BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 1178 (Achadjian)
Version: June 23, 2015
Hearing Date: July 14, 2015
Fiscal: Yes
Urgency: No
TH
SUBJECT
Vehicles: Manufacturers and Distributors
DESCRIPTION
Existing law prohibits a vehicle manufacturer or distributor
from taking or threatening to take an adverse action against a
dealer pursuant to an export or sale-for-resale prohibition
because the dealer sold or leased a vehicle to a customer who
either exported the vehicle to a foreign country or resold the
vehicle, unless the export or sale-for-resale prohibition policy
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 in
violation of the prohibition. Existing law creates a rebuttable
presumption that a dealer did not have reason to know of a
customer's intent to export or resell a vehicle when the dealer
causes the vehicle to be registered in this or any other state,
and collects the applicable sales or use tax.
This bill would instead make it unlawful to take or threaten to
take any adverse action against a dealer pursuant to an export
or sale-for-resale prohibition because the dealer sold or leased
a vehicle to a customer who either exported the vehicle to a
foreign country or resold the vehicle in violation of the
prohibition if the dealer causes the vehicle to be registered in
this or any other state, and collects the applicable sales or
use tax. Notwithstanding the foregoing, this bill would provide
that a manufacturer or distributor may take an adverse action
against a dealer only when a vehicle is either exported to a
foreign county or resold in violation of the prohibition policy
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and the dealer sold or leased the vehicle to a person listed as
a known exporter on a known exporter list provided by the
manufacturer or distributor at least 48 hours before the sale or
lease.
BACKGROUND
Sustained decades of economic growth in China have resulted in
significant demand for imported American and European vehicles.
Responding to that demand, several global automakers have
modified their distribution networks to sell their line make
vehicles directly in the Chinese market. Due to regional
pricing differences, the average cost of a particular imported
vehicle can cost almost three times more on the Chinese market
than in the United States. This price differential has prompted
individuals and companies not affiliated with automakers to
purchase their vehicles in the United States for export and
re-sale in overseas markets. According to one recent news
article:
One thing is certain: Exporting cars to China can be extremely
lucrative, even considering the cost of obtaining and shipping
them. That's because many automakers set their Chinese
sticker prices at double or triple what U.S. buyers pay. A BMW
X6, for example, starts at $61,900 at U.S. dealerships but
1.06 million yuan, or $171,000, in China. (Nick Bunkley,
Selling Vehicles for Export Angers Automakers, But is it
Illegal? [as of Jul. 11, 2015].)
Since manufacturers cannot directly prevent individuals from
exporting the vehicles they purchase overseas, they combat the
purchasing of vehicles for export outside of their intended
market through restrictions in the franchise agreements they
have with car dealers in their dealer networks.
For dealers, exporting represents a mixed bag. Sales to
exporters are often easy, fast transactions at sticker price.
But those who knowingly sell to exporters -- or don't do
enough to screen them out, even at the risk of missing their
end-of-month target -- can face severe consequences from the
factory. These include monetary penalties known as
chargebacks, the loss of future inventory or even termination
of their franchise.
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BMW, Land Rover, Mercedes-Benz and Porsche -- four of
exporters' most-favored brands -- penalized their U.S. dealers
with chargebacks totaling $30.4 million from 2008 through 2013
. . . The automakers estimated their losses to be about five
times the penalties they have levied.
. . .
Automakers maintain lists of known exporters and bar their
dealerships from doing business with them. But beyond
checking that list, many dealers say they have few ways to
separate straw buyers from legitimate customers whom they
don't want to turn down. (Id.)
California law protects vehicle dealers from being penalized for
violating an export or sale-for-resale prohibition in a
franchise agreement by prohibiting manufacturers and
distributors from threatening adverse action unless a dealer
"knew or reasonably should have known of [a] customer's intent
to export or resell the vehicle in violation of the prohibition
at the time of sale or lease." (Veh. Code Sec. 11713.3(y).)
Despite this prohibition, some manufacturers have "sent lengthy
letters to their U.S. dealers in recent months outlining more
stringent penalties for selling to exporters," stating that
"dealerships linked to exported vehicles could forfeit bonuses
and future vehicle allocations if they can't demonstrate
adequate due diligence," and that "[e]ven the first violation
could be grounds for franchise termination if the circumstances
are particularly egregious." (Nick Bunkley, Selling Vehicles
for Export Angers Automakers, But is it Illegal?)
This bill would alter the existing prohibition restricting
manufacturers or distributors from threatening adverse action
for violating an export or sale-for-resale prohibition by making
it unlawful to take such adverse action if the dealer both
registers and collects the applicable sales or use tax on a
vehicle that is later exported or resold. However, this bill
would allow adverse action to be taken if a dealer sells a
vehicle that is later exported to an individual listed on a
known exporter list provided to the dealer at least 48 hours
before the sale.
