Automobile dealership owners make decisions each day that impact the future operations and success of their businesses. Dealers regularly enter into contracts to operate their business, and a common decision that dealers, like all business owners, are faced with is whether to agree to the contract terms as set forth in a potential agreement. Whether it is as minimal as a contract with a uniform provider/cleaning service, a detailing company or some other small vendor, or as important as a payroll provider, a dealer management service provider or even the manufacturer, dealers must be careful that they are highly critical of the provisions that govern such relationships. The importance of what many may think to be mundane, boilerplate contract terms has been highlighted in the wake of the CDK cyber incident that shut down many dealerships for weeks, causing massive losses that some dealers are learning may not be recoverable because of the fine print in their service agreement with CDK. While we hear time and again, “I’ll just sign it. What else can I do?” or “I will just sign it. What is the worst that could happen?” it should now be abundantly clear that even when presented with seemingly boilerplate contracts, you should not “just sign it”! There is more you can and should do.

Here, we highlight some of the crucial contract terms that dealers should take a close look at, and be weary to agree to, without pushing back and fully assessing what impact these provisions could have if (or when) something should go awry.

Limitations of Liability

It is well established in New Hampshire that “[p]arties to a contract are generally bound by the terms of an agreement freely and openly entered into.”¹ One exception to this general principle is if a contract or one of its terms contravenes public policy. An agreement or term is against public policy “if it is injurious to the interests of the public, contravenes some established interest of society, violates some public statute, is against good morals, tends to interfere with the public welfare or safety, or … is at war with the interest of society and is in conflict with the morals of the time.”² Now what on earth does that mean?

What this meant for the plaintiff/claimant in Mentis Sciences Inc. v. Pittsburgh Networks LLC was that Pittsburgh Networks, a technological support and IT services company hired by Mentis to provide services including monitoring of computers and network data backup, network services, antivirus, and comprehensive maintenance and support for servers, PC’s and the network, could only be held liable for direct damages after Pittsburgh Networks caused Mentis to permanently lose valuable data. After filing suit seeking damages estimated to be in the millions of dollars to recreate the lost data and make Mentis whole for lost business, Mentis was likely shocked to find out that it could only recover direct damages, “which is probably close to … the contract price” all because its agreement with Pittsburgh Networks included a limitation of liability clause. Ultimately, Mentis was awarded $40,000 — not the millions in losses it estimated were caused by Pittsburgh Networks — all because the limitation of liability clause in the service contract with Pittsburgh Networks limited recovery to direct damages. Dealers across New Hampshire may be surprised to learn that the very contracts they hold with many vendors likely have similar limitations, despite the crippling effects breach of such agreements could have.

Now I am sure we are all asking ourselves the same thing: “Why on earth would a company agree that its data and the work it obtains employing such data, which is worth millions of dollars, was only worth $40,000 if completely lost by its vendor that was supposed to be the one safeguarding such information?” The likely answer is that Mentis either was not aware of the limitation, it did not consider the full financial impact such a limitation could have, or it said to itself, like so many others do, “What can we do about it?” In fact, there is a lot that can be done, because as the court put it, Mentis “chose to enter into the contract.”

Limitations of liability are one such provision that dealers should be acutely aware of and should evaluate fully before agreeing to, including discussions with your legal counsel to understand the full impact such clauses could have. Limitations of liability in the commercial context are generally enforceable³and can have severe impacts on what types of damages may be pursued and the maximum recovery that can be achieved. Many service providers limit liability to the value of services rendered, the fees charged to date for the service or the value of fees charged for a certain number of months preceding the event giving rise to liability. In many scenarios, this amounts to a mere fraction of the damages that can be caused by the failure of a service provider to perform.

If you are entering into a contract with a provider who is essential to the daily operation of your business, you may want to think long and hard and seek the advice of counsel before agreeing to that limitation of liability, as it could be the difference between a $40,000 recovery, or a recovery worth millions.

Data Sharing/Privacy

Another aspect of the fallout of the recent CDK cyber incident is what data of those being serviced by CDK was placed at risk, and what reporting obligations do the users of CDK have as a result? Such concerns are not unique to CDK and the services it provides. Recently, I saw a thread where someone was discussing a manufacturer agreement that required the dealers to install, use and pay for manufacturer-specific technology. As part of that requirement to use a new system, at the dealer’s expense, to facilitate the exchange of information between the manufacturer and dealer, the dealer was also required to grant the manufacturer an unconditional and irrevocable license to all rights, title and interest in and to the dealer’s data. This included both personal information and intellectual property rights. Now, beyond being entirely too overbroad, such a grant of a license to the data of unknowing third parties could potentially run afoul of numerous data privacy laws.

