FTC Staff Comment to Governor James R. Thompson Concerning Illinois H.B. 776 to Regulate Auto Manufacturer Licensing of Repair Shops and Franchising of Dealers

Suite 1437
55 ust Monroe Street
Chiago. Illinois 60603
Area Code 312 353.8156
FEDERAL TRADE COM~USSIOr-.;
Chicago Regional Office
September 8, 1989
COMMISSION AUTHORIZED
V891)1)91
The Honorable James R. Thompson
Governor of the State of Illinois
Office of the Governor
Springfield, Illinois 	62706
Dear Governor Thompson:
The staffs of the Federal Trade Commission's Chicago Regional Office and Bureau
of Competition are pleased to have this opportunity to respond to your letter of August
21, 1989, requesting our comments on House Bill 776. l 	The bill, in essence, would
prevent automobile manufacturers fr0"'l!i£~!1sin~repair shops to operate in areas where
their new car dealers provide repair services and would further restrain the ability of
manufacturers to franchise more than one dealer in any market.2 	We believe that the
bill, if enacted, would most likely injure consumers by reducing competition, increasing
costs, and raising prices in the market for repair services and could have similar effects
in the market for new automobiles.
INTEREST AND EXPERIENCE OF THE FEDERAL TRADE COMMISSION
Our interest in this legislation stems from the Commission's mandate to enforce
the consumer protection and antitrust laws of the United States. 	The Federal Trade
Commission is charged with promoting competition and protecting consumers from unfair
methods of competition and unfair or deceptive acts or practices.3 	In fulfilling this
mandate, the staff of the Federal Trade Commission often submits comments, upon
request, to federal, state, and local governmental bodies to help assess the competitive
and con~umer we!fare implications of pending policy issues. 	In enforcing the Federal
Trade Commission 	Act, the 	Commission staff has gained 	substantial 	experience 	in
analyzing the impact of both private and governmental restraints on competition.
1 	These comments represent the views of the staffs of the Federal Trade
Commission's Chicago Regional Office and Bureau of Competition and do not
necessarily represent the views of the Commission or any individual Commissioner.
2 	HB 776 would also amend the Illinois Business Corporation Act of 1983, III.
Rev. Stat. ch. 32. 	We express no comment upon these amendments.
3 	See 15 U.S.C. § 41 et sea.

The Honorable James R. Thompson - Page 2
During recent years, the Commission has been actively involved in issues relating
to the retail automobile market. 	In 1984, for example. the Commission issued the Used
Motor Vehicle Trade Regulation Rule ("Used Car Rule") in an effort to educate consumers
about their warranty rights 	and 	to prevent the injury that can 	be 	caused 	by oral
misrepresentations in used car transactions.4 	The Commission has also recently ruled
that automobile dealers in the Detroit area violated the antitrust laws by agreeing to limit
their hours of operation.s 	In addition, the Commission staff has conducted economic
research concerning nutomobile marketing. 6
The Commission staff recently commented on proposed Illinois legislation that
would have prohibited brokers from selling new and used cars and that would have
expanded Illinois's dealer licensing provisions.' 	We have also commented on Illinois
legislation that would have prohibited car dealers from holding sales outside of their local
markets.s We have also submitted comments to several other states regarding legislative
initiatives in the automobile sales area. 9
4 	Used Motor Vehicle Trade Regulation Rule, 16 C.F.R. Part 455. 	The Used Car
Rule requires used car dealers to place a sticker in the window of each car that
clearly states the warranty coverage being offered and that suggests consumers
obtain an independent inspection of the vehicle prior to purchase. 	16 C.F.R. § 455.2.
These stickers form part of the contract of sale for a used car. 	16 C.F.R. § 455.3(b).
Staff compliance guidelines were updated as recently as May 17, 1988. 	53 Fed. Reg.
17658 (1988).
5 	Detroit Auto Dealers Ass'n, Inc., FTC Docket 9189 (February 22, 1989).
6 	See Robert P. Rogers, The Effect of State Entry Regulation on Retail
Automobile Markets, Federal Trade Commission, Bureau of Economics Staff Report, at
108 (January 1986).
, 	Letter from C. Steven Baker, Director, Chicago Regional Office of the Federal
Trade Commission, to the Honorable Aldo A. DeAngelis, Senate of the State of Illinois,
concerning Illinois Senate Bill 1978 (March 21, 1989). 	That legislation was vetoed.
S 	Letter of April 24, 1987, from John M. Peterson, Director, Chicago Regional
Office of the Federal Trade Commission, to the Honorable Woods Bowman, State
Representative, concerning House Bills 787 (1986) and 1173 (1987). 	That legislation
was vetoed.
9 	See Comments of the Cleveland Regional Office and Bureau of Economics
staffs of the Federal Trade Commission on Michigan House Bill 4390 by Mark Kindt,
Director, Cleveland Regional Office (September 29, 1988); letter from the FTC staff to
the Florida Senate (March 29, 1988); letter from the FTC staff to the South Carolina
House of Representatives (March 21, 1988); letter from Jeffrey I. Zuckerman, Director,
(continued ... )