CHANGES TO EXISTING LAW
Existing law charges the Department of Motor Vehicles (DMV) with
licensing and regulating dealers, manufacturers, and
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distributors of motor vehicles who conduct business in
California. (Veh. Code Sec. 3000 et seq.)
Existing law prohibits a licensed dealer, manufacturer, or
distributor of motor vehicles from taking or refraining from
taking specified acts. (Veh. Code Sec. 11700 et seq.)
Existing law prohibits a licensed manufacturer, manufacturer
branch, distributor, or distributor branch from, directly or
indirectly through an affiliate, taking or threatening to take
any adverse action against a dealer pursuant to an export or
sale-for-resale prohibition because the dealer sold or leased a
vehicle to a customer who either exported the vehicle to a
foreign country or resold the vehicle in violation of the
prohibition, unless the export or sale-for-resale prohibition
policy 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 in
violation of the prohibition at the time of sale or lease.
(Veh. Code Sec. 11713.3(y).)
Existing law states that if a dealer causes a vehicle to be
registered in this or any other state, and collects or causes to
be collected any applicable sales or use tax due to this state,
a rebuttable presumption is established that the dealer did not
have reason to know of the customer's intent to export or resell
the vehicle. (Veh. Code Sec. 11713.3(y).)
This bill would, instead, prohibit a licensed manufacturer,
manufacturer branch, distributor, or distributor branch from,
directly or indirectly through an affiliate, taking or
threatening to take any adverse action against a dealer pursuant
to an export or sale-for-resale prohibition because the dealer
sold or leased a vehicle to a customer who either exported the
vehicle to a foreign country or resold the vehicle in violation
of the prohibition, if the dealer causes the vehicle to be
registered in this or any other state, and collects or causes to
be collected any applicable sales or use tax due to this state.
This bill would provide, notwithstanding the above, that a
manufacturer, manufacturer branch, distributor, or distributor
branch may take an adverse action against a dealer only when a
vehicle is either exported to a foreign county or resold in
violation of an export or sale-for-resale prohibition policy if
the manufacturer, manufacturer branch, distributor, or
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distributor branch provided the policy and a known exporter list
in writing to the dealer at least 48 hours before the sale or
lease of the vehicle and the dealer sold or leased the vehicle
to a person listed as a known exporter.
This bill would make related findings and declarations, as well
as other technical and conforming changes.
COMMENT
1.Stated need for the bill
The author writes:
The sale and service of motor vehicles is important to
California's economy. California motor vehicle franchises
employ over 110,000 people and in 2014, motor vehicle sales
and services result[ed] in over $105 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 primary owned
and operated as family businesses.
Just two years ago, the California Legislature overwhelmingly
passed and the Governor signed SB 155 (Padilla [Ch. 512,
Stats. 2013]), which prohibited certain automobile
manufacturer activities, including threatening dealers with
unreasonable manufacturer export policies. At the request of
many manufacturers, SB 155 established a rebuttable
presumption that a dealer did not have actual knowledge of the
intent to export so long as the vehicle is registered in
California and sales tax is collected . . . [S]ome
manufacturers are choosing to ignore California's law by
imposing a strict liability export policy. Such policies
provide that, any time a vehicle is exported or resold (even
without dealer knowledge and even though sales taxes are paid
and the vehicle is registered here) the dealer will face
severe sanctions. [California] . . . did not anticipate that
certain auto manufacturers would simply ignore the . . .
recently enacted franchise protection law . . . on export and
resale policies. The punitive practices include reducing
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vehicle allocation, withholding or charging back incentive
monies and threats of terminating the franchise agreement.
AB 1178 strengthens California's law by prohibiting
manufacturers from taking negative actions against a dealer
when a vehicle is exported or resold if the dealer collects
sales tax and registers the vehicle in California. AB 1178
does create an exception where the manufacturer can take
negative actions against a dealer if the dealer sells a
vehicle to a person identified on the manufacturer-provided
"known exporter list" and the manufacturer provides their
export policy in writing.
2.Protecting Franchise Dealers
This bill would provide additional protection to motor vehicle
dealers threatened with adverse action by manufacturers or
distributors for selling vehicles to customers that later resell
or export them in violation of an export or sale-for-resale
prohibition. Regarding the need for additional protection, the
California Motorcycle Dealer's Association states that "[s]ome
manufacturers, including motorcycle manufacturers, continue to
ignore the provisions of [existing law] . . . and sanction
dealers, whose customers export newly purchased vehicles."
Similarly, the California New Car Dealers Association states:
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 planned exportation is irrelevant.
Punishment under these policies includes reduced allocation,
incentive program chargebacks, or even termination.
. . .
