Legal Hardball: Sonic Automotive vs. Mercedes-Benz

(MoneyWatch)  Mercedes-Benz is playing legal hardball with a major U.S. dealership group, Sonic Automotive, a publicly traded auto dealership chain with $8.3 billion in 2007 revenues based in Charlotte, N.C. Sonic owns nine Mercedes-Benz dealerships plus 160 other franchises around the country, making it one of the nation's three biggest dealer chains, and a major Mercedes-Benz retailer.

At issue is the car company's ability to persuade -- or compel -- independent dealers to upgrade their dealerships to meet the automaker's new standards. Mercedes-Benz is trying to get most of its 300-plus U.S. dealers to join its Autohaus Initiative, which among other things calls on dealers to "glass in" their service garages so that customers can observe repair work.

In other worldwide markets, Mercedes-Benz and other manufacturers own most of their retail dealerships. In the U.S., however, ironclad state franchise laws strictly regulate what the factories can and can't do, especially when it comes to terminating a franchise or appointing a new one.

That's exactly what Mercedes and Sonic are now arm-wrestling about. In a March 17 complaint, Sonic accused Mercedes-Benz USA, the German automaker's U.S. sales and marketing subsidiary, of "unfair and deceptive trade practices." Sonic charges that MBUSA effectively vetoed Sonic's proposed acquisition of an additional Mercedes-Benz dealership, Beck Imports in Charlotte, earlier this year.

According to Sonic's complaint, filed in Charlotte's Mecklenburg County Superior Court, it wasn't the first time MBUSA made it difficult for Sonic to add more Mercedes-Benz dealerships. Last year, the suit said the automaker held up a Sonic acquisition in California, claiming that Sonic had failed to live up to an even earlier agreement to upgrade four other dealerships.

Sonic claims it has made "substantial progress" toward meeting the Mercedes-Benz standards, but charges that the automaker is applying unfair and improper "leverage" to force Sonic to spend millions of dollars on its other dealership, or lose its ability to grow its Mercedes-Benz business by acquisition. Sonic asks for unspecified damages.

In its May 19 reply, Mercedes-Benz denies any wrongdoing, and insists that "Sonic's claims are barred by its own breach of contract," for failing to make the required improvements.

The franchise laws are in part a reaction to the early days of the auto industry, when the factories would reward their friends or punish a dealer who was out of favor, by withholding cars, or by appointing another dealer nearby. North Carolina, where Sonic is based, has a reputation for particularly dealer-friendly state laws.

Mercedes-Benz owns only one retail dealership in the U.S. market, a showcase on New York's Park Ave., which features a showroom originally designed by Frank Lloyd Wright.