Washington area auto dealers have joined a nationwide protest against a Chrysler Corp. franchise proposal that critics say could undermine the new-car retailing system in the United States.

At issue is a step taken by the auto maker to absorb nearly 1,200 American Motors Corp. dealers following Chrysler's $2 billion takeover of AMC in August. The AMC dealers are now part of Chrysler's new Jeep-Eagle Division, which sells the popular four-wheel-drive Jeep vehicles and a group of passenger cars designed by French auto maker Regie Nationale des Usines Renault.

Six of the Jeep-Eagle outlets are in Maryland, five are in Virginia, and one is in the District.

Chrysler has asked that the dealers sign a franchise contract requiring them to settle all disputes with the auto maker through binding arbitration. That requirement seems to conflict with state "dealer franchise laws" written to protect the rights of auto dealerships as independent businesses.

Forty-nine states, including Virginia, have such laws; Maryland does not. Under the terms of the state laws, dealers may seek judicial remedy for problems with the manufacturers.

The franchise laws began flowering after World War II, when domestic car companies, bent on selling new cars as fast as possible, often rode roughshod over their dealerships and put out of business those deemed to be underperformers.

Under the state laws, auto makers must demonstrate, often in court, that they acted fairly in terminating a dealership.

The laws also require car companies to give affected dealerships adequate notice of intent to set up additional franchises in areas where the manufacturers have sales outlets. Under the terms of the laws, dealers have the right to appeal manufacturers' decisions to establish new shops within given areas.

But Chrysler's proposed contract would erode those protections, said Gerard Murphy, president of the Automotive Trade Association of the National Capital Area (ATANCA), which represents 185 auto dealers in the Washington area.

"The Chrysler contract is a little heavy-handed in favor of the company, and we've got some problems with that," Murphy said.

"Arbitration per se is fine. But Chrysler's proposal for binding arbitration prohibits the dealer from resorting to state franchise laws put into place to prevent auto makers from acting capriciously in disputes," he said.

If the proposal is adopted, it could encourage other auto makers to seek similar agreements, thus producing "a threat to the entire new car franchise system in the United States," Murphy said.

ATANCA has joined with the McClean-based National Automobile Dealers Association and other dealership groups in protesting the Chrysler plan, Murphy said.

Top NADA officials, including president James T. Caplinger and executive vice president Frank McCarthy, met for two hours Friday with Chrysler leaders in suburban Detroit in an attempt to settle the issue.

"We were very straightforward in explaining why we don't like binding arbitration, and they were straightforward in explaining why they put it in the contract," McCarthy said.

He said the meeting was "cordial" and "polite" and that the two sides made progress in understanding each other's position. "But no solution was offered," McCarthy said.

Chrysler officials declined specific comment on the meeting and dispute, but said they would have an answer for the Jeep-Eagle dealers by Oct. 26.

Chrysler officials in the past have expressed concern about the former AMC dealership system, which had some of the lowest consumer satisfaction ratings in the U.S. auto industry.

Chrysler officials have said privately that they have no intention of undercutting the independence of new car franchises. But many of the Jeep-Eagle dealers are going to have to meet stronger quality standards, Chrysler officials said.

To that end, Chrysler initially drafted a Jeep-Eagle contract that called for the termination of franchises whose consumer ratings fell below a median level, sources familiar with the contract negotiations said.

But the Jeep-Eagle dealers threatened a revolt over that measure, and Chrysler revised it to consider the size and location of dealerships in assessing consumer satisfaction scores.

There are other points of argument, including Chrysler's demand for the right of first refusal in cases where a dealer wants to sell his or her business.

"We think that's really asking too much," said Murphy.

"The right-of-first-refusal thing could really gum up the works if the dealer has to delay selling his business to an interested buyer in order to give Chrysler a shot at it," Murphy said.

"A lot of our people feel that the contract, as it stands, takes away some of our rights as citizens. They don't want that to happen. That's what this all boils down to," said Peter Zourdos, owner of Courtesy Jeep-Eagle in Rockville, and NADA vice chairman in charge of Jeep-Eagle affairs.