A group of Southern California tool dealers filed suit Tuesday against their supplier, Snap-On Tools Corp., alleging that the company exaggerated potential profits to would-be dealers and harassed existing dealers.
The dealers claimed at a Claremont news conference that the Kenosha, Wis.-based producer of socket wrenches and other automotive tools creates uneconomically small sales territories for new dealers while seeking to break up the territories of existing dealers. By making each dealer sell to fewer and fewer mechanics, the company ensures that every dealer will give the maximum possible sales effort, but without necessarily showing a profit, the dealers said.
"You've taken the map and cut it into so many quarter-inch squares that no one can make money in those quarter-inch squares . . . They've got slave labor," said Robert S. Kilborne, the group's attorney.
Kilborne alleged that Snap-On makes verbal assurances to dealers that they will earn $80,000 to $100,000 a year, but the small size of some territories has caused dealerships to change hands annually for the last four or five years in some areas of Los Angeles. The dealers' lawsuit, filed in Orange County Superior Court, asks $250,000 plus damages for each of the 27 dealerships.
Earlier Suit Settled
Between 200 and 250 dealers nationwide have already sued Snap-On or will do so soon, Kilborne said. The company has about 3,800 dealers.
Snap-On spokesman David C. Heide said Tuesday's lawsuit, together with a similar lawsuit filed last Thursday in Santa Clara County by a group of 23 Northern California dealers, is without merit and prompted by ambitious lawyers eager for fat settlements. "We characterize them definitely as attorney-generated. . . . They don't have a legal foundation, but they have a lot of glitz to them."
The lawsuits are inspired by a successful lawsuit two years ago against Snap-On by a dealer who charged that his territory was illegally reduced. A San Francisco jury awarded the dealer $6.85 million in July, 1986, and the company later settled the suit out of court for an undisclosed sum.
One of the dealers who filed suit Tuesday charged that Snap-On has tried to harass him into surrendering chunks of his increasingly populous territory in Irvine, Newport Beach and Costa Mesa. Michael A. Stay, a dealer for 10 years, said the company sought to give part of his area to a new dealer without even telling him.
"My wife and I were promised that it was our family business," said Stay, who made $100,000 on sales of $391,000 last year.
However, a state court in Michigan and a federal court in Virginia have ruled in other lawsuits that Snap-On can shrink existing territories, Heide said. The company has a right to change the size of territories at will because dealers do not pay any sort of franchise fee, he said.
One Dealer's Troubles
A new dealer makes an initial investment of about $65,000, he said, of which about $35,000 pays for a start-up inventory of tools and $5,000 pays for a lease on a company truck. The rest is paid to the dealer giving up the territory for amounts still owed by his or her customers. The company buys back all unsold tools from a dealer who goes out of business.
Heide argued that dealers who sue Snap-On are poor businessmen. He said that in 10 instances where dealers went out of business and later claimed they had received inadequate territories, the average replacement dealer in the same territories produced 82% more sales.
But Timothy E. Pollock, one of the dealers who filed suit Tuesday, said his dealership, a new territory in El Monte, could never be profitable. The territory, which Pollock has given up, included about 180 "mechanics" by the company's count, he said, but some were workers at an upholstery shop, a bowling alley, and eight employees of a single car-detailing garage.
Pollock mortgaged his home and possessions to make his initial investment, only to lose $79,000 in six months before selling his dealership back to Snap-On. "I'm just about to lose everything I own," he said.
Heide said every territory includes between 175 and 225 professional mechanics, all of whom make their living with the types of tools sold by the company.
Snap-On posted net earnings of $88.6 million on sales of $754.3 million last year. The growing number of lawsuits by dealers is unlikely to affect Snap-On's profits substantially, said F. John Mirek, a machinery and automotive industry analyst with Blunt, Ellis & Loewi, a Milwaukee brokerage. "I can't see it'll have any real impact other than the expense involved in going to court."
Snap-On shares closed up 37.5 cents at $41.875 in moderate New York Stock Exchange trading.