BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Adam B. Schiff, Chairman
1999-2000 Regular Session
SB 1146 S
Senator Burton B
As Amended June 21, 1999
Hearing Date: June 22, 1999 1
Health and Safety Code 1
GWW:cjt 4
6
SUBJECT
Motor Vehicle Repair and Trade Secrets
-Disclosure of Trade Secret Information for the Repair and
Remanufacture of Emissions-Related Vehicle Parts Upon Board
Finding-
-No Prospective Certification Unless Violation is
Corrected-
DESCRIPTION
This bill would require the California Air Resources Board
("CARB" or board) to adopt regulations within one year, to
the extent not limited or barred by federal law, to require
automobile manufacturers ("auto makers") to disclose
specified information for the repair or manufacture of
emissions-related motor vehicle parts to any person engaged
in the business of servicing or repairing motor vehicles or
engaged in the manufacture or remanufacture of
emissions-related motor vehicle parts. (See Changes to
Existing Law for the required disclosures.)
Any information that an auto maker can demonstrate to the
board, on a case-by-case basis, is trade secret or
proprietary information would be exempt from disclosure
unless the board finds that disclosure is necessary to
mitigate any anticompetitive effects or is otherwise in the
public interest.
Where the board requires the disclosure of trade secret or
proprietary information, the bill would require the board's
adopted regulations to:
(more)
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permit the imposition of reasonable business conditions
as a condition of disclosure, and the imposition of
punitive sanctions for an improper release of the
information to a competitor of the manufacturer;
provide fair and reasonable compensation for required
disclosure of a trade secret, and provide for the
dissemination of the trade secret information and
collection of fair and reasonable licensing fees through
licensing agreements.
If the board determines that disclosure of any of the
required information constitutes a taking, the bill would
specify that a jury trial, unless waived, would determine
the amount of compensation for that taking.
If a auto manufacturer fails to comply with a requirement
after 30 days of receiving a warning of non-compliance, the
board would be required to immediately fine the
manufacturer $25,000 per day until the violation is
corrected. If the violation is not corrected within 90
days, the board would be required to suspend the
certification process for any motor vehicle or engine
submitted for CARB approval by that manufacturer which has
not yet been certified. The bill would provide for a
hearing upon request prior to the imposition of the
financial or "no certification" penalty.
BACKGROUND
The federal Clean Air Act ("CAA") requires the
Environmental Protection Agency ("EPA") to mandate and
regulate the installation of on-board diagnostic ("OBD")
computers in new cars beginning with the 1994 model year in
order to monitor, control, and record emissions emitted by
automobile engines. OBD systems also store information
about emissions systems faults for later retrieval and warn
drivers by way of malfunction lights to seek repairs of
identified faults.
Pursuant to California's unique authority under the CAA to
establish its own vehicle emissions standards for new cars,
CARB revised its regulations for use in 1994 and later
model year cars to require the use of OBD II devices. To
address concerns about aftermarket tampering of the
computer chips in OBD systems, CARB's OBD II regulations
SB 1146 (Burton)
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requires the computer monitoring system to be tamper-proof
so that its computer-code operating parameters cannot be
altered without specialized tools and procedures. (Title
13, CCR, Section 1968.1(d)(1993).) Thus, prior to selling
any new car or new car engine in California, automobile
manufacturers must obtain certification from CARB that the
car and engine comply with CARB's OBD II requirements.
(Prior to adopting its own standards, California must
determine that its standards will be "in the aggregate, at
least as protective of public health and welfare as
applicable Federal standards" and must receive a preemption
waiver from the EPA before adopting and enforcing the
standards. In 1996, CARB obtained a waiver of federal
preemption for its OBD II regulations.)
Proponents of SB 1146 contend that auto makers have used
the regulations and designed the OBD II systems in such a
way as to lock out competitors in the aftermarket parts
replacement market. Proponents of SB 1146 thus seek to
persuade the Legislature to exercise its police powers to
compel the disclosure of specified information to enable
aftermarket parts manufacturers to build aftermarket parts
that are compatible with the OBD II systems.
