BILL ANALYSIS Ó
SB 642
Page 1
Date of Hearing: July 7, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 642 (Padilla) - As Amended: June 30, 2011
As Proposed to be Amended
SENATE VOTE : 38-0
SUBJECT : VEHICLES: MANUFACTURERS AND DEALERS
KEY ISSUES :
1)SHOULD CAR DEALERS RECEIVE NEW AND STRONGER LEGAL PROTECTION
AGAINST ALLEGEDLY UNFAIR CONTRACT TERMS IN THEIR AGREEMENTS
WITH AUTO MANUFACTURERS?
2)IF CAR DEALERS DO RECEIVE THESE ADDITIONAL LEGAL PROTECTIONS,
SHOULD THE ONE CONSUMER PROTECTION IN THIS MEASURE BE
ENFORCEABLE BY CONSUMERS, AS ARGUED BY THE OPPOSITION?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill is sponsored by the California New Car Dealers
Association to prohibit or limit the ability of manufacturers of
motor vehicles from obtaining or enforcing specified contract
terms that car dealers allege are unfairly one-sided in favor of
manufacturers and violate public policy. As recently amended,
the bill reflects the consensus reached between dealers and most
manufacturers (Ford Motor Co. remains opposed) following lengthy
negotiations. Somewhat unusually among business-to-business
contracting rules, the bill would prohibit certain contract
terms - regardless of the parties' assent or other rules of
contract formation - including provisions that require the
termination of a dealer's franchise agreement, modify or
disclaim certain statutory duties, or that limit or constrain
the right of a dealer to file, pursue, or submit evidence in
connection with a protest before the New Motor Vehicle Board.
Other contract provisions would be allowed only if voluntary and
supported by valuable consideration. Among other provisions,
the bill protects dealers from mandatory pre-dispute arbitration
agreements with manufacturers. While this is consistent with
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federal law, it is inconsistent with the rights of consumers who
are subject to mandatory arbitration clauses in their contracts
with car dealers.
Ford's opposition rests on one provision of the bill relating to
service contracts, which provides that manufacturers may
lawfully contract with dealers to obligate them to provide a
specified notice advising consumers when the service contract
they purchase is not provided by or backed by the manufacturer.
Ford argues that this provision lacks sufficient "teeth" to be
effective because the parties would have to mutually agree to
provide the specified disclosure, which Ford contends is solely
dependent on the dealer's willingness to agree to do so, is
extremely challenging for the manufacturer to track, and is not
enforceable on behalf of the consumer who is not a party to the
agreement between the factory and the dealer.
SUMMARY : Regulates contracts between motor vehicle dealers and
manufacturers. Specifically, this bill :
1)Makes it unlawful for a manufacturer, distributor or others
(collectively "manufacturer") 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:
a) Modifies or disclaims a duty or obligation of a
manufacturer, or a right or privilege of a dealer, pursuant
to Chapter 4 (commencing with Vehicle Code Section 11700)
of Division 5 or Chapter 6 (commencing with Section 3000)
of Division 2.
b) Limits or constrains the right of a dealer to file, pursue,
or submit evidence in connection with a protest before the
board.
c) Requires a dealer to terminate a franchise.
d) Requires a controversy between a manufacturer and a dealer
to be referred to a person for a binding determination.
This subparagraph does not, however, prohibit arbitration
before an independent arbitrator, provided that whenever a
motor vehicle franchise contract provides for the use of
arbitration to resolve a controversy arising out of or
relating to that contract, arbitration may be used to
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settle the controversy only if after the controversy arises
all parties to the controversy consent in writing to use
arbitration to settle the controversy. For the purpose of
this subparagraph, the terms "motor vehicle" and "motor
vehicle franchise contract" shall have the same meaning as
under 15 U.S.C. Section 1226. Whenever arbitration is
elected to settle a dispute under a motor vehicle franchise
contract, the arbitrator shall provide the parties to the
arbitration with a written explanation of the factual and
legal basis for the award.
