December 18, 2009
How Would Chrysler Attack The Dealer Arbitration Law?
Posted by David Zaring

The chief of Fiat says he's thinking about suing to undo the law that gives former GM and Chrysler dealers arbitration rights against the two companies.  Here's a summary of how the law works:

GM and Chrysler now have 30 days to send letters to the owners of about 2,150 rejected dealerships informing them of their rights under the new law and spelling out the reasons that their franchise agreements were terminated.

With Obama's signature, the eliminated dealerships have 40 days to give notice that they intend to seek arbitration.

Arbitration must be completed within six months, and dealerships that win must receive a letter of intent from the automakers within another 14 business days.

I don't see any way that Chrysler could prevail in this suit.  Congress can do anything it likes to regulate commerce, provided that it doesn't take property without compensation or due process (and it gets plenty of leeway there), commandeer the states, or violate certain enumerated rights.  In other words, congressional legislation cannot be unconstitutional, but nowhere does it say that it has to be sensible.  Interfering in the company-dealer relationship is a stunningly bad idea, probably, but there's nothing illegal about it.  It is worth noting, moreover, that the government all but owns these two auto companies, though - to be clear - I don't think that makes a bit of difference to the constitutionality of the legislation.  Binding arbitration is pretty due process (it is to be conducted under AAA rules), and the takings clause is rarely applied to interfered with contracts (which franchise agreements are).  As for the contracts clause, the Supreme Court has said that “[L]aws intended to regulate existing [private] contractual relationships must serve a legitimate public purpose ... [and] courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.”  That's rational basis review, which requires much less than straightforward sensibility, and UPDATE: as Larry Ribstein reminds me, the contracts clause doesn't even apply to the federal government.  I'm no constitutional law scholar, so I may be missing something, but I don't see anything here.

After the jump, the test the arbitrator is supposed to use in these disputes (it is on page 187 of this document).  I confess that I've rarely seen this sort of intervention a private relationship by the federal government, though I suspect that states do it all the time.  But there, Bainbridge and Ribstein are much more likely to be reliable guides than I.  It looks to me like the dart at the heart of capitalism, and done entirely for the benefit of a rich, politically connected group.  It makes financial regulatory reform look that much more difficult.

The covered manufacturer and the covered dealership may present any relevant information during the arbitration. The arbitrator shall balance the economic interest of the covered dealership, the economic interest of the covered manufacturer, and the economic interest of the public at large and shall decide, based on that balancing, whether or not the covered dealership should be added to the dealer network of the covered manufacturer. The factors considered by the arbitrator shall include (1) the covered dealership’s profitability in 2006, 2007, 2008, and 2009, (2) the covered manufacturer’s overall business plan, (3) the covered dealership’s current economic viability, (4) the covered dealership’s satisfaction of the performance objectives established pursuant to the applicable franchise agreement, (5) the demographic and geographic characteristics of the covered dealership’s market territory, (6) the covered dealership’s performance in relation to the criteria used by the covered manufacturer to terminate, not renew, not assume or not assign the covered dealership’s franchise agreement, and (7) the length of experience of the covered dealership.

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