Opponents contend that the bill, particularly proposed
Section 43105.5(a)(4) (henceforth "(a)(4)" - which would
require disclosure to the aftermarket parts manufacturers
of the operating parameters, electronic interface and
performance specifications and transfer functions for all
parts monitored by the OBD system), would compel automobile
makers to disclose trade secret and proprietary information
in violation of their intellectual property and contract
rights.
The bill was amended on June 21 to require that, prior to
compelled disclosure of trade secret information, the
board must find that disclosure is necessary to mitigate
any anticompetitive effects or is otherwise in the public
interest.
CHANGES TO EXISTING LAW
Existing law authorizes the Air Resources Board to adopt
and implement emission standards for new motor vehicles to
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control vehicle emissions.
Existing law provides for the protection of a "trade
secret," defined as "information that: 1) has independent
economic value; 2) is not generally known in the industry,
to the public, or to others who can realize economic value
from its disclosure or use; and 3) is the subject of
efforts that are reasonable under the circumstances to
maintain its secrecy." Trade secret information includes,
among other things, formula, patterns, compilations,
programs, devices, methods, techniques, and processes.
(Civil Code Section 3426.1(d).)
Existing federal law also provides for the protection of
intellectual property through the federal Patent Act and
the federal Copyright Act, which includes the Semiconductor
Chip Protection Act.
This bill, under proposed Section 43105.5(a), would require
CARB to adopt regulations within one year, to the extent
permitted by federal law, that would require a motor
vehicle manufacturer to:
1)Place on the Internet the full contents of all manuals,
technical service bulletins, and training materials
regarding emissions-related motor vehicle parts, within a
reasonable period of time.
2)Make available, within a reasonable period of time, for
sale at a non-discriminatory price to auto repair persons
and aftermarket parts makers the car makers' specific
diagnostic tools, and make available to equipment and
tool companies enhanced information about the tools in
electronic format.
3)Provide, within a reasonable period of time, equipment
and tool companies with information that will allow a
company to adopt into aftermarket scan tools the same
reprogramming capability as is provided by the
manufacturer to its dealerships in cases where the car
maker uses reprogrammable computer chips in their motor
vehicles.
4)Make available to all covered persons, within a
reasonable period of time, a description of the operating
parameters, electronic interface and performance
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specifications, including transfer functions, for all
emissions-related motor vehicle parts monitored by the
on-board diagnostic system. Such information shall be
provided for each monitoring system utilized by a
manufacturer that has the potential of setting a fault
code or illuminating an on-board diagnostic (OBD II and
future implementation) malfunction indicator light. The
information required shall not include algorithms,
software code, and specific calibration data beyond what
is available on Mode $06 of the SAEJ1979 Generic Scan
Tool.
5)Not employ any access code or any type of encryption
which would prevent a vehicle owner from using a part
which has not been manufactured by that manufacturer or
any of its original equipment suppliers.
(6)Provide information regarding initialization procedures
for dealing with immobilizer circuits (or other lock-out
devices) necessary for properly repairing, rebuilding,
installing, or otherwise reinitializing vehicle on-board
computers that employ integral vehicle security systems.
(7) Provide the information in a readily accessible
electronic format that is compatible with computer
systems commonly used by covered persons and that is
accessible without the need for any decoding information
or device.
This bill would:
Allow a vehicle manufacturer to conditionally protect
information from required disclosure if it could
demonstrate to the board, on a case-by-case basis that
the information is proprietary or a trade secret.
Allow the board to compel the disclosure of trade secret
or proprietary information if it finds that disclosure
"is necessary to mitigate anticompetitive effects or is
otherwise in the public interest."
Require the board to adopt regulations providing for: 1)
the payment of fair and reasonable compensation for any
required disclosure of trade secret information, and 2)
the dissemination of the trade secret information and
collection of licensing fees through licensing
agreements.
Provide for a jury trial, unless waived, to determine
just compensation if the board finds that the required
disclosure of a trade secret constitutes a taking;
Provide that the Act is not intended to permit
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infringement of intellectual property rights protected by
federal patent, copyright or trademark laws "in so far as
those rights are exercised consistently with other
federal law."