2)Specifies that the bill not do any of the following:
a) Limit or restrict the terms upon which parties to a
protest before the board, 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.
b) Affect the enforceability of any stipulated order or
other order entered by the board.
c) Affect the enforceability of any provision in a contract
if the provision is not prohibited under this subdivision
or any other law.
d) Affect the enforceability of a provision in any contract
entered into on or before December 31, 2011.
e) Prohibit a dealer from waiving its right to file a
protest pursuant to Vehicle Code Section 3065.1 if the
waiver agreement is entered into after a franchisor
incentive program claim has been disapproved by the
franchisor and the waiver is voluntarily given as part of
an agreement to settle that claim.
f) Prohibit a voluntary agreement supported by valuable
consideration, other than the consideration of granting or
renewing a franchise, that does both of the following:
i. Provides that a dealer establish or maintain
exclusive facilities, personnel, or display space or
provides that a dealer make a material alteration,
expansion, or addition to a dealership facility.
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ii. Contains no waiver or other provision prohibited by
subparagraph (A), (B), (C) or (D) of paragraph (1).
g) Prohibit a voluntary waiver agreement, supported by
voluntary consideration, other than the consideration of
renewing a franchise, to waive the right of a dealer to
file a protest under the provisions of Vehicle Code Section
3062 for the proposed establishment or relocation of a
specific proposed dealership, if the waiver agreement
provides specified information regarding the proposed
dealership.
1)Prohibits a manufacturer from competing with a dealer in the
same line-make operating under an agreement or franchise from
a manufacturer or distributor in the relevant market area,
except that a manufacturer shall not, however, be deemed to be
competing in the following limited circumstances:
a) 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. However, after a
showing of good cause by a manufacturer, branch, or
distributor that it needs additional time to operate a
dealership in preparation for sale to a successor
independent franchisee, the board may extend the time
period.
b) Owning an interest in a dealer as part of a bona fide
dealer development program if the manufacturer that owns or
operates a dealership gives written notice to the board,
within 10 days, each time it commences or terminates
operation of a dealership and each time it acquires,
changes, or divests itself of an ownership interest, as
specified, or in other specified circumstances gives
written notice to the board, annually, of the name and
location of each dealer in which it has an ownership
interest, the name of the bona fide dealer development
owner or owners, and the ownership interests of each owner
expressed as a percentage.
2)Prohibits a manufacturer from unfairly discriminating in favor
of a dealership owned or controlled, in whole or in part, by a
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manufacturer. Unfair discrimination includes, but is not
limited to, the following:
a) The furnishing to a franchisee or dealer that is owned or
controlled, in whole or in part, by a manufacturer of any
of the following:
i. A vehicle that is not made available to each
franchisee pursuant to a reasonable allocation formula
that is applied uniformly, and a part or accessory that
is not made available to all franchisees on an equal
basis when there is no reasonable allocation formula
that is applied uniformly.
ii. A vehicle, part, or accessory that is not made
available to each franchisee on comparable delivery
terms, including the time of delivery after the
placement of an order. Differences in delivery terms
due to geographic distances or other factors beyond the
control of the manufacturer shall not constitute unfair
competition.
b) Information obtained from a franchisee by the manufacturer,
branch, or distributor concerning the business affairs or
operations of a franchisee in which the manufacturer,
branch, or distributor does not have an ownership interest.
The information includes, but is not limited to,
information contained in financial statements and operating
reports, the name, address, or other personal information
or buying, leasing, or service behavior of a dealer
customer, and other information that, if provided to a
franchisee or dealer owned or controlled by a manufacturer
would give that franchisee or dealer a competitive
advantage. This clause does not apply if the information
is provided pursuant to a subpoena or court order, or to
aggregated information made available to all franchisees.
c) Sales or service incentives, discounts, or promotional
programs that are not made available to all California
franchises of the same line-make on an equal basis.
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3)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. Defines unfair discrimination,
for these purposes, to include but not be 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.
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 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 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.
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.
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.
4)Provides that unfair discrimination does not include, and
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
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similar products approved, endorsed, sponsored, or offered by
the manufacturer if the program does not provide vehicle sales
or service incentives.
