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Berkshire Hathaway Automotive vs. Texas Law

July 31, 2017 0 Comments

The future is unclear for the fate of Berkshire Hathaway Automotive’s quest to open up a new – and its first – Mercedes-Benz dealership in Austin, Texas: State regulators have recommended revoking the licenses under which Berkshire Hathaway Automotive operates the other 29 car dealerships it owns in Texas, as well as recommending that the application for a new license be denied.

An administrative judge pressed pause on the Austin plans, providing some time for the issue to be cleared up.

Berkshire Hathaway Automotive, based in Irving, is a subsidiary of Warren Buffett’s Berkshire Hathaway conglomerate. BHA has Mercedes’s support, with the automaker in favor of opening a second retail location in Austin other than the current one, Mercedes-Benz of Austin.

“Mercedes-Benz is committed to adding another [dealership] to this market,” said Austin attorney Lloyd Ferguson, representing Mercedes-Benz USA during a recent license application hearing. “At times last year, 25 percent of the people of Austin who bought a Mercedes were going outside the market” to do so.

Continental Imports Inc., which owns Mercedes-Benz of Austin, opposes BHA’s plans and is “formally protesting to the state” saying a new Mercedes franchise will hurt its business.

Under a Texas law, franchise dealerships can protest new franchise licenses if the proposed newcomer is “within 15 miles of them or located within the same county.” Unfortunately for BHA, its proposed dealership would be just slightly less than 15 miles away from Mercedes-Benz of Austin and would be in Travis County, the same county where Mercedes-Benz of Austin is located.

Continental asked if consideration of the franchise license application could be put on hold due to BHA’s legal predicament when it comes to dealership ownership. Casey Bell, an administrative law judge presiding over the case, said the request was “reasonable” and granted Continental the delay.

“Please don’t make us spend the hundreds and hundreds of thousands of dollars now” on economic analyses and market studies needed to protest the application,” said Leon Komkov, attorney for Continental, during a recent hearing. “It’s a useless, it’s a moot, process,” given the circumstances.

Jordan Mayfield, an attorney representing BHA, “downplayed the significance” of the Department of Motor Vehicles enforcement division’s recommendations back in May and June that the licenses be revoked.

“The parties are engaged in some discussions to try and resolve” the issue, Mayfield said during the hearing, saying the DMV’s recommendations were “informal” and “preliminary.”

Mayfield and Ferguson, the latter representing Mercedes-Benz USA, “advocated for the application process for the new license to go forward in the interim” (My Statesman).

According to the Texas law, if a company manufactures vehicles, it isn’t allowed to own car dealerships – even if the vehicles produced and sold aren’t the same type. BHA’s parent company, Buffett’s Berkshire Hathaway, owns Forest River Inc., an Indiana-based recreational vehicle maker.

The DMV enforcement division started looking into BHA’s ownership issues in April, with both the parent and child company “scrambling” to find a way around the law. A lobbying effort in the spring, with Buffett traveling to Austin to meet with state leaders, did not “result in approval of a legislative fix” dubbed the “Buffett bill” which would allow ownership of both manufacturer and dealership so long as the vehicle types differed. Recently, DMV board chairman Raymond Palacios, Jr., asked Texas Attorney General Ken Paxton if it was technically possible for BHA to “comply with the law” by relinquishing control of RV manufacturer while still retaining ownership status.

Berkshire Hathaway is understandably reluctant to let go of its “lucrative” Texas dealerships, mostly in the Dallas-Fort Worth metro area. According to the National Automobile Dealers Association, the average U.S. dealership made about $59.6 million in sales in 2016, with luxury dealers pulling in an average of $94.1 million.

BHA, formerly held by the Van Tuyl Group before being acquired by Buffett’s conglomerate for $4.1 billion in 2015, owned 83 dealerships at the end of 2016 – including the 29 in Texas.

Jeff Rathor, chief executive of BHA, called it “a $10 billion company” during a Texas Legislature committee hearing in April and said the company employs 4,200 Texans. According to Rathor, he only recently discovered Berkshire Hathaway had issues with the ownership law.

Those in support of the strict regulations, “including the politically powerful Texas Automobile Dealers Association,” say the law helps keep automakers from establishing monopolies. Critics of the law say it’s a “protectionist” measure intended to keep auto dealerships as third-party middlemen.

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