While privacy/data security laws vary by country and state based on where the data subject is sitting, increasingly, the data subject (who the information or data is about — in this case, the customer — not the company collecting that person’s data) owns their data and has certain rights to restrict the use of such.⁴ In addition to state privacy laws, federal privacy laws and regulations, such as the Gramm-Leach-Bliley Act and the FTC’s Privacy Rule, may apply to certain dealer activities, particularly with respect to leasing and/or financing. Notably, dealers generally NEED to provide consumers with a right to opt out of sharing their information with non-affiliated third parties when providing their information for the purposes of requesting financing. To that end, FAQ 12 of the FTC’s “Privacy Rule and Auto Dealers: FAQs | Federal Trade Commission” specifically notes that “A manufacturer is not considered your ‘affiliate’ unless it controls your management or your policies, or you are under common control with the manufacturer,” so unless an exception applies, consumers retain the right to opt out of the dealer sharing their information under federal law regardless of what an agreement between the dealer and manufacturer may say.⁵

This begs the question, “Am I even permitted to sign such an agreement or is such sharing of customer data a violation of federal or state data privacy laws on its face?” Here again comes the overarching question, “What can I do about it? It is the manufacturer that requires this.” In fact, there is a lot you can do to push back and protect yourself.

For example, the New Hampshire Dealer Act includes safeguards to protect dealers from overly burdensome manufacturer contract requirements. In particular, R.S.A. 357-C:3(III)(b) provides that:

“It shall be deemed an unfair method of competition and unfair and deceptive practice for any: …

“III. Manufacturer; distributor; distributor branch or division; factory branch or division; or any agent thereof to: …

“(b) Coerce, or attempt to coerce, any motor vehicle dealer to enter into any agreement with such manufacturer, distributor, distributor branch or division, factory branch or division, or any agent thereof, or do any other act prejudicial to the dealer by threatening to cancel any franchise or any contractual agreement existing between such manufacturer, distributor, distributor branch or division, or factory branch or division, and the dealer provided, however, that notice in good faith to any motor vehicle dealer of that dealer’s violation of any terms or provisions of such franchise or contractual agreement shall not constitute a violation of this chapter …”

In this case, if you fight back and refuse to sign such a burdensome agreement presented by the manufacturer, you likely could find protection under the New Hampshire Dealer Act. The New Hampshire Dealer Act was put in place to level the playing field between manufacturers and dealers, and the New Hampshire courts have been supportive of the Act and its goals. In fact, even when dealers have voluntarily agreed to contract provisions that the courts believe run afoul of the Act, the courts have been quick to render such provisions unenforceable.⁶ However, it is usually much more cost-effective to avoid signing contracts with such onerous terms in the first place rather than fight over the enforceability of such provisions later on in the courts. If you have already signed one of these data-sharing agreements, we recommend that you consult with legal counsel who specializes in data privacy issues to make sure that you have proper privacy disclosures in place at your dealership and on your website.

Forum Selection Clauses

Many contracts include a provision that defines where a lawsuit (or, in some cases, arbitration) must be brought if the parties end up in a dispute.⁷ Like limitations of liability, such provisions are regularly enforced if they provide for exclusive jurisdiction in a particular forum.⁸ For many service providers, they seek to select a forum, or location, that best suits them and their needs. However, does it really make sense for you, a New Hampshire dealer, to have to litigate a dispute in Ohio, or better yet, California, if the relationship turns sour? I would hazard to guess that 99% of the time, the answer is no!

The majority, if not all, of your witnesses in such a dispute are likely located in New Hampshire. The same likely holds true for the documents and evidence that will be used in such a dispute. In addition, your counsel of choice is likely located and licensed in New Hampshire, not some far flung state that is half-way or entirely across the country. This means that you will then probably engage both your local counsel, with whom you are familiar and comfortable, as well as counsel in the jurisdiction where you have agreed to bring your disputes (unless your counsel has a national presence). All of this means added expense to vindicate your rights. So, what can you do?

Next time a service provider presents you with a contract,⁹ pay particular attention to the forum selection clause. Discuss with your local counsel the potential implications of such a clause. Then, in following the mantra of this article, push back! If a service provider seeks to do business in this state thereby generating revenues and profits from citizens thereof, they should similarly be welcome to resolve any disputes with its residents in its courts. Why should you, the dealers, be forced to litigate your disputes where these service providers wish? Given that nowadays there are numerous providers offering the same or similar services, there is an opportunity for dealers to shop around and to use the fact that the same services can be obtained elsewhere to negotiate these types of provisions in their favor. If enough dealers push back on these provisions in a given locale, service providers will have no choice other than to either concede such provisions or lose out on potential customers. The important thing to know is how to recognize which provisions could have serious negative consequences if they are to be followed and what power and rights you have as dealers to push back.

Conclusion and Takeaways

As many have unfortunately learned as of late, the terms and conditions of even the most standard contracts can have staggering impacts on a party’s rights and options should things go awry. It is for that reason that dealers must be acutely aware of the following considerations when entering into all contracts:

• Have we or our counsel reviewed the contract to determine if there are any provisions that could interfere with your ability to pursue the other party to the contract or to get out of the contract should the other party not be able to perform?
• Have we considered the full financial impact that the various provisions of a contract or a dispute with the other party to the contract could have on our business, and is that a risk that we are willing to take?
• Are we permitted under local laws to even agree to what is being proposed in a given contract?
• Have we attempted to negotiate more favorable terms in the contract or seek other service providers with more favorable terms?

While many businesses feel that they are hamstrung when presented with a contract for services or otherwise by a vendor, they must remember that they, too, can push back and fight for more favorable terms. This is particularly true in situations where a vendor or service provider focuses on a particular industry. So, I say again, always think, “Should you sign that contract?”