BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 642 (Padilla)
As Introduced
Hearing Date: April 26, 2011
Fiscal: Yes
Urgency: No
BCP
SUBJECT
Vehicles: Manufacturers and Distributors
DESCRIPTION
Existing law prohibits manufacturers and distributors of motor
vehicles from engaging in specified actions with respect to
dealers of those vehicles. This bill would additionally
provide, among other things, that manufacturers, distributors,
and their affiliates are prohibited from:
Obtaining or enforcing an agreement that modifies or
disclaims a duty of the manufacturer or a right of the
dealer, limits the right of a dealer to file evidence with
the New Motor Vehicle Board, provides for termination of a
franchise by a dealer, or requires a controversy to be
referred to a person for a binding determination;
Unfairly discriminating in favor of a dealership owned
by a manufacturer or distributor by allowing that
dealership to receive sales or service incentives,
discounts, or promotional programs that are not available
to all franchises on an equivalent basis; and
Unfairly discriminating against a franchisee selling a
service contract, debt cancellation agreement, or similar
product not approved by the manufacturer or distributor, as
specified.
This bill would additionally narrow the circumstances where a
manufacturer is permitted to operate a dealership, and augment
the disclosure requirements when a manufacturer or distributor
does own an interest in a dealership.
BACKGROUND
(more)
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The New Motor Vehicle Board (NMVB) is a program within the
Department of Motor Vehicles (DMV) which operates in a
quasi-judicial capacity to resolve disputes between franchise
dealers and manufacturers/distributors of new motor vehicles and
specified motorsports vehicles. Under existing law, the NMVB
may only take action on disputes when "a protest is presented to
the Board by a franchisee." (Vehicle Code Section 3050.)
This bill, sponsored by the California New Car Dealers
Association, would enact numerous prohibitions that seek to
address concerns of new car dealers regarding their ability to
submit a protest to the NMVB, competition from factory-owned
dealerships, and manufacturers requiring dealers to sell certain
products.
CHANGES TO EXISTING LAW
Existing law , Vehicle Code Section 11713.3, makes it unlawful
for a vehicle manufacturer or distributor to take specified
actions against a vehicle dealer or franchise, including:
Requiring a dealer to prospectively assent to a release,
assignment, novation, waiver or estoppel that would relieve
any person from liability, as specified, or requiring any
controversy to be referred to any person other than the
board, if that referral would be binding on a dealer, as
specified;
Competing with a dealer in the same line-make operating
under an agreement or franchise from a manufacturer or
distributor in the market area, except that competing does
not include: (1) temporarily owning or operating a
dealership, as specified; (2) owning an interest in a
dealer as part of a bona fide development program, as
specified; or (3) owning a subsidiary corporation of a
distributor that sells motor vehicles at retail if, for at
least three years prior to January 1, 1973, the subsidiary
corporation has been wholly owned, and notice is given to
the board each time it commences or terminates operation of
a dealership and each time it acquires or divests itself of
an ownership interest.
Unfairly discriminating in favor of a dealership owned
or controlled, in whole or in part, by a manufacturer or
distributor or an entity that controls or is controlled by
the manufacturer or distributor, as specified.
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This bill would revise the above prohibitions as follows:
Makes it unlawful to obtain or attempt to obtain from a
dealer, or to enforce or attempt to enforce against a
dealer an agreement, provision, release, assignment,
novation, waiver or estoppel that does any of the
following: (1) modifies or disclaims a duty or obligation
of the manufacturer, distributor, or a right or privilege
of a dealer; (2) limits or constrains the right of a dealer
to file, pursue or submit evidence in connection with a
protest before the board; (3) provides for the termination
of the franchise by a dealer; or (4) requires a controversy
to be referred to a person for a binding determination. An
agreement in violation of the above would be void.
Requires manufacturers or distributors that compete with
dealers through the temporary ownership or operating
exception: (1) to do for not more than one year at the
location of a former dealership of the same line-make that
has been out of operation for less than six months; (2)
provide written notice to the board each time it changes a
temporary ownership interest in the dealership; and (3)
provide written notice to the board of the name of the bona
fide dealer develop owner and the ownership interests of
each owner when the ownership is part of a development
program.
This bill would add that the following would be unlawful actions
on the part of a manufacturer or distributor:
Sales or service incentives, discounts, or promotional
programs that are not made available to all California
franchises on an equivalent basis;
Unfairly discriminating against a franchisee selling a
service contract, debt cancellation agreement, maintenance
agreement, or similar product not approved, endorsed,
sponsored, or offered by the manufacturer, distributor, or
affiliate. Unfair discrimination would be defined as
including, but not limited to:
o Express or implied statements that the dealer
is under an obligation to exclusively sell or offer to
sell service contracts, debt cancellation agreements,
or similar products offered by the manufacturer or
distributor;
o Express or implied statements that selling or
offering service contracts, debt cancellation
agreements, maintenance agreements, or similar
products not approved or offered by the manufacturer
or dealer, or the failure to sell those products, will
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have any negative consequences for the dealer;
o Measuring a dealer's performance under a
franchise agreement based upon sale of service
contracts, debt cancellation agreements, or similar
products approved or offered by the manufacturer or
distributor;
o Requiring a dealer to actively promote
specified products; and
o Conditioning access to vehicles or parts, or
vehicle sales or service incentives upon the sale of
service contracts, debt cancellation agreements, or
similar products approved or offered by the
manufacturer or distributor.