Provide for a mandatory fine of $25,000 if a violation is
not corrected after 30 days notice of the violation, and
for a halt in the certification process of the auto
makers' cars and engines not yet certified if a violation
is not corrected within another 90 days. A car maker may
request a hearing within 30 days of the violation notice
to contest the violation.
COMMENT
1. Should auto makers be required to disclose and share
trade secret and proprietary information for the repair
or manufacture of emissions-related vehicle parts, as
proposed?
Proponents, a coalition including both the automotive
service/repair industry and the aftermarket parts
manufacturers, contend that auto makers have used
California's regulatory scheme requiring the use of OBD
systems to try to gain control over the automotive
service and replacement parts markets. California
Consumer Choice ("CCC"), the umbrella coalition, contends
that auto makers have used the regulations to "lock out
competitors and favor their own franchised car dealers by
restricting access to information that would allow others
to develop or rebuild compatible (and potentially more
affordable) aftermarket parts; limiting independent
repair shops' ready access to key information about the
OBD system which would allow them to compete for
emissions-related maintenance and repairs on late model
vehicles; and attaching exorbitant price tags on
diagnostic and repair tools used in emissions-related
service, so smaller shops are unable to afford them.
CCC contends that the Legislature should use its police
powers to order the regulations be amended to mitigate
its anticompetitive effects so that independent repair
shops and aftermarket parts makers may compete on a level
playing field for automotive repair and replacement part
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dollars, a combined $15.6 billion industry in California.
CCC also contends that monopolization of the aftermarket
service and parts market by auto makers and their dealers
will cost consumers billions of dollars in extra repair
costs.
Opponents, motor vehicle manufacturers, new car dealers,
and producers of original and replacement manufacturers'
parts, oppose the compelled disclosure of trade secret or
proprietary information. They contend that this bill is
a continuation of an unsuccessful ten-year campaign by
aftermarket parts makers to force auto makers to turn
over their intellectual property so that those
competitors can more easily and cheaply make aftermarket
parts rather than having to conduct their own research,
development and testing. Opponents contend that
Congress, the United States EPA, CARB, and the United
States Court of Appeal of the District of Columbia
Circuit have all rejected the claim of aftermarket parts
manufacturers that they are entitled to receive trade
secret and proprietary information needed to make
replacement parts. (See Motor & Equipment Mfrs. Assn. v.
Nichols, 142 F.3d 449, 465 (D.C. Cir. 1998), henceforth
"MEMA.")
SHOULD THE LEGISLATURE REQUIRE CARB TO PROVIDE TO
AFTERMARKET PARTS MAKERS WHAT CONGRESS, THE US EPA, AND
CARB HAS THUS FAR REFUSED TO PROVIDE?
Proponents respond that MEMA only rejected the argument
that the Clean Air Act and its "Service Information Rule"
requires auto makers to furnish aftermarket parts
manufacturers with OBD II systems information, that MEMA
did not address the anticompetitive effects of
California's regulations, and that MEMA in fact
demonstrates the need for the Legislature to intervene
and use its police powers to re-balance the marketplace.
Opponents also contend that SB 1146 would require auto
makers to subsidize potential competitors by furnishing
them with the technical specifications needed to build
competing replacement parts. They assert that the
"lock-out" argument is a Trojan horse and point out that
the sponsors have not cited a single case of a
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reversed-engineered aftermarket part being rejected by
the OBD system. Opponents also assert that expansion of
the Service Information Rule to require auto makers to
furnish aftermarket parts makers with the OBD systems
information conflicts with Congressional intent, is
preempted by federal law, and, if implemented, would
jeopardize the state's exemption under the Clean Air
Act. (Perhaps in recognition of federal preemption and
waiver issues, the bill would qualify its required
adoption of regulations "to the extent not limited or
prohibited by federal law.)
In short, proponents of SB 1146 say they cannot build
compatible aftermarket parts without the requested OBD II
information, and that the withholding of the essential
OBD II information effectively blocks them from
competing, thereby giving manufacturers a monopoly in the
aftermarket parts market. They argue that public
interest would be served by requiring auto makers to
disclose the needed information to build compatible
aftermarket parts, thus re-balancing the marketplace and
providing greater consumer choices. The sponsors further
contend that they are not seeking the technology to build
the parts, only the interface and performance
specifications so that the part would be accepted by the
OBD II system.
