BILL ANALYSIS Ó SB 155 Page 1 Date of Hearing: August 13, 2013 ASSEMBLY COMMITTEE ON JUDICIARY Bob Wieckowski, Chair SB 155 (Padilla) - As Amended: June 10, 2013 SENATE VOTE : 36-0 SUBJECT : MOTOR VEHICLES: MANUFACTURERS AND DEALERS KEY ISSUE : SHOULD CAR DEALERS RECEIVE STRONGER PROTECTIONS AGAINST ADVERSE ACTIONS BY AUTO MANUFACTURERS IN CERTAIN CIRCUMSTANCES? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS This bill is sponsored by the California New Car Dealers Association to modify the relationship between motor vehicle dealers and manufacturers. Among other things, the bill requires a 15-day notice for decreases in compensation according to reimbursement schedules when dealers repair a vehicle under a manufacturer's warranty, requires certain procedures for warranty and incentive claim processing (relating to disapproval, appeal, notice, protest), shortens the time periods by which warranty repairs and incentive program charges may be audited, and makes changes with regard to export and resale policies, facility improvements, and performance standards. Additional provisions limit disapproval or chargeback of claims on the basis of extrapolation from a sample of claims. The proposed amendments reflect lengthy negotiations between the dealers and the manufacturers and are believed to substantially reduce, if not completely remove, the manufacturers' opposition. Due to time constraints, should the bill pass out of this Committee, these amendments would be adopted in the Appropriations Committee. SUMMARY : Modifies the relationship between motor vehicle dealers and manufacturers to improve protections for dealers. Specifically, this bill : 1)Modifies automobile warranty repair rules regarding disapproval, appeal, notice, protest, and audit requirements, including: SB 155 Page 2 a) Imposes limits on changes to the warranty reimbursement schedule, as specified, including requiring 15 days' prior written notice for reduction in time and compensation. b) Provides that a protest challenging a warranty reimbursement reduction must be filed within six months of the franchisee's notice of the reduction, and the franchisor shall have the burden of proof, as specified. c) Prohibits a franchisor from disapproving a claim unless the claim is false or fraudulent or for other specified reasons. d) Requires notification in writing of disapproval of a claim, as specified. e) Requires a reasonable appeal process, including a right to cure material noncompliance and notification of final denial, as specified. f) Allows a franchisee to protest to the New Motor Vehicle Board (the Board) a denial of an appeal, in which protest the franchisor has the burden of proof. g) Regarding audits: i) Limits the availability and frequency of audits of franchisee warranty records by the franchisor, as specified. ii) Provides similar disapproval, notice, appeal, and protest processes to those in paragraph (1) above. iii) Prohibits disapproving or charging back a claim based upon an extrapolation from a sample of claims, unless the sample of claims is selected randomly and the extrapolation is performed in a reasonable and statistically valid manner. 2)Modifies the franchisor incentive program provisions with disapproval, appeal, notice, protest, and audit requirements similar to the warranty requirements in paragraph (1) above. 3)Prohibits manufacturers from taking adverse action against a dealer because the dealer sold or leased a vehicle to a customer who exported the vehicle to a foreign country or SB 155 Page 3 resold the vehicle in violation of an export or resale prohibition, unless the prohibition was provided to the dealer in writing prior to the sale or lease, and the dealer knew or reasonably should have known of the customer's intent to export or resell the vehicle, as specified. 4)Prohibits a manufacturer from establishing or maintaining a performance standard or like program, as specified, that may materially affect the dealer unless both of the following requirements are satisfied: a) The performance standard or like program is reasonable in light of all existing circumstances, including such factors as demographics in the dealer's area of responsibility. b) Within 30 days after a request by the dealer, the manufacturer provides a written summary of the methodology and all data used in establishing the performance standard or like program in detail sufficient to permit the dealer to determine how the standard was established and applied to the dealer. 5)Provides that a required facility alteration, expansion, or addition shall not be deemed reasonable if it requires that the dealer purchase goods or services from a specific vendor when substantially similar goods or services are available from another vendor, with specified limitations, including that the manufacturer may require pre-approval for alternative goods or services, as specified. EXISTING LAW : 1)Charges the Department of Motor Vehicles (DMV) with licensing and regulating dealers, manufacturers, and distributors of motor vehicles who conduct business in California. (Vehicle Code Section 3000 et seq. All references hereinafter are to this code unless otherwise noted.) 