This bill would provide that unfair discrimination does not
include, and that nothing shall prevent a manufacturer from,
offering an incentive program to vehicle dealers who voluntarily
sell or offer to sell service contracts, debt cancellation
agreements, or similar products approved, endorsed, sponsored,
or offered by the manufacturer or distributor, if the program
does not provide vehicle sales or service incentives.
This bill would expand the above prohibitions to apply to
actions taken directly or indirectly through an affiliate.
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COMMENT
1. Stated need for the bill
According to the author:
Despite dealer franchise protection laws, dealers are being
pressured by manufacturers to waive their rights by signing
"voluntary" agreements and to sell manufacturer products and
are discriminated Ýagainst] if they do not. There are also
renewed concerns and fear of unfair competition among
franchises of the same manufacturer. The state needs to
step in and level the playing field for all the participants
in the new vehicle market. . . . This bill would update and
augment California's dealer franchise protection laws by
prohibiting statutory protest right waivers, addressing
product discrimination and unfair competition by
factory-owned dealerships.
2. Waiver of rights
Manufacturers and distributors are currently prohibited from
requiring a dealer to prospectively agree to a release or waiver
that would relieve any person from liability, as specified, or
to require any controversy to be referred to a person other than
the NMVB, if the referral would be binding on the dealer. (Veh.
Code Sec. 11713.3.) That provision arguably recognizes the
disparity in bargaining power between a small-family owned
dealer and a large multi-national auto manufacturer by ensuring
that the protections enacted by the Legislature cannot be
waived.
The California New Car Dealers Association, sponsor, asserts
that a 2006 decision by California's Third District Court of
Appeal "effectively held that the waiver of a protest right is
permissive unless a manufacturer uses coercion to obtain the
waiver." That case, DaimlerChrysler Motors Co. v. Lew Williams,
Inc. (2006) 142 Cal. App. 4th 344, involved the owners of
dealerships (referred to in the opinion as "Keil") agreeing to
waive any and all rights to protest or challenge a reopening or
reestablishment of a DaimlerChrysler dealership in the area.
The court held that the prohibition in Section 11713.3 of the
Vehicle Code against waivers did not invalidate Keil's waiver as
follows:
First, DaimlerChrysler did not "require" Keil to assent to
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the waiver. The waiver was the result of an arm's length
voluntary transaction where for valuable consideration,
DaimlerChrysler agreed not to exercise its right to
reestablish a franchise on Florin Road within the time
period statutorily exempt from protests in exchange for Keil
agreeing not to protest should DaimlerChrysler eventually
reestablish a dealership there.
Keil retorts that DaimlerChrysler admitted it required the
dealers to waive their rights. The statement is taken out of
context. In 2000, five years after Keil executed the
waiver, DaimlerChrysler met with Sacramento area dealers to
discuss its business objectives, including reestablishing a
dealership on Florin Road. DaimlerChrysler stated its
objectives could not be met unless all of the dealers agreed
to the proposed changes, given the existence of protest
rights held by certain of the dealers. Nothing in this
statement discloses coercion by DaimlerChrysler on its
dealers, and certainly the statement cannot apply to a
waiver made years before.
Second, Vehicle Code section 11713.3 does not invalidate the
waiver because the waiver did not relieve any person from
liability imposed under article 1 of chapter 4, division 5
of the Vehicle Code. Keil agreed to waive its statutory
protest rights, which are not contained in article 1,
chapter 4, division 5. Indeed, Keil did not relieve any
person from liability at all.
(DaimlerChrysler Motors Co. at 353-354.)
The sponsor asserts that since the above decision was issued,
"several manufacturers have expanded their use of 'voluntary'
agreements for dealers to waive their statutory rights to
protest their own termination, and/or any proposed additions or
relocations of competing dealerships within their relevant
market area." The sponsor also maintains that "Ým]anufacturers
have also begun a practice of avoiding termination protest
rights altogether by inserting provisions in dealer agreements
under which a dealer must agree to 'self-termination' if certain
events occur (such as failure to achieve
manufacturer-established sales or service standards)."
This bill seeks to address the sponsor's concerns regarding the
above holding by specifically codifying that it is unlawful for
a manufacturer or dealer to obtain, or attempt to obtain, a
waiver or attempt to enforce an agreement against a dealer that:
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(1) modifies or disclaims a duty or obligation of a manufacturer
or distributor; (2) limits or constrains the right of a dealer
to file, pursue, or submit evidence in connection with a protest
before the board; (3) provides for termination of the franchise
by a dealer; or (4) requires a controversy to be referred to a
person for a binding determination. Agreements in violation of
those prohibitions would be unenforceable and void, and, the
prohibition would not restrict the ability for parties to a
protest to settle or resolve the claim or protest itself.