Opponents respond that compatible aftermarket parts are
commonly reverse-engineered, but that the aftermarket
parts makers are seeking to avoid the
reverse-engineering costs by instead requiring the auto
makers to disclose the data needed to build compatible
parts. Opponents also reject the claim that auto makers
have a monopoly on aftermarket service and parts, stating
the their collective marketshare in the service and
repair industry is about 30% to 40%, and assert that its
share is far less than the 75% to 80% marketshare
required for a monopoly finding under antitrust law.
While the repair market may not be the relevant market to
gauge if an auto maker has a monopoly in the replacement
parts market, the sponsors have not provided any
statistical evidence showing that the auto makers'
marketshare in the aftermarket parts market supports a
monopoly finding.
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2. Should an auto maker's trade secret information relating
to its OBD systems be subject to disclosure upon a board
finding that disclosure is necessary to mitigate
anticompetitive effects or is otherwise in the public
interest?
The June 21 amendments would require a CARB finding prior
to disclosure of trade secret information being mandated.
Prior to the amendment, the bill sought to require trade
secret disclosures, across the board, as a matter of law.
The following reasons are offered for disclosure upon a
CARB finding:
CARB has the better expertise to analyze the
effects of disclosure or non-disclosure on the
availability of compatible aftermarket parts and
whether its rules result in any anticompetitive
effects which should be mitigated.
CARB promulgated the OBD II regulations and has the
responsibility to ensure that its operation protects
public health and welfare "in the aggregate, at least
as protective of applicable federal standards" in
order to preserve the federal EPA waiver. Expansion
of the federal "Service Information Rule" to include
disclosure of OBD information for the manufacture of
replacement parts may require a new waiver ruling.
CARB would also be able to better assess whether
the greater availability and use of aftermarket parts
(which may be less precise in its tolerances in order
to provide greater utility to a greater number of
vehicles) will result in more vehicle emissions.
Greater emissions could jeopardize the waiver.
Review and a finding by CARB would also enable a
balancing of the need for disclosure against any risk
of tampering, which would undermine the efficacy of
the OBD II systems.
The disclosures required by (a)(4) particularly
involve trade secrets and proprietary information. As
originally proposed, the bill would have required the
disclosure of trade secrets without a particularized
showing of public need or anticompetitive effects.
CARB could make the appropriate case-by-case, or
part-by-part analysis.
Any taking of trade secrets for a public use
require the payment of just compensation. (See
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Ruchelshaus v. Monsanto Co., 467 U.S. 986 (1984.) If
a compelled disclosure is found to constitute a
taking, takings on a part-by-part basis will involve
fewer issues of just compensation. A wholesale taking
will raise numerous just compensation claims.
While a prerequisite board finding is a significant
narrowing of the bill, opponents contend that its broad
standards would not protect an auto maker's trade secrets
from unfair use by competitors in the aftermarket parts
industry. In particular, opponents object that
disclosure could be compelled solely upon a public
interest finding, which they assert is such a vague
standard that it would provide CARB with far too much
discretion. Opponents contend, instead, forced
disclosure of trade secrets should be based on a finding
that "without disclosure, there will be a substantial
lessening of competition or tendency to create a line of
monopoly in any line of commerce." In effect, opponents
propose a substitute test similar to the standard used by
a court to determine anticompetitive effects. The
sponsors say the opponents' proposal would gut the bill.
In support of SB 1146, the sponsors cite Proposition 65
as one example where manufacturers are compelled to
publicly disclose hazardous chemicals in a public
building, as a matter of public interest. They also cite
Corn Products Refining Co. v. Eddy, 249 U.S. 427 (1919),
as quoted in Ruchelshaus v. Monsanto, 467 U.S. 986, 1008
(1984), in which the US Supreme Court stated: "[t]he
right of a manufacturer to maintain secrecy as to his
compounds and processes must be held subject to the right
of the State, in the exercise of its police power and in
the promotion of fair dealing, to require that the nature
of the product be fairly set forth."