5)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 certified used
vehicle program to provide the manufacturer's particular
service contract.
6)Provides that unfair discrimination does not include, and
nothing shall prohibit a franchisor from requiring a
franchisee to provide, the following notice prior to the sale
of the service contract if the service contract is not
provided or backed by the franchisor and the vehicle is of the
franchised line-make: "Service Contract Disclosure: The
service contract you are purchasing is not provided or backed
by the manufacturer of the vehicle you are purchasing. The
manufacturer of the vehicle is not responsible for claims or
repairs under this service contract."
EXISTING LAW :
1)Makes it unlawful for a vehicle manufacturer or distributor to
take specified actions against a vehicle dealer or franchise,
including:
a) 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.
b) 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:
i) temporarily owning or operating a dealership, as
specified;
ii) owning an interest in a dealer as part of a bona
fide development program, as specified; or
iii) 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
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the board each time it commences or terminates operation
of a dealership and each time it acquires or divests
itself of an ownership interest.
c) 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. (Vehicle
Code Section 11713.3.)
2) Defines a "service contract" to mean a contract in
writing to perform, over a fixed period of time or for a
specified duration, services relating to the maintenance or
repair of a consumer product. (Civil Code section
1791(o).)
3) Provides that a service contract may be sold to a buyer
of goods in addition to or in lieu of an express warranty
if that contract fully and conspicuously discloses in
simple and readily understood language the terms,
conditions, and exclusions of that contract, and that the
service contract shall contain specified items of
information. (Civil Code section 1794.4.)
4) Specifies that except as otherwise expressly provided in
the service contract, a service contract shall obligate the
service contractor to provide to the buyer of the product
all of the services and functional parts that may be
necessary to maintain proper operation of the entire
product under normal operation and service for the duration
of the service contract and without additional charge.
(Civil Code section 1794.4.)
5) Provides that no service contract covering any motor
vehicle may be offered for sale or sold unless all of the
following elements exist:
a) The contract shall contain the disclosures specified in
Civil Code Section 1794.4 and shall disclose in the manner
described in that section the buyer's cancellation and
refund rights as provided.
b) The contract shall be available for inspection by the
buyer prior to purchase and either the contract, or a
brochure which specifically describes the terms,
conditions, and exclusions of the contract, and the
provisions as provided relating to contract delivery,
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cancellation, and refund, shall be delivered to the buyer
at or before the time of purchase of the contract. Within
60 days after the date of purchase, the contract itself
shall be delivered to the buyer.
c) The contract is applicable only to items, costs, and
time periods not covered by the express warranty. However,
a service contract may run concurrently with or overlap an
express warranty if (A) the contract covers items or costs
not covered by the express warranty or (B) the contract
provides relief to the purchaser not available under the
express warranty, such as automatic replacement of a
product where the express warranty only provides for
repair.
d) The contract shall be cancelable by the purchaser under
specified conditions. (Civil Code section 1794.41.)
6)Provides that any buyer of consumer goods who is damaged by a
failure to comply with any obligation as provided or under an
implied or express warranty or service contract may bring an
action for the recovery of damages and other legal and
equitable relief. (Civil Code section 1794.)
7)Specifically with respect to vehicles, defines "vehicle
service contract" as a contract or agreement for a separately
stated consideration and for a specific duration to repair,
replace, or maintain a motor vehicle or watercraft, or to
indemnify for the repair, replacement, or maintenance of a
motor vehicle or watercraft, necessitated by an operational or
structural failure due to a defect in materials or
workmanship, or due to normal wear and tear. "Vehicle service
contract" also includes an agreement of a term of at least one
year, for separately stated consideration, that promises
routine maintenance. A vehicle service contract also includes
one or more of the following:
a) An agreement that promises the repair or replacement of
a tire or wheel necessitated by wear and tear, defect, or
damage caused by a road hazard. However, an agreement that
promises the repair or replacement of a tire necessitated
by wear and tear, defect, or damage caused by a road
hazard, in which the obligor is the tire manufacturer, is
exempt from the requirements of this part. A warranty
provided by a tire or wheel distributor or retailer is
exempt from the requirements of this part as long as the
warranty covers only defects in the material or workmanship
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of the tire or wheel.
