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Automotive Meltdown

– Key Points of Risk Management and Preparedness

Friday August 21, 2009Presentation to the Japan Business Society of Detroit

Thomas J. ManganelloChair, Automotive Industry GroupWarner Norcross & Judd LLP

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The EmployeeThe Employee Free Choice ActFree Choice Act

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History Of The EFCA First proposed in the 108th Congress, but never got past

the committee hearing stage

Introduced again in 2007, and passed the House by a vote of 230 - 195

Introduced in the Senate, but failed to be brought to a vote, due to the certain veto by then President G.W. Bush

Current version of the EFCA was introduced in both chambers of the 111th Congress on March 10, 2009 W.R. 1409, S.R. 560. Both referred to Committee and have not been reported out

Bolstered by the support of the incoming administration and the democratic majority Congress, the passage of some semblance of the EFCA is virtually certain in 2009

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Employee Free Choice Act (EFCA)

THREE MAJOR CHANGES: 1. EFCA provides for card check authorization of a

petitioning union, without an election. Signed authorization cards from a majority of the bargaining unit employees will certify a petitioning union

2. Establishes radical bargaining process for initial collective bargaining agreements

3. Creates new sanctions against employers for certain unfair labor practices – Treble back pay damages and imposition of $20,000.00 penalties

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EFCA’S Three Major Changes1.Card Check Union Certification under the

EFCA

• Unions can become certified as the exclusive collective bargaining agent by presenting a majority of (50% plus 1) signed union authorization cards from employees in a bargaining unit.

• Once the union presents a majority of authenticated signed cards, the NLRB must certify the union. No election is necessary.

• EFCA potentially takes away the right for all the employees in the bargaining unit to privately vote whether or not they want a union.

• Why you need to know: The EFCA will make it abundantly easier for unions to organize an employer.

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EFCA’S Three Major Changes2. Strict Negotiation Timelines

• Once the union is certified and demands bargaining, an employer must begin good faith negotiations within 10 days.

• If a contract is not reached within 90 days, either party can request mediation from the Federal Mediation and Conciliation Service (FMCS).

• If no agreement is reached after 30 days of FMCS involvement, an “Arbitration Board” may, after fact finding, impose a collective bargaining agreement on the parties, which can be binding for 2 years.

• Why you need to know: If a union gets certified, it can lead to an imposed two year collective bargaining agreement within approximately 6 months of certification– or sooner.

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Three Major Changes3. Stiff Sanctions and Severe Monetary

Penalties Imposed on Employers

• Requires the Board to seek injunctions when certain unfair labor practice charges are filed against an employer.

• Expands back pay remedies to treble damages (3 times the amount) for employer unfair labor practices committed against individuals during union organizing or negotiations.

• Subjects employers, but not unions, to potential civil penalty up to $20,000 for unfair labor practices.

• Why you need to know: Employers are subject to much harsher and more expensive penalties.

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Implications Of The EFCA

• Enacts the most sweeping changes in labor legislation in the last 70 years

• In its current wording, takes away the employees’ right to privately vote on whether or not to have union representation. Is this "Free Choice"?

• Makes all employers, especially smaller businesses, susceptible to an easier and swifter unionization process

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Implications Of The EFCA

• Potential risk of undue peer pressure (coercion) in order to obtain signed authorizations cards. No standards for limiting deceptive practices in convincing employees to sign cards

• Potentially puts decisions regarding sensitive wage and employment conditions in the hands of an arbitration board who lack the knowledge of the employer’s history and relative economic challenges. Much about this process is unknown

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Implications Of The EFCA• Increased penalties on employers could

significantly add expenses to the process thus forcing economically motivated compromises against a company’s mid-term and long-term best interests

• Limited time for employers to respond to union activity. Currently employers have time during the union campaign to explain the benefits of remaining union-free. This is precisely why unions currently do not proceed without 65% authorization card support

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Current Status of EFCA in 111th Congress

• Political sands have shifted, particularly due to auto stimulus hearings

• Key Senate supporters have announced they cannot support the legislation as proposed

• The 60 votes in the Senate necessary to overcome filibuster are not attainable

• Discussions for compromise proposals (EFCA LITE) are underway, which would preserve private vote in an expedited process – the “quickie election”, among other compromises

• Resistance in private sector remains strong

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Contracting Pitfalls

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For Buyers or Sellers: do  the T&Cs match the  reality of the

transaction?

Most companies use boilerplate T&Cs , sell or buy.  The warranty contract provisions of every OEM and all the major Tier Ones say that seller warrants the design of the product -- even when Seller may  have absolutely no design responsibility (or, more likely the design is joint).  Recently defended $250 million warranty dispute and design was an issue (because the T&Cs said so), even though the reality was the exact opposite 

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Terms and Conditions -- they are not just for Buyers anymore!

Sellers: If your customer does not make you sign Buyer's terms, do your quotes have terms?  What do the terms say?  Do they assist you in knocking out the more onerous Buyer terms?

Sellers: Do you have terms? Have you presented your quote such that is an offer that must be accepted by Buyer , including your terms?

The gap fillers of the UCC  -- terms that take the place of "knocked out" terms -- benefit Sellers except for warranty liability

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SellersDo your  terms allow your pricing to

make you  profitable in the long term? Assuming that the products were priced properly

at the time of the quote, have you factored in and negotiated for rising prices of raw materials and other key components of profitability (currency issues?) over the life of the platform.  With raw materials at their lowest point now, the risk is even greater (being locked into a price for the life of the program at current prices).  Not just raw materials, currency fluctuations can also kill profitability.  Indexing is necessary

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SellersAre you permitting your customer to benefit competitors in LCC?

Technology transfer agreements are said to be for situations where you are unable to supply the Vehicle Manufacturer, but many are worded far broader.  Some OEM agreements permit them to license your technology to your competitors in China or elsewhere without limitations.  Other OEMs do this in the T&Cs.  Be wary of any technology transfer or license automatically included in T&Cs or DTA. If there comes a time when you can’t perform, negotiate a royalty for your technology to be used by “contract” manufacturer.

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Sellers Can your company be destroyed by unlimited recall/product liability even where a root cause analysis is unclear?

Preemptive debits mean just that -- your customer can withhold payment based on its "belief" that your product was the cause or even part of the cause for the recall.  Caps are clearly essential -- or at least mechanisms to dispute issues before the debits begin

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Buyers

Tier 1s and 2s: do your terms ( or lack thereof ) have you  trapped in the middle?

Vigilance and consistency are the key.  If you have not updated your terms or you do not insist that your supplier agree to your terms, your company can be at great risk.  Buyers have lots of jobs, but none more important than making sure that your company’s terms govern the transactions

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Terminate before its too late. The Bankruptcy Court is no place for a non-Debtor

2-609 and the ability to seek adequate assurance of performance

UCC remedies if your customer is insolvent – termination and suspension of performance

Planning for Your Customer’s Bankruptcy: The Lower Tier

Supplier

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Mutuality of Debt: Are you protected if you have to pay the Debtor’s sub-suppliers? A real world example

Do you have the ability to obtain financial information you need to make informed decisions? Do you have a “deemed insecure” clause to terminate a PO?

Is there “shared pain” through the supply chain if you have to compromise a receivable in bankruptcy?

Did your suppliers share the cost of using government receivable guaranties?

Contracting for Bankruptcy The Upper

Tier Supplier

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Change in Ownership and Control Provision The new owner will need all of the

contracts

Best time to get a re-affirmation and signature on the PO and to even change the form of agreement

Can keep the prior owners on the hook for shutdown costs

Contracting for the Change in Control