Corn Products, however, pertained to required disclosures
under a food ingredient labeling law enacted to secure
freedom from adulteration and misbranding, so that
purchases are not "mislead with respect to the
wholesomeness or food value of the compound." Id. at
431. That case did not, as here, involve required
disclosures of trade secret information for the purpose
of enabling competitors to build competing products.
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3. Measure attempts to distinguish between permitted
regulatory disclosure requirements and "taking" of trade
secret information which requires just compensation; use
of alternative licensing system
Trade secrets are classified as property and are
constitutionally protected against taking without
compensation. (Ruckelshaus v. Monsanto Co., supra. The
California Constitution, Article I, Section 19, provides
a right to have a jury trial to ascertain just
compensation for a taking.
Under SB 1146, if the board requires the disclosure of
proprietary or trade secret information, the board's
regulations would require payment of fair and reasonable
compensation to the vehicle manufacturer for the required
disclosure of trade secret information. If the required
disclosure constitutes a "taking," the auto maker would
be entitled to a jury trial to determine the
compensation, unless the jury trial right is waived.
According to the sponsor, the bill properly distinguishes
between permitted required disclosures of trade secrets,
such as where the government requires disclosure as a
condition of seeking registration, and other forced
disclosures which are a taking and which require just
compensation. The requirement to disclose information as
a condition of seeking future CARB certification and the
proposed licensing scheme and collection of licensing
fees are viewed by the sponsors as an appropriate
exercise of police powers such that the required trade
secret disclosures would not constitute a "taking." The
proposal will doubtlessly be litigated.
4. Does federal case law support the constitutionality of
this proposal?
The sponsors cite Monsanto as supporting
administratively-compelled disclosure in the public
interest, as proposed by SB 1146. Monsanto, a complex
case involving trade secret rights under three versions
of the Federal Insecticide, Fungicide, and Rodenticide
Act (FIFRA), held that (as to post-1978 cases) where the
act did not provide express protection for trade secrets
and a manufacturer knew that data being submitted to a
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regulatory agency could be used or disclosed by the
agency in specified ways, a voluntary submission of data
by an applicant in exchange for the economic advantages
of registration does not constitute a taking of property.
Those economic advantages included an exclusive 10-year
use for data on new active ingredients and a right to
compensation for 15 years if the manufacturer's
submitted data is used and considered in support of
another manufacturer's registration application for a
similar pesticide ("data consideration"). The post-1978
law specifically allowed all health, safety, and
environmental data to be divulged upon request,
notwithstanding trade secret claims, and allowed the
revelation of manufacturing or quality control processes
upon an EPA determination that such disclosure was
"necessary to protect against an unreasonable risk of
injury to health or the environment. Supra, at 995-996.
Under these circumstances, the court reasoned that
Monsanto did not have a reasonable investment-backed
expectation that its trade secret information would be
kept secret if provided to the government. A similar
ruling was handed down for the 1948 through 1972 law,
which was primarily a licensing and labeling statute, and
which prohibited disclosure of any information relative
to formula of products, but was silent with respect to
the disclosure of any of the health and safety data
submitted with an application.
In contrast, for the period between 1972 and 1978, during
which FIFRA required disclosures to the EPA and the
public of environmental, health, and safety data, but
provided specific trade secrets exemptions and prohibited
EPA from publishing the data, the Court held that the
uncompensated use or disclosure of trade secret
information constituted a taking of property. See id. at
1010-1014. During this period, data consideration was
allowed if the original applicant owner of the data
agreed to and was paid for that use.
The sponsors assert that the analogy between Monsanto and
SB 1146's required disclosure and licensing scheme could
hardly be more clear.