b) An agreement that promises the repair or replacement of
glass on a vehicle necessitated by wear and tear, defect,
or damage caused by a road hazard. However, a warranty
provided by a vehicle glass or glass sealant manufacturer
is exempt from the requirements of this part. A warranty
provided by a vehicle glass distributor or retailer is
exempt from the requirements of this part as long as the
warranty covers only defects in the material or workmanship
of the vehicle glass.
c) An agreement that promises the removal of a dent, ding,
or crease without affecting the existing paint finish using
paintless dent repair techniques, and which expressly
excludes the replacement of vehicle body panels, sanding,
bonding, or painting. (Vehicle Code section 12800.)
1)Provides that only DMV-licensed dealers may sell a vehicle
service contract to a purchaser. (Insurance Code section
12810.)
2)Provides that an obligor under a vehicle service contract,
other than a dealer, shall possess a vehicle service contract
provider license by the Department of Insurance. (Insurance
Code section 12815.)
3)Prior to offering a vehicle service contract form to a
purchaser or providing a vehicle service contract form to a
seller, an obligor shall file with the Insurance Commissioner
a specimen of that vehicle service contract form, which shall
comply with specified requirements, which are subject to
licensing compliance enforcement by the Department of
Insurance. (Insurance Code section 12825.)
COMMENTS : The author explains the reason for the bill as
follows: "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."
The author adds:
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The Vehicle Code prohibits a manufacturer from requiring a
dealer to prospectively waive statutory protest right.
However, a 2006 California Appellate Court decision
(DaimlerChrysler Motors Co. v. Lew Williams, Inc. 48 Cal.
Rptr. 3d 233 (Cal. Ct. App. 2006)) effectively held that
the waiver of a protest right was permissive unless the
manufacturer used coercion to obtain the waiver.
Since this decision, several manufacturers have expanded
their use of "voluntary" agreements requiring dealers to
waive their statutory rights to protest their own
termination. Manufacturers have also begun a practice of
avoiding termination protest rights altogether by requiring
dealers to sign prospective "self-termination" agreements,
under which a dealer will agree to terminate their
dealership if certain events occur.
This bill, sponsored by the California New Car Dealers
Association, would enact numerous restrictions and prohibitions
that seek to address concerns of new car dealers regarding their
ability to contest allegedly unfair practices by manufacturers.
The premise of the bill is that the regulated contract terms are
fundamental to sound public policy and therefore should not
simply be left to negotiation because dealers lack sufficient
bargaining power against manufacturers.
Prohibition Against Dealer Termination Agreements And Other
Contractual Terms. Dealers argue that manufacturers subject
them to contract provisions that they are not free to resist,
including terms that require a dealer to terminate his or her
franchise. This bill prohibits such clauses by making it
unlawful for a manufacturer or distributor to obtain or enforce
such an agreement against a dealer, and making such provisions
unenforceable and void
The bill likewise flatly prohibits an agreement that 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, pursuant to Chapter 4
(commencing with Section 11700) of Division 5 or Chapter 6
(commencing with Section 3000) of Division 2, except as
otherwise specified. Similar provisions against waiver of
statutory terms are a common feature of consumer protection
laws, although these consumer protections are commonly lost
under mandatory pre-dispute arbitration clauses, as discussed
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below. Under this bill, dealers would not lose these
protections as consumers do.
Also prohibited unless otherwise specified are agreements that
limit or constrain the right of a dealer to file, pursue, or
submit evidence in connection with a protest before the New
Motor Vehicle Board (discussed below).
New Restrictions Against Dealers' Rights To File Complaints With
The New Motor Vehicle Board (NMVB). The New Motor Vehicle Board
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 take action on disputes only when "a
protest is presented to the Board by a franchisee." (Vehicle
Code Section 3050.) This bill would place prescribed limits on
contracts that require dealers to waive their rights to protest
to the NMVB.
