain terms, an effort to further insulate in-state dealers from the competitive pressures of the marketplace under the guise of a “disparity in bargaining power” between equipment manufacturers and dealers.

What Equipment and Machinery Manufacturers Need to Know About SB 224

The new legislation, signed into law on May 25, 2016, maintains the general framework of its predecessor law, but there are some notable additions and revisions that manufacturers should be aware of:

SB 224 applies retroactively, and thus applies to new dealer agreements as well as already existing ones. SB 224 borrows an important feature found in New Hampshire’s SB 126, in that it applies both prospectively to dealer agreements entered into after its effective date of July 1, 2016, and retroactively to all dealer agreements that pre-date its existence. See SB 224, Sec. 3 (“[F]or a dealer agreement, as defined in 9 V.S.A. § 4071, that is in effect on or before July 1, 2016, the provisions of this act shall apply on July 1, 2016.”). This means manufacturers may need to change the way they are doing business under their current agreements with dealers to ensure compliance with the new restrictions imposed by SB 224, including the ones described below.

Retroactive application of dealer statutes is currently a hot-button topic. A group of equipment manufacturers have petitioned the U.S. Supreme Court to review a case in which the manufacturers argue that the retroactive application of New Hampshire SB 126 unconstitutionally impairs their rights under pre-existing dealer agreements. Should the Supreme Court take the case, its ultimate decision would have an immediate effect on the legality of SB 224. If New Hampshire SB 126 is upheld, it could potentially usher in a wave of state legislation, like SB 224, geared toward modifying existing dealer agreements.

SB 224 further restricts the way manufacturers can legally terminate dealers. Beginning on July 1, 2016, covered manufacturers can only terminate a dealer if that dealer fails “to meet one or more requirements of a dealer agreement, provided that the requirement is reasonable, justifiable, and substantially the same as requirements imposed on similarly situated dealers” in Vermont. Id. at Sec. 1, §§ 4072(b)(1)–(2). This provision is a substantial departure from the law’s old language, which only required a manufacturer to demonstrate that a dealer failed to comply with a requirement of a dealer agreement that the manufacturer imposed upon similarly situated dealers. Further, the law provides no guidance as to what a "justifiable" requirement is — a term so vague that it invites litigation. The law also requires manufacturers terminating a dealer for cause to give the dealer 120 days notice of termination, and also provide the dealer with 60 days to cure its breach of the agreement.

SB 224 imposes an even lengthier notice period for manufacturers seeking to terminate a dealer agreement for the dealer’s failure to meet market penetration requirements. Under the new law, a dealer is entitled to two years’ notice before the effective date of termination for a dealer’s failure to meet financial expectations under the dealer agreement. Id. at Sec. 1, §§ 4072(c)(1)–(5). If at the end of that lengthy notice period the dealer has still failed to meet expectations, the manufacturer is required to give the dealer a second “final” notice of termination, which gives the dealer another 3 months before termination is effective. Id.

SB 224 prohibits manufacturers from modifying dealer territories without “good cause.” Without explanation, SB 224 now forbids manufacturers from making a “change” to the “geographic area of responsibility specified in a dealer agreement” without first demonstrating “good cause” to do so. Id. at Sec. 1, § 4077a(e). It does not define the term “change” — which could feasibly mean anything from re-drawing a dealer’s territory to include another county to adding (or removing) another dealer within a particular territory — nor does it clearly define what “good cause” for a change may be. In light of this prohibition, manufacturers should be cautious in making any modification to a Vermont dealer’s assigned territory, even if the dealer’s territory is “non-exclusive” under the dealer agreement.

SB 224 renders exclusive dealing clauses unenforceable — even those voluntarily entered into by a dealer. So-called “anti-coercion” provisions are commonplace in dealer-friendly state statutes. In general, they prohibit a manufacturer from illegally forcing a dealer not to sell or market products made by a competitor. However, in general, “anti-coercion” provisions do not preclude a manufacturer from enforcing an exclusive dealing clause in a contract. But this is exactly what Vermont appears to have done. Under the new law, a supplier shall not “prevent, coerce or attempt to coerce a dealer from investing in, or entering into an agreement for the sale of, a competing product line or make of inventory.” Id. at Sec. 1, § 4077a(c)(1). The unqualified use of the term “prevent” is the key. If a manufacturer cannot “prevent” a dealer from carrying a competing product, then it is highly doubtful that a manufacturer can demand strict compliance with an exclusive dealing clause – even one voluntarily agreed to by a dealer.

This could have network-wide implications for manufacturers. If a manufacturer cannot enforce an exclusive dealing clause against a Vermont dealer, how can it hold other “similarly situated” dealers in other states to such a standard?

But SB 224 does not stop there. It goes a step further by prohibiting a manufacturer from requiring a dealer to have separate facilities for competing products, which is often a legislative “consolation prize” for manufacturers. Id., Sec. 1, § 4077a(c)(2); compare with Tex. Bus. & Com. Code § 57.301(c) (“It shall not be considered a violation of this section if the supplier requires a dealer to have or provide separate facilities …. for major competing product lines …. ”).

Manufacturers beware: Vermont has given equipment dealers the unilateral and unqualified right to carry competing products, regardless of any promise the dealer made.

In sum, much like New Hampshire’s effort in 2013, the new Vermont law represents a significant incursion into the commercial dealings between manufacturers and dealers. SB 224 seems to indicate that state legislatures are ready and willing to ride the coattails of other states’ protectionist legislation by passing new, dealer-friendly laws of their own, or further sharpening — to the benefit of in-state dealers — the laws already on the books. Manufacturers across the United States should take notice and closely monitor legislative activity in states that are integral to their distribution network.

Legal News is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Trent Johnson
Milwaukee, Wisconsin

Timothy Patterson
Milwaukee, Wisconsin

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