The Honorable James R. Thompson - 	Page 3
SUMMARY OF HOUSE BILL Tl6
The State of Illinois currently regulates the sales of new cars in several ways.
Dealers are required to obtain licenses from the State. IO In addition, the Motor Vehicle
Franchise Act ll contains various provisions designed to protect the interests of car
dealers. 	For 	example, 	a 	manufacturer 	cannot 	unilaterally 	establish 	an 	additional
dealership in the "relevant market area" of a dealer of the same line of cars without that
dealer's consent.12 	Should a dealer withhold consent, any attempt by the manufacturer
to establish an additional dealership can be challenged through arbitration or in court. 13
Thus, for example, a Mercury dealer could possibly prevent Ford Motor Company from
establishing a competing Mercury dealer nearby. I"
House Bill 776 would amend the Illinois Motor Vehicle Franchise ActlS to restrict
the ability of manufacturers to franchise service centers and restrain further their ability
to franchise car dealerships. 	The bill would amend Section 216 of the Act to expand the
scope of the Act's coverage to au~bile ~airJirms franchised by an automobile
manufacturer. 	The bill would also amend Section 41
TQf the Act to declare additional
9( ...continued)
FTC Bureau of Competition, to William P. TeWinkle, Wisconsin State Senate (February
19, 1988); letter from the FTC staff to the California State Assembly (January 29,
1988); letter from the FTC staff to the Governor of Texas (June 1, 1987).
10 	Illinois Vehicle Code, III. Rev. Stat. ch. 95 1/2, para. 5-101 and 5-102.
11 	III. Rev. Stat. ch. 121 1/2, para. 751 - 764.
12 	III. Rev. Stat. ch. 121 1/2, para. 751 - 764.
13 	See III. Rev. Stat. ch. 121 1/2, para. 762.
14 	The Commission's Bureau of Economics conducted a study of "relevant
market area laws" and concluded that state laws restricting the number of automobile
dealers in an area increase costs to car buyers in this country by as much as $3
billion each year. 	See Rogers, supra note 6.
IS 	Ill. Rev. Stat. ch. 121 1/2, para. 751 - 764.
16 	III. Rev. Stat. ch. 121 1/2, para. 752.
17 	III. Rev. Stat. ch. 121 1/2, para. 754. 	Section 4 	provides, in part, that "[i]n
construing the provisions of this Section, the courts may be guided by the
interpretations of the Federal Trade Commission Act (15 U.S.C. § 45 et ~, as from
time to time amended." 	III. Rev. Stat. ch. 121 1/2, para. 754 (a). 	Section 4 also
prohibits a manufacturer from engaging in various enumeraied unfair means of
competition and deception with respect to its franchised dealerships.

