BILL ANALYSIS Ó
SB 642
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Date of Hearing: June 13, 2011
ASSEMBLY COMMITTEE ON TRANSPORTATION
Bonnie Lowenthal, Chair
SB 642 (Padilla) - As Amended: June 7, 2011
SENATE VOTE : 38-0
SUBJECT : Vehicle manufacturer/dealer relationships
SUMMARY : Modifies and expands the existing statutory framework
regulating the relationship between vehicle manufacturers and
their franchised dealers. Specifically, this bill :
1)Makes findings and declarations regarding the importance of
the vehicle sales industry as well as the vehicle franchise
system, and states the Legislature's intent to preserve the
integrity of that system.
2)Makes statutory prohibitions against various actions taken by
manufacturers or distributors to apply even if those actions
are taken indirectly by an affiliate.
3)Includes, among those prohibited actions, obtaining from a
dealer or enforcing against a dealer an agreement, provision,
release, assignment, novation, waiver, or estoppel that does
any of the following:
a) Modifies or disclaims a duty or obligation of a
manufacturer, manufacturer branch, distributor, distributor
branch, or representative, or a right or privilege of a
dealer.
b) Limits or constrains the right of a dealer to file,
pursue, or submit evidence in connection with a protest
before the New Motor Vehicle Board (NMVB).
c) Provides for the termination of a franchise by a dealer.
d) Requires a controversy between a manufacturer,
manufacturer branch, distributor, distributor branch, or
representative and a dealer to be referred to a person for
a binding determination.
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1)Provides that any prohibited agreement, provision, release,
assignment, novation, waiver, or estoppel is unenforceable and
void whether entered into before or during the term of a
franchise.
2)Specifies that these provisions do not limit or restrict the
terms upon which parties to a protest before the NMVB, civil
action, or other proceeding can settle or resolve the protest
or other claim, or stipulate to evidentiary or procedural
matters during the course of a protest, civil action, or other
proceeding.
3)Provides that these provisions do not affect the
enforceability of any stipulated order or other order entered
into by the NMVB, or prohibit a dealer from waiving its right
to file a protest after a franchisor incentive program claim
has been disapproved and the waiver is voluntarily given as
part of an agreement to settle that claim, or prohibit a
voluntary agreement supported by substantial consideration,
other than granting or renewing a franchise.
4)Specifies that a manufacturer or distributor is not in
violation of the prohibition against competing with a
franchisee by owning or operating a dealership for a temporary
period, not to exceed 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.
5)Requires a manufacturer or distributor owning an interest in a
dealership as part of a bona fide dealer development program
to give written notice annually to the NMVB of the name of the
bona fide dealer development owner or owners, and the
ownership interests of each owner expressed as a percentage.
6)Prohibits a manufacturer or distributor from furnishing to a
franchisee or dealership that it owns or controls any sales or
service incentives, discounts, or promotional programs that
are not made available to all California franchises of the
same line-make on an equivalent basis.
7)Prohibits a manufacturer or distributor from 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, manufacturer branch, distributor,
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or distributor branch or affiliate.
8)Defines unfair discrimination, for these purposes, to include
but be not limited to any of the following:
a) 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 approved, endorsed, sponsored, or offered by the
manufacturer, manufacturer branch, distributor, or
distributor branch or affiliate.
b) Express or implied statements that selling or offering
to sell service contracts, debt cancellation agreements,
maintenance agreements, or similar products not approved,
endorsed, sponsored, or offered by the manufacturer,
manufacturer branch, distributor, or distributor branch or
affiliate, or the failure to sell or offer to sell service
contracts, debt cancellation agreements, maintenance
agreements, or similar products approved, endorsed,
sponsored, or offered by the manufacturer, manufacturer
branch, distributor, or distributor branch or affiliate
will have any negative consequences for the dealer.
c) Measuring a dealer's performance under a franchise
agreement based upon the sale of service contracts, debt
cancellation agreements, or similar products approved,
endorsed, sponsored, or offered by the manufacturer,
manufacturer branch, distributor, or distributor branch or
affiliate.
d) Requiring a dealer to actively promote the sale of
service contracts, debt cancellation agreements, or similar
products approved, endorsed, sponsored, or offered by the
manufacturer, manufacturer branch, distributor, or
distributor branch or affiliate.
e) 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, endorsed, sponsored, or offered by the
manufacturer, manufacturer branch, distributor, or
distributor branch or affiliate.
1)Provides that unfair discrimination does not include, and
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nothing prohibits 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, manufacturer branch, distributor, or
distributor branch or affiliate, if the program does not
provide vehicle sales or service incentives.
