UPDATE:US Car Dealers Push For Tougher State Franchise Laws

Some states are considering legislation to enhance payments to auto dealers when manufacturers eliminate brands, moves that could add significant costs to the restructurings of General Motors Corp. (GM) and Chrysler LLC.

The proposals involve changes to state franchise laws that cover contracts between auto makers and dealers, including rules on how much car companies owe dealers when they discontinue a model.

Auto dealers have been pushing for the changes in recent months in anticipation of broad cost-cutting by Detroit auto makers, and dealers say some states have already enacted the changes.

The laws could affect GM, which said in restructuring plans this week that it plans to phase out its Hummer and Saturn brands if no alternatives arise.

A bill making its way through the Virginia legislature would require that compensation payments to dealers be based on a brand's value over a two-year period, rather than at the moment it is discontinued, according to dealers and an auto-industry association tracking the legislation. The bill appears to have significant backing in the legislature but is opposed by Gov. Tim Kaine.

Such a bill could significantly affect payments to Saturn dealers in 2011, when GM says it may discontinue the brand, because by then the brand would likely have lost much of its value under the stigma of discontinuation.

About a dozen states are considering similar proposals designed to enhance compensation payments for dealers, said the Alliance of Automobile Manufacturers, which represents major U.S. and foreign auto makers and is fighting the proposals.

Auto makers say the changes could add billions of dollars in restructuring expenses at a time GM and Chrysler are already in danger of falling into bankruptcy.

But dealers contend that strengthening state laws is the only way to ensure balanced negotiations with big auto makers.

Many dealers feel they were outmuscled and unfairly compensated when GM eliminated its Oldsmobile brand, said Don Hall, president and chief executive of the Virginia Automobile Dealers Association.

"Most of these dealers got very little for a 70- or 80-year investment," Hall said. "You promised to give me parts, inventory. I built you a six-and-a-half-million-dollar facility. Now you're telling me I'm losing my livelihood and I'm not entitled to anything."

But manufacturers say the proposed changes are biased toward auto dealers - who can carry significant sway in state legislatures - and would severely limit their ability to reshape the companies.

"Auto makers believe this is just another brick in the backpack given all that the entire industry is struggling with," said Wade Newton, spokesman for the Alliance of Automobile Manufacturers. He said that shutting down a vehicle line is "emotionally and technically" difficult but a necessary step toward the industry's long-term health. But he said that the additional costs tied to the proposed changes could offset the savings associated with the elimination of a brand.

"The only reason you would do that is because there's some economic benefit that contributes to a company's viability," Newton said. "Franchise laws like this eliminate that benefit."

Spokesmen for GM and Chrysler didn't immediately respond to requests for comment.

In its plan submitted to the Treasury Department on Tuesday, GM said it intended to phase out its Hummer brand this year and Saturn in 2011 if no alternatives arise.

The company said that state franchise laws "protect individual dealers more than typical retail franchisees," "drive complexity" and limit auto makers' "freedom to operate."

-By Josh Mitchell, Dow Jones Newswires; 202-862-6637; [e-mail]