BILL ANALYSIS Ó
SB 642
Page 1
SENATE THIRD READING
SB 642 (Padilla)
As Amended July 13, 2011
Majority vote
SENATE VOTE :38-0
TRANSPORTATION 10-0 JUDICIARY 8-2
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|Ayes:|Bonnie Lowenthal, |Ayes:|Feuer, Wagner, Atkins, |
| |Achadjian, Blumenfield, | |Dickinson, Beth Gaines, |
| |Bonilla, Buchanan, Eng, | |Huber, Jones, Monning |
| |Furutani, Logue, Norby, | | |
| |Solorio | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
| | |Nays:|Huffman, Wieckowski |
| | | | |
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APPROPRIATIONS 16-1
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|Ayes:|Fuentes, Harkey, | | |
| |Blumenfield, Bradford, | | |
| |Charles Calderon, Campos, | | |
| |Davis, Gatto, Hall, Hill, | | |
| |Lara, Mitchell, Nielsen, | | |
| |Norby, Solorio, Wagner | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Donnelly | | |
| | | | |
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SUMMARY : Modifies and expands the existing statutory framework
regulating the relationship between vehicle manufacturers and
their franchised dealers. Specifically, this bill :
1)Makes it unlawful for a vehicle 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:
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a) Modifies or disclaims a duty or obligation of a
manufacturer, or a right or privilege of a dealer under
Vehicle Code provisions regarding manufacturers, dealers and
the New Motor Vehicle Board (NMVB);
b) Limits or constrains the right of a dealer to file,
pursue, or submit evidence in connection with a protest
before the NMVB;
c) Requires a dealer to terminate a franchise; or,
d) Requires a controversy between a manufacturer and a dealer
to be referred to a person for a binding determination. This
restriction 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 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 these purposes,
the terms "motor vehicle" and "motor vehicle franchise
contract" 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 must
provide the parties to the arbitration with a written
explanation of the factual and legal basis for the award.
2)Specifies that the bill does not do any of the following:
a) 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;
b) Affect the enforceability of any stipulated order or other
order entered by the NMVB;
c) Affect the enforceability of any provision in a contract
if the provision is not prohibited under these provisions or
any other law;
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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
regarding dealer incentives 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; and,
ii) Contains no waiver or other provision prohibited by
subparagraph a), b), c) or d) of paragraph 1) above.
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 Vehicle Code 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 will 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 NMVB may extend the
time period; and,
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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 NMVB,
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
NMVB, 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
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; or,
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 do not constitute unfair competition.
b) Information obtained from a franchisee by the
manufacturer, branch, or distributor concerning the business
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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; and,
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.
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. Unfair discrimination is defined 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
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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; and,
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 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 prohibits 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)Prohibits manufacturers and distributors of motor vehicles from
engaging in a comprehensive list of specified actions with
respect to franchised dealers of those vehicles.
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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 : According to the Senate Appropriations Committee,
there will be minor, absorbable costs to DMV, which administers
the NMVB.
COMMENTS : The author has introduced this bill because: "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: "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.
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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. 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 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 NMVB. The 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 take action on disputes only when "a protest is
presented to the Board by a franchisee." 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.
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.
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
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cannot require a dealer to agree to arbitration before a dispute
arises.
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. It also exempts from its restrictions a
voluntary agreement supported by valuable consideration that does
both of the following: 1) 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; and 2) contains no otherwise
prohibited waiver or other prohibited provision.
Supporters and opponents engaged in multiple and lengthy
negotiation sessions hosted by the Assembly Transportation
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 Company 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 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
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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 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
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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.
"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
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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
36/60 thousand mile basic/powertrain warranties are some of the
lowest in the country as compared to Acura (50/70); Buick (50/100)
Hyundai (60/100); Kia (60/100); Mitsubishi (60/100) and VW
(50/60)."
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.
Analysis Prepared by : Howard Posner / TRANS. / (916) 319-2093
FN: 0001920