2)Provides that these provisions do not prohibit a manufacturer
or distributor from requiring a franchisee who sells a used
vehicle as certified under the manufacturer's or distributor's
certified used vehicle program to provide the manufacturer's
or distributor's particular service contract.
EXISTING LAW :
1)Prohibits manufacturers and distributors of motor vehicles
from engaging in a comprehensive list of specified actions
with respect to franchised dealers of those vehicles.
2)Authorizes the NMVB to hear and decide protests presented by
motor vehicle franchisees for actions taken by manufacturers
allegedly in violation of statutes governing franchise
termination, relocation of dealerships, warranty reimbursement
and incentive programs.
FISCAL EFFECT : Unknown. This bill was withdrawn from the
Senate Appropriations Committee pursuant to Senate Rule 28.8.
COMMENTS : The California New Car Dealers Association (CNCDA)
cites three major issues in sponsoring this bill. First, in
regard to this bill's provision prohibiting the waiver of a
dealer's right to protest to the New Motor Vehicle Board, CNCDA
points to a 2006 California Appellate Court decision
(DaimlerChrysler Motors Co. v. Lew Williams, Inc.) that
effectively held that the waiver of a protest right cannot be
obtained by the use of coercion. According to DNA, "Ever since
the 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. Manufacturers 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
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events occur (such as failure to achieve
manufacturer-established sales or service standards)." This
bill would clarify that obtaining such an agreement is
prohibited under California statute.
Second, in regard to factory-owned dealerships, CNCDA notes that
while a majority of states completely prohibit manufacturers
from owning new car dealerships, California generally prohibits
a manufacturer from owning a dealership within ten-miles of a
privately owned dealership of the same line-make but allows
temporary factory ownership as well as joint ownership with
"bona fide dealer development candidates" who have money
invested at risk in the dealership and are in the process of
acquiring a majority ownership interest. Consequently, state
law also prohibits a manufacturer from unfairly discriminating
in favor of a factory-owned dealership (whether located within
ten-miles or not). "Unfortunately," according to CNCDA, "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." Therefore, this bill allows temporary
manufacturer-ownership only when a dealership has been out of
business for less than six months and it expands the unfair
competition provisions to prohibit a manufacturer from providing
a manufacturer owned dealership with sales or service
incentives, discounts, or promotional programs that are not made
available to all California franchisees of the same line-make on
an equivalent basis.
Finally, in regard to price discrimination, CNCDA contends that
"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 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.
SB 642 prohibits manufacturers from discriminating against
franchised dealers for selling non-approved or sponsored debt
cancellation agreements, maintenance plans, and service
contracts or similar products. The recent amendments clarify
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that the prohibition does not extend to manufacturer 'certified'
used car programs. Moreover, the bill does not restrict
manufacturers from incentivizing the sale of approved or
sponsored products on a voluntary-participation basis."
Opponents of this bill primarily object to its provision that
makes it unlawful for a manufacturer to obtain an agreement from
a dealer that provides for the termination of the dealer's
franchise (i.e. an agreed-upon voluntary termination), unless
the agreement is negotiated in connection with the settlement of
a protest. They complain that this bill applies to existing
contracts on a retroactive basis, which they term to be
"unconscionable." They envision situations where a dealer
accepts money from a manufacturer in consideration for an
agreement that the dealer then decides not to honor. These
opponents believe the bill would effectively overturn the
Chrysler v Williams case cited by the sponsor and will result in
increased litigation to interpret both old and new contracts.
Finally, regarding the issue of service contracts, opponents
believe dealers should be required to disclose to consumers if
the extended service contracts they offer are actually provided
by a third party vendor and are not manufacturer products.
While one might question the propriety of using state statute to
govern the business relationship between dealers and
manufacturers, the Vehicle Code already contains a long list of
prohibitions and requirements in that regard. The additional
provisions contained in this bill appear to be designed to
protect dealers from practices detrimental to themselves as well
as (in the instance of restricting the available choices of
service and debt cancellation contracts) to their customers.
Double-referral : This bill has also been referred to the
Assembly Judiciary Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California New Car Dealers Association (sponsor)
Association of California Insurance Companies
California Motorcycle Dealers Association
California Recreational Vehicle Dealers Association
Opposition
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Alliance of Automobile Manufacturers
Association of Global Auto Makers
Motorcycle Industry Council
Nissan North America
Analysis Prepared by : Howard Posner / TRANS. / (916) 319-2093