2)Regulates warranty agreements, as follows: a) Requires that the franchisor file with the Board a reimbursement schedule for work and services that franchisees shall be required to perform. Requires the schedule of compensation to be reasonable, with SB 155 Page 4 reasonableness subject to the approval of the Board if the franchisee protests. In determining the reasonableness of the schedules, requires the Board to consider all relevant circumstances. (Subsection 3065(a).) b) Requires that all claims made by franchisees pursuant to this section shall be either approved or disapproved within 30 days after, with notification and prompt payment requirements. Allows for individual failures to abide by the specified time limits in circumstances beyond the reasonable control of the franchisor. (Section 3065(d).) c) Allows that audits of franchisee warranty records may be conducted by the franchisor on a reasonable basis, and for a period of 12 months after a claim is paid or credit issued. Forbids disapproval of claims except for good cause. (Section 3065(e).) 3)Regulates incentive program claims. Provides similar restrictions as those on warranty agreements in 2). (Section 3065.1.) 4)Prohibits manufacturers from taking specified actions against dealers, including requiring, by contract or otherwise, a dealer to make a material alteration, expansion, or addition to any dealership facility, unless the required alteration, expansion, or addition is reasonable in light of all existing circumstances, including economic conditions. (Section 11713.13.) COMMENTS : According to the author: The sale and service of motor vehicles is important to California's economy. California motor vehicle franchises employ over 110,000 people and in 2011, motor vehicle sales and service resulted in over $60 billion in economic activity. To protect such an important industry, California, like every other state, has enacted motor vehicle franchise laws. In addition to preserving a well-organized and cost-effective distribution system of motor vehicles, franchise laws seek to address the disparity in bargaining power between multi-national auto manufacturers and California's motor vehicle franchises that are primarily owned and operated as family businesses. SB 155 Page 5 California's motor vehicle franchise protection laws however, did not anticipate certain punitive practices taken by automobile manufacturers, which have become a growing concern. The punitive actions include: Undercompensating California motor vehicle franchises by unilaterally reducing the flat-rate time schedules for factory warranty repairs, even when a franchise is using a nationally recognized flat rate schedule for non-warranty repair work. Disapproving California motor vehicle franchise warranty and incentive program claims for technical reasons, such as disapproving a claim based on an improper signature. Some manufacturers do not offer an appeals process to correct the simple, technical mistake. Auditing samples of California motor vehicle franchise warranty claims and then extrapolating the number of disapproved claims from the sample to arrive at a final disapproval rate. Holding California motor vehicle franchises strictly liable for exported vehicles, even if the export occurred unbeknownst to the franchise. Implementing unreasonable performance standards for California motor vehicle franchises based upon statewide data that do not take into account differences in local markets. Requiring that California motor vehicle franchises use factory-mandated vendors for dealer facility improvements, even when similar goods or services are available for a better price from local California vendors. . . . [SB 155] would strengthen California's dealer franchise protection laws by implementing various provisions to protect California motor vehicle franchises from punitive actions taken by manufacturers Proposed Revisions To Warranty Reimbursement. Currently, manufacturers reimburse dealers for the cost of repairs that dealers make under manufacturer warranty. A manufacturer SB 155 Page 6 typically reimburses according to a schedule that it has prepared, and the sponsor states that manufacturers have recently made unrealistic cuts to reimbursements. This bill requires 15 days' prior written notice before the manufacturer may change its reimbursements, which may give franchisees time to adjust to the change. Also, existing law requires that manufacturer reimbursements be reasonable, and it allows dealers to protest these reimbursements to the New Motor Vehicle Board (NMVB). The sponsor writes that it is not clear when and under what circumstances these protests can take place, and this bill clarifies those conditions. Specifically, the bill provides that, within six months after receipt of a written notice of a denial of a claim, a franchisee may file a protest with the board for determination of whether the franchisor complied with the claim denial requirements. Warranty and Incentive Claim Processing. The sponsor states: "Manufacturers often disapprove (pre- or post-audit) warranty claims for very technical reasons, and some do not offer an opportunity to correct mistakes - costing the dealer tens to hundreds of thousands of dollars in reimbursement for work already performed. Growing numbers of manufacturers are auditing samples of claims, and extrapolating the result to arrive upon a final chargeback amount." This bill requires that manufacturers not disapprove a claim unless it has specified defects, such as that the claim is false or fraudulent or repairs were not properly made. Also, the bill prescribes procedures for notifying a dealer of disapproval of a claim, providing an appeal process (including attempts to cure noncompliance), and other related activities. Finally, the bill restricts chargeback based on extrapolation, requiring that the sample of claims be selected randomly and the extrapolation be performed in a reasonable and statistically valid manner. Supporters believe that these provisions will reduce problems relating to disapprovals. Export Policies. According