The bill similarly prohibits any agreement that limits or
constrains the right of a dealer to file, pursue, or submit
evidence in connection with a protest before the board.
Contract Restrictions Would Not Apply To Settlement Agreements
When There Is A Pending Board Protest Or Other Action. The bill
specifies that its prohibitions do not limit or restrict the
terms upon which parties to a protest before the board, civil
action, or other proceeding can settle or resolve, or stipulate
to evidentiary or procedural matters during the course of, a
protest, civil action, or other proceeding. This exemption
therefore applies only where there is a pending proceeding.
Dealer Protections Against Waivers of Rights That Consumers
Would Not Have Against Dealers. The bill imposes a number of
prohibitions and restrictions on the contractual waiver of
dealers' legal rights vis-à-vis manufacturers. Among these
provisions is a limitation on the imposition of arbitration
clauses. Under the bill, a manufacturer cannot require a dealer
to agree to arbitration before a dispute arises. This is
consistent with federal law. However, the use of pre-dispute
arbitration clauses is also controversial when dealers impose
such provisions on consumers, for the same reason that dealers
find such clauses unacceptable when imposed on them by
manufacturers. This bill does not address that issue, leaving
dealers in a privileged and arguably inequitable legal position
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with protection against pre-dispute arbitration clauses imposed
by manufacturers - where dealers are arguably the less-powerful
party to the contract - but free to impose pre-dispute
arbitration clauses on consumers where dealers are arguably the
more powerful party. The Committee may wish to explore the
rationale for this apparent double-standard.
Just as importantly, the bill prohibits any dealer contract from
modifying or disclaiming a duty or obligation of a manufacturer
or a right or privilege of a dealer under specified statutes, as
discussed above. This provision effectively requires an
arbitrator to follow those laws in reaching a decision regarding
a dispute under the contract. Although this approach may not be
unreasonable, it is far different than the rights of consumers
under the general rule of arbitration according to which -
surprisingly to most people - arbitrators are free to disregard
the law as well as the evidence in reaching their decisions,
unless the contract specifies otherwise. Indeed, the general
rule of arbitration is so unlike the judicial system that
arbitrators need not be judges or even have any legal training
or familiarity with the law.
In addition, the bill requires that an arbitrator must provide
the parties to the arbitration with a written explanation of the
factual and legal basis for the award. This provision is
likewise unique to car dealers, and denied to consumers, because
arbitrators are not otherwise statutorily required to issue
written decisions explaining the basis for their rulings.
Again, the Committee may wish to explore the justification for
affording car dealers these special legal protections from the
customary rules of arbitration that dealers routinely impose on
consumers.
Other Contract Terms Allowable Only If Voluntary And Supported
by Valuable Consideration. The bill specifically allows
certain voluntary waiver agreements regarding the proposed
establishment or relocation of a proposed dealership when those
agreements are voluntary and supported by valuable consideration
and specified information is stated in the waiver agreement.
The bill also exempts from its restrictions a voluntary
agreement supported by valuable consideration that does both of
the following: (i) provides that a dealer establish or maintain
exclusive facilities, personnel, or display space or provides
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that a dealer make a material alteration, expansion, or addition
to a dealership facility; and (ii) contains no otherwise
prohibited waiver or other prohibited provision.
One Outstanding Point of Contention Regarding Consumer
Disclosure of Service Contract Responsibility: Supporters and
opponents engaged in multiple and lengthy negotiation sessions
hosted by the Committee in an effort to resolve differences.
These discussions were largely successful in achieving
compromise and consensus. However, there is one remaining point
of contention between the dealers and Ford Motor Co. regarding
automobile service contracts.