The Honorable James R. Thompson - 	Page 4
methods of competition and deceptive acts or practices unlawful. Section 4, as amended
by HB n6, would prohibit a manufacturer from:
1) 	granting an additional dealer or automobile service franchise in the market
area of an existing dealer or service franchise;18
2) 	renewing or extending a dealer or automobile service franchise in the
market area of an existing dealer or repair franchise;19 or
3) 	maintaining or extending an automobile service franchise that had been
granted indefinitely prior to the effective date of HB n6 in the market area
of an existing dealer or service franchise. zo
The bill, therefore, would prohibit a manufacturer from authorizing a service center
to operate in any market area where a dealer had been granted a franchise. 	Further, the
bill most likely would discourage a manufacturer from franchising a repair center in a new
area, 	for 	any 	such 	franchise 	would 	preclude 	the 	manufacturer 	from 	subsequently
establishing a new car dealership in the market. 	As a result, the bill would tend to
eliminate manufacturer-authorized service facilities that are not affiliated with new car
dealerships. 	Moreover, the bill apparently would force manufacturers to eliminate all but
one new car dealership in each market area defined in a franchise agreement, thereby
creating a single outlet in each area for both the distribution of that manufacturer's new
cars and the provision of its authorized service.
THE POTENTIAL EFFECTS OF HOUSE BILL ns
A The Market for Car Repair Services
Car repair services are offered by manufacturer-authorized service centers and by
repair shops that are operated without official manufacturer sanction. 	Traditionally,
authorized service has been available only from new car dealers. 	A variety of firms offer
non-authorized service, including independent repair shops, general repair service chain
outlets, specialized service centers, and filling stations. 	Consumers may prefer to obtain
authorized service for several reasons. 	For example, some manufacturers limit their
warranties to repairs performed by authorized service centers. 21 	In addition, some
18 	HB 776, § 4(e)(13), amending Ill. Rev. Stat. ch. 121 1/2, para. 754.
19 	HB 776, § 4(e)(14), amending Ill. Rev. Stat. ch. 121 1/2, para. 754.
20 	HB 776, § 4(e)(15), amending III. Rev. Stat. ch. 121 1/2, para. 754.
2l 	We understand, for example, that non-emergency repair services must be
obtained from authorized centers under General Motors Corporation warranties.

The Honorable James R. Thompson - 	Page 5
consumers 	may 	value 	the 	manufacturer's 	representation 	of 	quality 	implicit 	in 	its
authorization and be willing to pay a premium to obtain the assurance.
We understand that one manufacturer, General Motors Corporation, has recently
instituted a pilot program in the Chicago area known as "Delco Tech." 	Under the
program, GM licenses independent service centers to provide repair services under the
Delco Tech tradename.22 	Delco Tech shops receive service bulletins, receive training
from GM, and are authorized to sell GM parts. 	According to GM, Delco Tech shops
charge much less for GM-authorized service than do new car dealers.
HB n6 would prevent a manufacturer like GM from establishing or maintaining
a franchised service center in the market area of a car dealer, 	as defined in the
dealership agreement. 	To the extent consumers value manufacturer-authorized service,
the bill may prevent manufacturers from offering that service in the most efficient way.
For example, a manufacturer may conclude that authorized service can best be provided
by facilities that are separate from car dealerships or that efficient service requires more
outlets in a given area than does distribution of new cars. 	Or it may find that a particular
independent garage in a city provides service more efficiently than does its own dealer.
Any loss of efficiency caused by restricting the manufacturer's options for offering
authorized service will be reflected in higher prices that consumers will have to pay.
Moreover, HB 776 may enable some dealers to charge prices for repair service
that exceed their costs. 	The bill would effectively force manufacturers to confine the
provision of authorized service to new car dealers; indeed, it would appar"ently force them
to franchise no more than one dealer in a market area. 	When a supplier unilaterally
decides to distribute its product or service through dealers assigned exclusive sales
territories, a presumption arises that the territorial restraints established increase the
efficiency of the distribution process. 23 	When the government requires the use of
exclusive territories, however, no such presumption arises. 	A distributor may be able to
charge a supra-competitive price because the manufacturer is barred from establishing
competing outlets. 	Further, by reducing the number of service providers, the bill may
increase the risk of collusion among them. 	Because the restrictions contained in HB 776
would apply to all motor vehicle manufacturers, the risk of anticompetitive effects is
22 	GM reports that Delco Tech shops are not currently authorized to perform
warranty work. 	GM presumably might decide to confer this authorization in the future,
especially after it has had an opportunity to assess the results of its experimental
program.
B 	See generally 	C0ntinental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).
As long as a manufacturer does flOt agree with other manufacturers to impose
territorial restraints on their respective dealers and does not impose them at the
behest of a dealer cartel, such restraints in franchise agreements will not violate the
antitrust laws if they are otherwise reasonable.

