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