A "service contract" is defined as a contract in writing to
perform, over a fixed period of time or for a specified
duration, services relating to the maintenance or repair of a
consumer product, except that this term does not include a
policy of automobile insurance, as defined in Section 116 of the
Insurance Code. Specifically with respect to motor vehicles, a
"vehicle service contract" is defined as a contract for a
separately stated consideration and for a specific duration to
repair, replace, or maintain a motor vehicle or watercraft, or
to indemnify for the repair, replacement, or maintenance of a
motor vehicle or watercraft, necessitated by an operational or
structural failure due to a defect in materials or workmanship,
or due to normal wear and tear. It includes an agreement of a
term of at least one year, for separately stated consideration,
that promises routine maintenance, as well as an agreement that
promises the repair or replacement of specified parts.
These service contracts may be offered by an automobile
manufacturer or by a dealer, often backed by an insurance
company (this bill is supported by Association of California
Insurance Companies) or presumably by other types of financial
services companies and others. The relative advantages and
disadvantages of manufacturer and non-manufacturer service
contracts are debated by the interest groups involved in this
bill.
The bill provides that manufacturers may not "unfairly
discriminate" against a franchisee for selling a service
contract or similar product that is not approved, endorsed,
sponsored, or offered by the manufacturer. However, the bill
specifies that a manufacturer is not prohibited from requiring a
dealer to provide the following notice prior to the sale of the
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service contract if the service contract is not provided or
backed by the manufacturer and the vehicle is of the franchised
line-make: "Service Contract Disclosure: The service contract
you are purchasing is not provided or backed by the manufacturer
of the vehicle you are purchasing. The manufacturer of the
vehicle is not responsible for claims or repairs under this
service contract."
Ford Motor Company remains opposed to the bill based on this
provision, arguing for stronger protection and enforceability.
Ford states:
At issue is how and whether a consumer gets notified of the
type of extended service plan he or she is purchasing when
buying a new vehicle from a dealer. Extended service
contracts provide coverage for mechanical failures after a
new car warranty expires. Like most manufacturers, we offer
our own factory-backed plan, while third party vendors
offer a variety of plans, many of which are of questionable
quality and reliability. Often the third party plans
appear to be less expensive up front and many dealers
aggressively market these products. Typically, these plans
call for widespread use of aftermarket parts (which do not
meet factory standards), and they are often quite limited
in terms of service locations that can be chosen by the
customer. Our Ford plan, on the other hand, provides for
only original factory equipment to replace mechanical parts
and is honored by every single Ford brand dealer in the
United States.
We hear every day from our customers who have unwittingly
purchased extended service contracts backed by third party
vendors. At the time of purchase, the consumer believes he
or she is buying a plan backed by our company which is,
after all, the brand name on their vehicle. After the new
car warranty expires, when it comes time to seek coverage
if a mechanical failure of some sort occurs, the consumer
finds out the hard way that Ford Motor Company has nothing
to do with the service contract they purchased. For
instance, there are numerous consumer horror stories
involving a third party contract which requires service at
the dealership where the car was purchased, then the dealer
goes out of business and the consumer has no recourse
whatsoever and a worthless service contract.
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The new amendments to SB 642 state that a franchisor is not
prohibited from requiring a franchisee to disclose to the
consumer that he or she is buying a plan not backed or
provided by the franchisor/manufacturer. In theory, this
appears to provide for disclosure. In reality, this means
that the parties would have to mutually agree to provide
consumer disclosure which: (1) is solely dependent on the
dealer's willingness to agree to do so; (2) is extremely
challenging for the franchisor to track; and, (3) is not
enforceable on behalf of the consumer who is not a party to
the agreement between the factory and the dealer.
Therefore, this is not a disclosure requirement. It is, at
best, a disclosure suggestion.
ÝThe California New Car Dealers Association] believes that
dealers are entitled to various protections in the context
of their sales of extended service contracts or plans;
however, they are not willing to extend even the most basic
protection to the very consumers who are buying these
products from the dealer. We find this to be an unjust
result, and believe it makes SB 642 a lopsided measure.
ÝW]e believe a mandated consumer disclosure will ensure
that consumers know what they are buying.