The Honorable James R. Thompson - 	Page 6
enhanced. 	Consumers, of course, may suffer if HB 776 prevents manufacturers from
restraining supra-competitive pricing of authoriLed repair services.
B. The Market for New Cars
By prohibiting a manufacturer from "renew[ing]" a franchise established prior to
the effective date of the act in a market area of a prior-established dealer,24 HB 776
would apparently allow manufacturers to maintain only a single dealership in each market
area, defined as the dealer's "area of primary responsibility" specified in the franchise
contract.25 	Although the size of these areas is thus determined by the franchise
agreement, the areas may have been defined expansively for business reasons at a time
when the effects of the specification under the bill could not have been foreseen. 	For
example, GM reports that, under its franchise agreements with car dealers, an entire
metropolitan area is a dealer's primary area of responsibility. 	The legislation would
therefore eliminate all but one Chevrolet dealership in the Chicago metropolitan area. u;
Even if this result is unintended and could be prevented through executive or
legislative amendatory action, the bill would still impose an additional restraint on the
ability of manufacturers to establish efficient distribution networks. 	Under current law, if
a dealer refuses to consent to the establishment of another dealership in its "relevant
market area," the manufacturer may nevertheless be permitted to grant the new franchise
after arbitration or litigation. 	Under HB 776, the manufacturer would be absolutely
prohibited from "grant[ing] an additional franchise in a market area of an existing motor
vehicle dealer ....,,27 	Therefore, even if market conditions change, such that efficient
distribution in a growing area requires another dealership, manufacturers would be denied
a forum for demonstrating the need and desirability of adding an outlet. 2tl
24 	HB 776, § 4(e)(14).
25 	III. Rev. Stat. ch. 121 1/2, para. 7~2 (p).
U; 	Our analysis does not consider whether HB 776, by affecting the pre-existing
contractual rights of a manufacturer and its franchisees, may run afoul of state or
federal constitutional mandates. See Fireside Chrysler-Plymouth Mazda Inc., v.
Chrysler Corp~, 129 III. App.3d 575, 472 N.E.2d 861 (1 st Dist. 1984) (aff'g trial court's
decision that retroactively applying the Motor Vehicle Franchise Act to the facts of that
case would have unconstitutionally impaired vested contractual rights).
27 	HB 776, § 4(e)(13).
2tl 	Another potential problem that could arise from enacting this legislation stems
from using the terms "relevant market area" and "market area" in different ways. 	The
Motor Vehicle Franchise Act defines "relevant market area" as an area around the
principal location of a franchisee. 	That area is either a ten or fifteen mile radius,
(continued ... )

The Honorable James R. Thompson -- Page 7
As in the market for repair services, the restraints that HB 776 would impose on
manufacturers in the market for new cars would most likely result in 	less efficient
distribution systems and could increase the risk of anticompetitive pricing. Consequently,
the price of automobiles to consumers would be expected to rise. 	Some manufacturers
may even discover that franchising additional dealers in neighboring states to serve
Illinois markets would be profitable. 29 Illinois consumers would then incur needless costs
of inconvenience, and jobs might unnecessarily exit the state.
CONCLUSION
We believe that HB 776 is likely to increase the costs of distribution and may
increase the risk of anticompetitive pricing in the markets for both car repair services and
new automobiles. 	In particular, the bill would effectively eliminate a valuable new source
for manufacturer-authorized repair work. 	We therefore believe that enactment of HB 776
may injure consumers by resulting in higher prices for some types of repair services and
for new cars.
We appreciate this opportunity to comment.
Sincerely.,
SSt~~~~Director
Chicago Regional Office
28( ...continued)
depending upon the population of the county in which the franchisee is located. 	III.
Rev. Stat. ch. 121 1/2, para. 752 (q). 	On the other hand, the bill prohibits
manufacturers from establishing, renewing, or maintaining a dealership or service
facility in the market area of an existing dealer. 	However, the size of a "market area"
for the purposes of HB 776 is defined in each franchise agreement and can thus vary
in size. 	Thus a dealer's market area could be larger than its "relevant market area."
The differences in these two terms could create anomalous situations. 	A
manufacturer can currently establish a competing dealer within the "relevant market
area" of an existing dealer if a reviewing court or arbitrator approves. 	Under HB 776,
however, the manufacturer would be absolutely barred from establishing that
dealership in a location outside the "relevant market area" if the location also
happened to be within a larger "market area" provided in a dealer's existing franchise
agreement.
29 	For example, dealers in northwest Indiana and southeast Wisconsin might be
able to serve the Chicago market, dealers in east central Iowa might be able to sell in
the Quad Cities market, and dealers in St. Louis might be able to serve Illinois
consumers in adjacent areas.