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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