The car dealers respond to this argument by stating "ÝA]
manufacturer, including Ford, can require dealers to provide a
specific notice about service contracts when selling vehicles of
the franchised line-make, Ýhowever], Ford opposes the bill
because expressly permitting such disclosure in contracts isn't
enough and it seeks to criminalize this disclosure requirement
for the sale of non-Ford service contracts, even though most of
their competitors have no such contract requirement and those
that do enforce the requirement as a civil breach of contract.
Moreover, if Ford wants such additional enforcement tools, they
can propose them in a separate bill sponsored by the company,
not as brazen attempt to undo a comprehensive compromise agreed
to by all the major auto manufacturers, including Ford. Rather
than trying to get the Department of Motor Vehicles to enforce
license violations for service contract disclosures, as Ford
seeks with its proposed amendments, Ford may wish to examine its
own warranties. Ford could provide longer warranties that would
reduce the need for consumers to consider a service contract on
its products. Ford's 36,000/60,000 mile basic/powertrain
warranties are some of the lowest in the country as compared to
Acura (50,000/70,000); Buick (50,000/100,000) Hyundai
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(60,000/100,000); Kia (60,000/100,000); Mitsubishi
(60,000/100,000) and VW (50,000/60,000)."
Concerns about service contracts have led to a number of
longstanding statutory consumer protections, including specified
consumer disclosures and other terms, enforceable through a
right of rescission and a private right of action to enforce
compliance (unless nullified by an arbitration clause). Such
rights are generally believed to be the most effective means of
enforcing obedience with statutory obligations, and far less
costly than employing the large number of government employees
that would be needed to police compliance. Many consumer
advocates nevertheless contend that service contracts generally,
and motor vehicle service contracts in particular, are
problematic for consumers because they do not cover items that
consumers expect, and because they have proven difficult to
exercise. As Ford indicates, no provision of existing law would
appear to expressly allow for consumer enforcement of the
disclosure notice specified in this bill, although the unfair
business practices laws would apply as they normally do. Thus,
the bill's service contract disclosure may well be left to
whatever terms dealers and manufacturers decide to implement, as
Ford contends, and the primary enforcement mechanism may
effectively be manufacturer demands, not consumer remedies.
Author's Clarifying Amendments. To correct drafting errors and
otherwise clarify the measure, the author proposes the following
useful amendments.
SECTION 1. The Legislature finds and declares all of the
following:
(a) The distribution, sale, and service of new motor vehicles in
this state vitally affects the state's general economy and the
public welfare.
(b) The new motor vehicle franchise system, which operates
within a strictly defined and highly regulated statutory scheme,
ensures provides consumers of a well-organized distribution
system for the availability and sale of new motor vehicles
throughout the state; provides a network of quality warranty and
repair facilities to maintain those vehicles; and creates a
cost-effective method for the state to police those systems
through the licensing and regulation of private sector
franchisors and franchisees.
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SEC. 2.
11713.3(g)(1)(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. However, this subparagraph does not
prohibit arbitration before an independent arbitrator , provided
that whenever a motor vehicle franchise contract provides for
the use of arbitration to resolve a controversy arising out of
or relating to that contract, arbitration may be used to settle
the controversy only if after the controversy arises all parties
to the controversy consent in writing to use arbitration to
settle the controversy. For the purpose of this subparagraph ,
the terms "motor vehicle" and "motor vehicle franchise contract"
shall have the same meaning as under 15 U.S.C. Section 1226.
Whenever arbitration is elected to settle a dispute under a
motor vehicle franchise contract, the arbitrator shall provide
the parties to the arbitration with a written explanation of the
factual and legal basis for the award.
(g)(3) This subdivision does not do any of the following:
?
(B) Affect the enforceability of any stipulated order or other
order entered into by the board.
11713.3 (u) (1) To unfairly discriminate 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. Unfair
discrimination includes, but is not limited to, the following:
?
(iv) 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 equal basis.
REGISTERED SUPPORT / OPPOSITION :
Support
California New Car Dealers Association (sponsor)
Association of California Insurance Companies
California Motorcycle Dealers Association
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Page 19
California Recreational Vehicle Dealers Association
One individual
Opposition (as amended)
Ford Motor Co.
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334