Opponents disagree, stating the uses and disclosures
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under FIFRA, as well as the character of the information
being disclosed, are fundamentally different than the
disclosures required by SB 1146. Under FIFRA,
disclosures of trade secret information are limited to
cases where EPA finds disclosure necessary to protect
against unreasonable risk of injury to health or the
environment. Moreover, the character of the information,
health and safety data, may help in the registration of a
competitor's independently developed product, but does
not help in the design of the product itself. In SB
1146, however, the character of the information being
disclosed are the interface and performance
specifications needed to build a competing product, and
the disclosures could be required in the public interest,
which could be interpreted to be lesser standard than
protecting against unreasonable risks of injury.
Further, SB 1146 would require immediate disclosure, and
thus fails to provide an exclusive 10-year use period, an
important economic benefit under FIFRA.
Opponents thus assert that SB 1146 would destroy its
trade secret rights and unfairly aid its aftermarket
competitors. Also citing Monsanto, "[w]ith respect to a
trade secret, the right to exclude others is central to
the very definition of the property interest. Once the
data that constitute a trade secret is disclosed to
others, or others are allowed to use those data, the
holder of the trade secret has lost his property interest
in the data?. The economic value of that property right
lies in the competitive advantage over others that
Monsanto enjoys by virtue of its exclusive access to the
data, and disclosure or use by others of the data would
destroy that competitive edge." Id. at 1013.
Opponents also point to Phillip Morris, Inc. v.
Harshbarger, 159 F.3d 670 (1st Cir. 1998), a recent case
interpreting Monsanto to distinguish between voluntary
exchanges of information, which do not constitute a
taking, and the forced disclosure of information under
legal compulsion, which does constitute a taking. In
that case, Phillip Morris challenged Massachusetts'
ingredient-reporting statute which required
brand-by-brand reporting of tobacco additives in
descending order of volume and permitted public
disclosure of the ingredient information. Any reported
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information which could reduce risks to public health was
deemed to be a public record if the disclosure did not
constitute an uncompensated taking as determined by the
state attorney general. Phillip Morris contended that
the descending order reporting requirement violated its
trade secrets, would make it easier for competitors to
reverse-engineer its products, and would constitute a
taking of its property. The Commonwealth of
Massachusetts defended, saying that Phillp Morris could
not have a reasonable, investment-backed expectation of
secrecy under Monsanto, and that its regulatory measure
is grounded in the state's police powers over matters of
public health.
The First Circuit Court of Appeals rejected
Massachusetts' claims, and read Monsanto to require a
voluntary exchange of information for a loss of the
manufacturer's reasonable investment-backed expectation
of secrecy. "Under the post-1978 FIFRA scheme,
submitters of environmental, health, and safety data
received significant benefits in return for the
disclosure of their data, including rights of exclusive
use ? and rights to compensation from later applicants?.
Since this exchange afforded tangible compensation to
pesticide manufacturers, the post-1978 version of FIFRA
did not work as an uncompensated taking?. Section 307B
effects no comparable bargain."
In reaching its decision that Section 307B violates the
takings clause, the court specifically rejected the claim
that the voluntary exchange consists of permitting
tobacco companies to continue doing business in the state
in return for compliance. Citing SB 1146's parallels of
forced disclosure upon penalty of loss of certification
rights, the difference between the character of
information being disclosed, and the significant lower
level of benefits conferred "in exchange" for the forced
disclosure, opponents argue that the analogy to Monsanto
fails.
The sponsors claim that Harshbarger is questionable
authority and would likely be overturned in the future.
However, to date, the authority has not been questioned.
The sponsors also say that Harshbarger is inapposite
because SB 1146 would provide regulatory compensation for
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the use of trade secrets, unlike the Massachusetts
statute.
5. The "Service Information Rule": Expansion of information
for repairs
When passing the Clean Air Act, Congress also sought to
"facilitate the ability of repair facilities, including
independent repair facilities, to properly diagnose
emission component malfunctions. (S.Rep. No. 101-228, at
97, reprinted in 1990 U.S.C.C.A.N. at 3482.) To assure
that all vehicle manufacturers use OBDs that can be
readily accessed and interpreted, Congress specifically
directed EPA to adopt regulations to require
manufacturers "to provide promptly to any person engaged
in the repairing or servicing of motor vehicles or motor
vehicle engines ? with any and all information needed to
make use of the emission control diagnostic system ? and
such other information including instructions for making
emissions- related diagnosis and repair." (CAA Sec.
