Car Dealership Franchise Laws

Buying into a franchised car dealership is one of the most complex business decisions a person can make. To be sure, the potential profits are high, but so is the need for detailed compliance with federal disclosure rules and state-specific motor vehicle franchise statutes that come with hefty penalties for violations. 

In this article, our Dallas franchise attorneys discuss what you need to watch for in any auto dealership franchise agreement. While many of these issues revolve around the Metroplex and the state of Texas, our franchise attorneys can help you with your car dealership no matter what state you reside in.

If you have additional questions about opening a car dealership in Dallas area, contact our franchise law firm today. The attorneys at Luther Lanard, PC can help you understand your rights. 

Car Dealership Franchising vs. “Independent Dealer” Models: What Changes Legally 

Not every dealership is subject to franchise laws. An independent used car dealer is generally not considered a franchise; these dealers buy and resell vehicles without a formal agreement tying them to a manufacturer or its brand standards.

In contrast, a franchised dealer operates under a franchise agreement granted by an Original Equipment Manufacturer (OEM) or its authorized distributor. 

The franchise agreement governs all areas of dealership operations, including: 

• Which vehicle the dealer is permitted to sell
• How service must be performed
• Standards for the facility (including signage on the building)
• How the parties can exit the agreement

In Texas, both types of dealerships must obtain a license through the Texas Department of Motor Vehicles before they can operate. However, with franchised dealers, the manufacturer must also notify the TxDMV when establishing or relocating a franchised dealership. 

Texas law treats manufacturer-dealer relationships as regulated franchises, not simple commercial contracts. That regulatory treatment gives dealers certain rights and protections they would not have under ordinary contract law.

The Core Laws That Shape Auto Dealership Franchises in Texas 

Texas regulates motor vehicle dealer franchises primarily through the Texas Occupations Code, Chapter 2301 (often called the Motor Vehicle Sales and Finance Act). The TxDMV’s Motor Vehicle Board has the authority to hear disputes between manufacturers and dealers, including complaints about unfair termination, unreasonable performance standards, and unlawful encroachment.

Texas law includes the following protections for dealers:

• Good Cause Requirements for Termination: A manufacturer cannot terminate a franchise without demonstrating good cause. Texas law defines what qualifies as a for-cause termination. A dealer who believes their agreement was unlawfully terminated has the right to protest the decision before the Motor Vehicle Board.
• Notice and Cure Periods: Before a manufacturer can terminate or decline to renew a franchise, it must provide written notice of the decision to the dealer. In many cases, it may be required to allow the dealer to cure the deficiency that triggered the termination. 
• Protest Rights for New Dealerships in the Area: If a manufacturer wants to add a new dealership in an existing dealer’s area, Texas law gives current dealers the right to file a protest. The burden then shifts to the manufacturer to show that the new point is justified by market conditions.
• Compensation on Termination: In certain circumstances, Texas law requires manufacturers to compensate a terminated dealer for inventory, parts, and equipment. 

Car dealership franchise laws in Texas are designed to even the playing field between dealers and manufacturers, who would otherwise experience an extreme power imbalance due to the manufacturer’s resources and corporate strength. 

Franchise Agreement Red Flags for Dealership Buyers

The franchise agreement is the document that will govern your business. Manufacturers draft these agreements to favor their interests. Here’s what an auto dealership franchise agreement lawyer will look for before advising a client to sign:

• Vague Performance Standards: Many franchise agreements include sales performance requirements tied to market penetration or customer satisfaction scores. When those standards are poorly defined or can be revised by the manufacturer, a dealer is more vulnerable to violations. 
• Broad Termination Rights: Some agreements include provisions that allow a manufacturer to terminate a dealership “for cause” according to a loosely defined list of events. A clause that gives the manufacturer discretion to define what constitutes a breach of these provisions may allow the manufacturer to arbitrarily terminate the dealership. 
• Facility Upgrade Mandates: Manufacturers routinely require dealers to build or renovate facilities to meet brand standards. If the agreement does not limit how often these mandates can be imposed or require the manufacturer to contribute to upgrade costs, a dealer can face massive and unexpected financial obligations.
• Limitation of Remedies: Many agreements include provisions waiving the dealer’s right to certain damages or restricting them to arbitration in the event of disputes. Dealers should be cautious of overbroad damages waivers or arbitration clauses that unfairly advantage the manufacturer.

Reviewing these clauses requires an experienced eye. An experienced car dealership franchise attorney can review your agreement for one-sided terms and propose alternative provisions that protect your interests in the future. 

The Federal Trade Commission’s Franchise Rule 

The FTC has generally considered arrangements between manufacturers and dealers to not constitute a franchise, in particular because the manufacturers do not charge a fee for the right to use the trademark.  Further, dealers would also very likely qualify under the large investment exemption.  The end result is that dealers do not receive the same disclosures as other franchise models. 

Territory, Encroachment, and Market Protections in Dealership Franchises 

Territorial rights refer to the region in which a dealer is permitted to market and sell the manufacturer’s vehicles, free from area-level competition selling the same automobiles. Most auto dealership franchise agreements define a dealer’s territory as a fixed geographic boundary (a radius around the dealership location, or a defined set of zip codes). 

