Ownership of territorial rights is a source of constant tension between franchisees and auto makers as companies seek maximum overall sales and franchise operators try to limit competition that cuts into their business.
A dispute about a plan by Chrysler Canada Inc. to open a new dealership in Calgary has thrown into question a key rule that has governed relations between auto dealers and manufacturers for more than a decade.
The dispute has led to an Alberta Court of Queen's Bench injunction that puts Chrysler's plans for an eighth dealership in Calgary on hold and has cast doubt on the so-called eight-kilometre rule, which prevents auto makers from setting up new dealerships within eight kilometres of an existing store of their own brand.
Ownership of territorial rights is a source of constant tension between franchisees and auto makers as companies seek maximum overall sales and franchise operators try to limit competition that cuts into their business.
Car companies and their dealers have generally avoided messy court fights over territorial rights since 1996, when they established the National Automobile Dealer Arbitration Program (NADAP), which established the rule that any plans to open new outlets within eight kilometres of an existing dealership are subject to arbitration.
That rule is "a crucial component of the NADAP agreement," said Rick Gauthier, president of the Canadian Automobile Dealers Association. "It's one of the cornerstones."
But in a case brought by Courtesy Chrysler (1987) Ltd., against Chrysler and another Calgary dealer, the court ruled that plans for a new dealership 12 kilometres away from Courtesy must be put on hold until a full trial examines how the new outlet would affect the existing dealership's business.
Chrysler's plan is to have the new dealership operating in 2014 as it tries to take advantage of residential growth in southeast Calgary and its own momentum, which includes 35 months of year-over-year sales increases and a jump to second spot in the Canadian sales rankings.
Chrysler spokeswoman Lous Ann Gosselin said the company is assessing its options, including a possible appeal.
The injunction halts plans that go back to 2006, when Chrysler first decided it needed another dealership in Calgary.
That plan was delayed during the 2008 recession when Chrysler's parent company went into Chapter 11 bankruptcy protection and came close to collapsing.
The eight-kilometre rule does not prevent Courtesy from challenging the proposed new location, Madam Justice K.M. Eidsvik said in a 22-page ruling granting the injunction against Chrysler.
"Courtesy has established the existence of a genuine risk that its ongoing viability as a business may be compromised," Judge Eidsvik wrote.
She rejected Chrysler's arguments, including its contention that allowing the injunction would set a dangerous precedent for other dealerships.
The eventual outcome of the case will have an impact throughout the industry because the NADAP plan set up in 1996 covers all auto makers in Canada and the vast majority of their dealerships.
The popular thinking among dealers has "always been that if [a new store] is outside that eight-kilometre zone then you're going to have a very tough case if you want to try to challenge any new appointment," said lawyer Shaun Laubman of Toronto-based Lax O'Sullivan Scott Lisus LLP.
"I'm not sure it completely eviscerates the eight-kilometre zone and the significance of it, but it opens the door to challenges that are outside that radius."