BILL ANALYSIS �
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:
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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
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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
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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.
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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
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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
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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,
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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
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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