From a policy standpoint, requiring a dealership to
self-terminate or to waive its right to submit a protest to the
NMVB would appear to be particularly drastic contract provisions
that may be indicative of the disparity in bargaining power. On
the other hand, as noted by the court, if there is no coercion
and the parties willingly enter into agreements with these
provisions (arguably in exchange for some benefit to the
dealership), this bill would remove the flexibility of
dealerships to enter into those negotiations in the first place.
Despite the reduction in flexibility for contract negotiations,
it should be noted that this bill does reinforce the purpose and
authority of the New Motor Vehicle Board, which was created to
oversee new motor vehicle franchises and to provide a forum by
which to resolve protest cases filed by dealers against
franchisors (including disputes over termination of a franchise
agreement).
3. Competition from factory owned dealerships
Under existing law, a manufacturer is prohibited from owning a
dealership in the same relevant market area as a privately owned
dealership of the same line-make except: (1) in the case of
temporary ownership (not to exceed one year); or (2) if the
dealership is partially owned as part of a "bona fide
development candidate." Existing law requires manufacturers to
file information with the NMVB when the above exceptions are
used, and the sponsor asserts that those filings are "not very
informational."
This bill would revise the temporary ownership exception to
apply only to locations of a former dealership of the same
line-make that has been out of operation for less than
six-months, and augment the information filed with the NMVB by
requiring: (1) a manufacturer to give written notice every time
it changes an ownership interest pursuant to the temporary
ownership exception; and (2) the name of the bona fide dealer
development owner or owners, and percentage ownership interest
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of each owner when the "bona fide development candidate"
exception is used. Those additional disclosures would appear to
provide greater transparency about the manufacturer's ownership
interest in these dealerships, although beyond additional
transparency, it is unclear how those disclosures would
specifically benefit dealerships.
This bill would also prohibit a manufacturer or distributor from
discriminating in favor of a factory owned dealership by
providing sales or service incentives, discounts, or promotional
programs that are not made available to all California
franchises on an equivalent basis. That additional prohibition
would appear to further protect franchisees from a situation
where a nearby manufacturer-owned franchise (with their special
deals) might attract all the customers that would otherwise go
to the local dealership. Protecting franchisees from unfair
competition on behalf of manufacturer-owned dealerships appears
consistent with the intent (and current provisions) of Vehicle
Code 11713.3. The sponsor, in support of the proposed additional
restrictions, notes that "at least one auto manufacturer appears
to be operating a factory-owned store within 10-miles of a
privately owned dealership which has led to renewed concerns and
fear of unfair competition."
4. Product discrimination
This bill would additionally prohibit a manufacturer or dealer
from unfairly discriminating against a franchisee selling a
service contract, debt cancellation agreement, or similar
product not approved, endorsed, sponsored or offered by the
manufacturer or distributor. That discrimination would be
defined to include express or implied statements that the dealer
is obligated to exclusively sell those products, statements that
failure to sell the products will have negative consequences,
measuring performance based upon sale of those products,
requiring the dealer to promote sale of the products, or
conditioning access to vehicles or parts based upon sale of the
products. The sponsor, in support of those restrictions,
asserts:
Some auto manufacturers and their affiliated finance
companies pressure their franchised dealers to sell
manufacturer products and services that are not covered
under the franchise agreement, such as maintenance plans,
service contracts, debt cancellation agreements, etc.
Dealers who desire to sell alternative products (which may
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be more affordable or of higher quality) sometimes face
discrimination by manufacturer representatives, including
threats against their franchise, and reduced access to
vehicles, parts, or incentives. Dealers, as independent
businesses, should have the right to sell ancillary products
of their choosing without the threat of manufacturer
retribution.
From a policy standpoint, consumers would appear to benefit from
the least expensive, highest quality products available. If a
dealership is required to sell products that are either too
expensive, or of poor quality, that dealership must arguably
deal with unhappy customers who question either the cost or
quality of what the dealership is required to sell. Although
this bill would promote flexibility, it would also prevent a
manufacturer from establishing a certain amount of uniformity in
products that are offered throughout dealerships by prohibiting
the manufacturer from determining which products should be sold
exclusively. Despite the potential for lack of uniformity, the
proposed change would allow dealerships to be flexible and
arguably offer consumers lower priced high quality products, if
they so elected.
It should also be noted that the bill would not prohibit
manufacturers from providing an incentive for the sale of those
products, if the program does not provide vehicle sales or
service incentives.
Support : California Recreational Vehicle Dealers Association
Opposition : None Known
HISTORY
Source : California New Car Dealers Association
Related Pending Legislation : None Known
Prior Legislation : SB 424 (Padilla, Chapter 12, Statutes of
2009), regulates actions that vehicle manufacturers may take
with regard to their franchised dealers, and allows franchisees
that have contracts terminated because of a manufacturer's or
distributor's bankruptcy to continue to sell new cars in their
inventory for up to six months.
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