Despite the [current] . . . "rebuttable presumption" export
policy framework adopted in 2013, some manufacturers are
choosing to ignore California's law by imposing a strict
liability export policy. Such policies provide that, any time
a vehicle is exported or resold - even without dealer
knowledge and even though taxes are paid and the vehicle is
registered in California - the dealer will face severe
financial and vehicle allocation sanctions.
This bill seeks to protect dealers from suffering adverse
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consequences under such export restriction policies by
prohibiting manufacturers and distributors from taking adverse
action against dealers who sell vehicles that are later exported
or resold, so long as the dealer registers the vehicle, ensures
the appropriate sales or use taxes are paid, and does not sell
to a known exporter identified on a list provided by the
dealer's franchise manufacturer or distributor.
3.Opposition Concerns
Honda North America (Honda), in opposition, states:
[In 2013,] the State of California enacted [Vehicle Code
Section 11713.3(y),] which placed significant restrictions on
a motor vehicle distributor's ability to prevent dealers from
selling vehicles to exporters or re-sellers instead of the
consuming public . . . The export provision that took effect
last year significantly restricts a distributor's ability to
control its distribution network. However, it at least
provides some remedy where a distributor can show that the
dealer has either intentionally directed vehicles to exporters
or resellers or failed to take reasonable steps to prevent
sales to exporters or resellers in violation of a policy
prohibiting such sales. The revisions to Section 11713.3(y)
proposed in Assembly Bill 1178 would strip this limited remedy
away. Instead, if enacted, Assembly Bill 1178 would prohibit
a distributor from taking any adverse [action] against a
dealer who sells vehicles to an exporter or re-seller, so long
as the dealer causes the vehicle to be registered and collects
sales or use tax on the sale. Under this provision, the
distributor could not take any action against the dealer for
these sales, even if the dealer knew the buyer intended to
export or resell the vehicle or willfully ignored any signs
that the buyer was an exporter or reseller.
Honda also raises concerns that the restrictions in this bill
would cause significant harm to distributors and their ability
to allocate vehicles where they are needed to serve the
consuming public. This disruption of a manufacturer's
distribution network could also harm "consumers in the state
because vehicles that are in high demand will be unavailable in
certain markets where the dealer has exported the vehicles or
sold them to a re-seller," and may "drive up prices on
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vehicles."
The Association of Global Automakers (Global), also in
opposition, raises similar concerns. Global "seeks to amend the
bill to provide an opportunity for manufacturers to address a
dealer's obligation to exercise due diligence, rather than
simply escape any responsibility to prevent exports by mandating
that in a situation where an exporter list and policy is
provided, the vehicle is registered in any state, and applicable
tax is collected, the automaker can never take any action
against even a serial exporter of vehicles."
Responding to these concerns, the author offers amendments that
would additionally render a dealer liable for adverse actions
when selling a vehicle to a purchaser whom the dealer knew
intended to export the vehicle to a foreign country. These
amendments would also specify that a manufacturer or distributor
bears the burden of proof to show that a purchaser's name
appeared on a list of known exporters provided to a dealer prior
to a sale or lease, or that a dealer had actual knowledge of a
purchaser's intent to export a vehicle to a foreign country at
the time of sale or lease.
Author's Amendments :
On page 16, line 11, strike "exporter." and insert: exporter
or the dealer had actual knowledge of the customer's intent to
export the vehicle to a foreign country at the time of sale or
lease. In any proceeding in which a challenge to an adverse
action is at issue, the manufacturer, manufacturer branch,
distributor, or distributor branch shall have the burden of
proof to show that the vehicle(s) were either exported or
resold in violation of an export or sale-for-resale
prohibition policy and that the customer(s) name appeared on a
list of known exporters given to the dealer at least 48 hours
prior to the sale or lease, or the dealer had actual knowledge
of the customer's intent to export the vehicle to a foreign
country at the time of sale or lease.
Support : California Motorcycle Dealers Association
Opposition : Association of Global Automakers; Honda North
America
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HISTORY
Source : California New Car Dealer Association
Related Pending Legislation : None Known
Prior Legislation :
SB 155 (Padilla, Ch. 512, Stats. 2013) modified the relationship
between motor vehicle dealers and manufacturers by, among other
things, making changes regarding the use of flat-rate time
schedules for warranty reimbursement, warranty and incentive
claims, audits, protest rights, export policies, performance
standards, and facility improvements.
SB 642 (Padilla, Ch. 342, Stats. 2011) modified and expanded the
existing statutory framework regulating the relationship between
vehicle manufacturers and their franchised dealers.
SB 424 (Padilla, Ch. 12, Stats. 2009) regulates actions that
vehicle manufacturers may take with regard to their franchised
dealers, and allows 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.
Prior Vote :
Senate Transportation and Housing Committee (Ayes 11, Noes 0)
Assembly Floor (Ayes 80, Noes 0)
Assembly Appropriations Committee (Ayes 17, Noes 0)
Assembly Transportation Committee (Ayes 16, Noes 0)
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