Alternatively, they may opt for a more fluid area of primary responsibility tied to performance expectations. The latter option is more ambiguous and less protective. Unfortunately, a dealer who fails to hit market penetration targets in their area of primary responsibility may give the manufacturer justification for adding another dealership nearby.

Encroachment from Manufacturers

Even dealers with defined territories face territory encroachment risk. Manufacturers have many ways around territorial commitments, including but not limited to:

• Internet sales policies that direct online leads to manufacturer-owned locations
• Fleet sales agreements that bypass the local dealer
• Certified pre-owned programs administered directly by the manufacturer 

These tactics can decrease revenue from a franchisee’s territory without technically violating a geographic boundary clause.

However, under Chapter 2301 of the Texas Occupations Code, a dealer has the right to file a protest with the Texas Motor Vehicle Board when a manufacturer seeks to add a new franchise point or relocate an existing dealership into the affected dealer’s territory. The burden of preparing and presenting that protest falls on the dealer.

Before signing, dealers should consider requesting explicit contractual provisions addressing online lead allocation, factory-direct sales programs, and any manufacturer-operated sales channels. If the manufacturer refuses to include those protections, you may be at a disadvantage should they try to encroach on your territory. 

Termination, Nonrenewal, Transfers: The “Exit Rights” That Matter Before You Sign 

The provisions governing how a franchise relationship ends are just as important as those determining how one begins. Without adequate legal review, these terms can also tilt heavily toward the interests of the manufacturer.

You should look out for the following franchise exit rights before you sign: 

• Termination Rights: Texas law requires manufacturers to demonstrate good cause before terminating a franchised dealer, and mandates notice periods that give dealers time to respond. But those protections have limits, and dealers may try to take advantage of them in certain circumstances. 
• Nonrenewal Rights: A manufacturer who declines to renew an expiring franchise agreement is generally not violating any for-cause termination requirements. Importantly, franchise nonrenewals have less protection than bona fide terminations. Review your agreement to determine if renewal is automatic (absent cause) or if the manufacturer has discretion to decline renewal. An agreement that gives the manufacturer a liberal right not to renew may leave the relationship at their whim. 
• Transfer and Succession Rights: If you plan to pass the dealership to a family member or sell it to a third party, the franchise agreement’s transfer provisions will govern the process. Most agreements require the manufacturer’s approval of any proposed transfer and transferee. Texas law defines when manufacturers can withhold such approval. 
• Right of First Refusal: Many manufacturer agreements include a right of first refusal that allows the manufacturer to match any offer a dealer receives for the dealership. This provision can complicate and delay the sale of the dealership.

It’s important to negotiate exit terms before you sign the agreement. Once you are inside the franchise relationship, you have significantly less leverage to propose new terms.

When to Hire a Car Dealership Franchise Attorney (and What They Actually Do)

Ideally, you should hire an experienced car dealership franchise attorney at the earliest stages of the process. You should absolutely consult an attorney before you negotiate terms or finalize the agreement. 

• Negotiate a fair agreement by identifying which provisions manufacturers have historically shown flexibility on and proposing reasonable alternatives that are fair to both parties.
• Complete regulatory filings and exercise your protest rights if a manufacturer proposes to add a dealership point in your market.
• Take the lead in dispute resolution if a manufacturer issues a cure notice, proposes to terminate your dealership, or takes action that affects your territorial rights.
• Transaction support at all stages of the agreement where franchise-specific experience matters.

The cost of trusted franchise counsel during a dealership transaction is a fraction of what it costs to recover from a poorly negotiated agreement years later.

Contact an Attorney Near You for Help with Your Car Dealership Franchise

At Luther Lanard, PC, we work with prospective and existing dealership franchisees across the Dallas–Fort Worth area on all stages of franchise transactions. If you’re considering a franchised dealership, we can help you protect your legal and financial rights. For a confidential consultation with our team, contact our franchise law firm today.

Frequently Asked Questions About Car Dealership Franchises

Below are answers to some of the most common questions that prospective car dealership franchisees ask during the research process.

What’s the difference between federal franchise disclosure rules and Texas dealer/manufacturer franchise protections? 

The FTC’s Franchise Rule and Texas’s Chapter 2301 serve different purposes. The federal rule focuses on pre-sale disclosure, but generally does not apply to dealers and manufacturers. Texas law applies after the franchise is established, giving dealers things like termination protections and protest rights. 

If the manufacturer tries to add another dealer nearby, what practical steps should a dealer take first? 

You should determine whether the manufacturer has filed an application with the Texas Department of Motor Vehicles to establish or relocate the competing dealer. Under Texas law, manufacturers are required to provide notice of the decision so you can file a formal protest if desired. As an affected dealer, you should contact franchise counsel as soon as you become aware that a manufacturer may be seeking to add a point in your market. 

Does getting licensed as a franchised dealer in Texas involve steps beyond just signing a franchise agreement? 

Signing a franchise agreement alone isn’t enough to begin operating in Texas. You’ll also need a separate TxDMV dealer license, a surety bond, and proof of an established business location. You’ll also have to comply with local zoning rules. Of course, you will also likely need financing and/or insurance to operate.