Overview
Rights of first refusal or “ROFRs” in dealer agreements are powerful tools vehicle manufacturers use to ensure satisfactory brand representation. As Automotive News recently reported, ROFRs are sometimes used to promote a diverse dealership body[1] and protect customers from would-be buyers who are unwilling or unable to properly serve them. They also allow a manufacturer to ensure representation in the market by a preferred dealer operator who shares that manufacturer’s vision.
In fact, ROFRs may be an automaker’s last line of defense preventing the sale of its branded dealership to a prospective buyer with a track record of low sales performance and poor customer service. Despite the benefits, though, many state dealer laws limit the ways in which a manufacturer can decline to approve a potential buyer in a buy/sell. For example, some states shorten the time period to exercise a ROFR compared to what is provided by the express terms of the ROFR. Other states require manufacturers to pay the attorney’s fees and expenses of the disappointed buyer in the event of a ROFR exercise.[2] Some state administrative boards have also nullified ROFRs that conflict with state franchise laws.[3]
Notwithstanding the myriad restrictions already in place, opponents of ROFRs—namely motor vehicle dealers—continue to fight for more. As reported in Automotive News, legislators in California and West Virginia have put forth bills seeking to further limit manufacturers’ freedom to utilize ROFRs[4], signaling a renewed effort by dealer lobbyists to curtail or eliminate them altogether.
Opponents of ROFRs—which are effectively banned in 11 states—put forth several arguments in support of their position. But their arguments are nonsensical.
Dealer lobbyists first argue that ROFRs drive down dealer prices. This argument is belied by the data, though, given the historically active buy/sell market and soaring prices for dealerships. According to The Blue Sky Report® prepared by Kerrigan Advisors, buy/sell activity in 2023 “is on track for a record year” and dealership blue sky values remain “far above pre-pandemic levels.”[5] What’s more, many states dealer laws—and even ROFRs themselves—mandate that a dealer receives the same or better compensation if a manufacturer exercises its ROFR.[6] These provisions ensure that dealers receive at least equal value as the price they bargained for with the would-be buyer.
Dealer lobbyists next argue that ROFRs inject uncertainty into the buy-sell process and cause lengthy delays. Yet this would be a problem of the prospective buyer’s own making—simple due diligence vitiates any such concerns. Before initiating a buy-sell, prospective buyers can quickly read the franchise agreement to determine if a ROFR is on the table. This fact would be known to both the dealer and prospective buyer. The dealer can also ask the manufacturer if they have a preferred buyer that can be benchmarked against a third-party bid. To the extent ROFRs cause any delays, they have apparently not slowed down the buy/sell market at large, as evidenced by the record buy/sell activity noted above.
Ultimately, ROFRs deserves as much protection as any other mutual obligation in the dealer agreement. ROFRs serve as important shields that protect vehicle manufacturers and customers from unsuitable market representation. The inconvenience sellers may experience is far outweighed by the benefit to customers of having stellar dealers selling their favorite vehicle brands. Vehicle manufacturers must work together to ensure that ROFRs are not further weakened.
[1] Jackie Charniga, Boon or burden? Automakers’ use of right of first refusal in dealership buy-sells aids some, hinders others, Automotive News (September 29, 2023) (hereafter, “Charniga 2023”).
[2] E.g., 815 Ill. Comp. Stat. 710/4(e)(14)(D).
[3] E.g., Halpert Properties, Inc. v. DaimlerChrysler Motors Co., No. 05-01-MVDB-302-J, Ohio Motor Vehicle Dealer Board (Jan. 20, 2006).
[4] Charniga 2023.
[5] Kerrigan Blue Sky Report at 7, Second Quarter, 2023 (emphasis added).
[6] E.g., 815 Ill. Comp. Stat. 710/4(e)(14)(B); Pa. Stat Ann. tit. 63, § 818.315(a)(2).