to the sponsor: "Given vehicle allocation limits to high-demand countries like China and Korea, a large number of 'straw purchaser' rings acquire new vehicles from California dealers for export. All manufacturers have policies prohibiting dealers from selling vehicles for export - most on a strict liability basis where dealer knowledge of the SB 155 Page 7 planned exportation is irrelevant." This bill would prohibit manufacturers from taking adverse action against such dealers based on their consumers' actions unless the dealers knew or reasonably should have known of the customer's intent to export or resell the vehicle in violation of the prohibition at the time of sale or lease. Additionally, this bill specifies that state registration or tax collection creates a rebuttable presumption that the dealer did not have reason to know of the consumer's intent. Effectively, this reverses the manufacturers' allegedly common practice. Facility Improvements. Existing law prohibits manufacturers from requiring dealers to make certain changes to any dealership facility, unless the required change is reasonable in light of all existing circumstances. This bill specifies that a change is not reasonable if it requires that the dealer purchase goods or services from a specific vendor when substantially similar goods or services are available from another vendor, but the bill also contains protections for manufacturers' intellectual property, for example regarding signage. This bill also allows manufacturers to require pre-approval, which shall not be unreasonably withheld, for alternative goods and services. The sponsor argues that this provision allows a "Buy California" policy that improves upon current practice. Performance Standards. This bill imposes two requirements on manufacturer performance standards for measuring a dealer's sales, service, or customer service performance that may materially affect the dealer. The first is that the standard be reasonable in light of all circumstances, including some of the dealer's local and individual circumstances as specified in the bill. The second is that, upon dealer request, the manufacturer must provide certain details, as specified in the bill, such that the dealer can determine how the standard was established and applied to the dealer. The sponsor contends that this corrects a common manufacturer practice. Continuing Dispute Regarding Manufacturers' Audit Timelines. Despite lengthy negotiations and agreement on many amendments, the dealers and manufacturers appear to remain some small but significant difference apart on the issue of audit timelines. Manufacturers are entitled to audit dealers' records regarding claims made under warranty and incentive programs. Currently, SB 155 Page 8 warranty records may be audited every 12 months, and incentive claims may be audited every 18 months. The frequency of these audits is a sensitive point between manufacturers, who are legitimately concerned about the potential for false or inflated claims, and dealers who are justifiably eager to avoid undue recordkeeping and disruption of settled accounts. As proposed to be amended, the bill changes these periods to 9 months for both types of audits. On this point the Alliance of Automobile Manufacturers writes: CNCDA seeks to restrict audit times for warranty and incentive claims to become among the most restrictive in the country. Current law requires us to make warranty repair and performance incentive payments within 30 days of submission by a dealer and allows up to 18 months to audit claims. SB 155 artificially and imprudently compresses the audit period to nine months. 43 states currently allow at least a 12 month audit period. The nine month audit period is too short to adequately ensure that such payments are deservedly entitled and does not reflect standard accounting standards of either government agencies or private sector entities. The Alliance has consistently opposed 9-month audit time periods as too brief and thereby creating a disparate and unfair relationship between two businesses. We are unaware of any long-term systemic issue with the current statutory time frames allowed in California law. The Alliance member companies are prepared, however, to accept a 12-month audit period, despite the challenges that those timeframes would present to them. Late Request For Amendments From Importers and Exporters. Last week a request for amendments was delivered to the author and Committee by North American Automobile Trade Association and the American Automotive Shippers Association, consisting of members who import and export automobiles. These groups argue that the bill should do more to prohibit anti-competitive restrictions manufacturers place on dealers and purchasers regarding imports and exports. These suggestions have not been adopted by the author, and it is believed they would be opposed by the manufacturers. Prior Related Legislation : SB 642 (Padilla, Chapter 342, Statutes of 2011) prohibited or restricted certain contracting SB 155 Page 9 terms between vehicle manufacturers and their franchised dealers, among other things. SB 424 (Padilla, Chapter 12, Statutes of 2009) allowed a franchisee to house one or more vehicle franchise at the same location and allowed 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, among other things. REGISTERED SUPPORT / OPPOSITION : Support California New Car Dealers Association (sponsor) California Motorcycle Dealers Association Opposition Association of Global Automakers Alliance of Automobile Manufacturers Analysis Prepared by : Kevin G. Baker and Tom Watts / JUD. / (916) 319-2334