202(m)(5).) The rule exempts trade secrets, but requires
its disclosure if that information is provided directly
or indirectly by the car maker to its franchised dealers
or other persons engaged in the service or repair of
motor vehicle engines.
In 1995, EPA promulgated the Service Information Rule
("SIR") to implement CAA Sec. 202(m)(5), which generally
requires manufacturers to make available any and all
information needed to make use of the OBD system and such
other information, including instructions for making
emissions-related repairs, excluding trade secrets. The
EPA rule also established that auto makers can charge a
"fair and reasonable" price for the mandated service
information.
Pointing to SIR, opponents reject the claim that the OBD
systems are used to lock out independent repair and
service facilities from competition. Diagnostic tools as
well as service information and OEM parts are available.
Proponents argue, however, that some manufacturers have
been more cooperative than others. Some manufacturers
require the purchase of diagnostic scan tools costing
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tens of thousands of dollars in order to make repairs on
their line of vehicles. This practice is inconsistent
with Congressional intent and should be corrected, they
argue.
Thus, in addition to the controversial (a)(4) provision
requiring the disclosure of information relating to the
operation of OBD systems, SB 1146 would require CARB to
expand the requirements of the Service Information Rule
to expand the scope of information and tools required to
be furnished to service and repair facilities. Most of
these provisions, such as (a)(1) - requiring Internet
posting of the full contents of technical service
bulletins and manuals, (a)(2) - making specific
diagnostic tools available at a non-discriminatory price,
and (a)(3) - requiring auto makers who use reprogrammable
computer chips in their vehicles to provide aftermarket
equipment and tool companies with information that will
allow those companies to build aftermarket tools with the
same reprogramming capability as is provided to the
franchise dealers, seem reasonable. In fact, CARB has
expressed concern to US EPA about the availability of
affordable tools and service information to independent
repair facilities. (Letter of October 8, 1998 to US
EPA.) In response, the US EPA has replied that it would
likely amend the Service Information Rule next year. In
this context, SB 1146 appears consistent with the intent
of Congress to "facilitate the ability of repair
facilities, including independent repair facilities, to
properly diagnose emission component malfunctions."
(However, expansion of the SIR to apply to aftermarket
parts manufacturers may raise preemption questions. See
Comment 8, below.)
As drafted, the bill is silent on whether a manufacturer
could charge a "fair and reasonable" fee for the mandated
information, as it could under the federal Service
Information Rule. While proposed (a)(2) would allow
manufacturers to charge a non-discriminatory price for
furnishing specific diagnostic tools, the rest of the
provision is silent.
SHOULD THE BILL BE CLARIFIED AS TO WHETHER AUTO MAKERS
COULD CHARGE A FAIR AND REASONABLE FEE FOR THE MANDATED
INFORMATION?
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Some auto manufacturers have indicated that they might be
able to accept these parts of SB 1146 to expand the
provision of service information. Other auto makers
would accept expansion, subject to some clarifying and
narrowing amendments, but object to any inclusion of the
(a)(6) requirement for disclosing "lock-out" technology.
Opponents say that technology has nothing to do with the
operation of OBD II systems and its disclosure would
compromise anti-theft systems in late model vehicles.
6. Multiple responsibilities for CARB: regulations,
adjudicatory hearings and possible appeals, promulgation
of licensing arrangements, and collection of licensing
fee - some implementation questions
SB 1146 would require CARB to undertake a multitude of
responsibilities.
First, CARB would promulgate regulations to require the
disclosure of the information specified in Section
43105.5(a)(1) through (a)(7). Second, and presumably in
response to an information request by a parts maker,
auto makers will either provide the information or file a
petition with CARB seeking to exempt it from disclosure
as a trade secret or proprietary information. Third ,
CARB will then determine if the information is a trade
secret or proprietary information. If it is protected
information, CARB may not require its disclosure unless
it makes the requisite finding of public interest or need
to mitigate anticompetitive effects. Fourth, if CARB
decides to require the disclosure of trade secret
information, CARB would provide for the dissemination of
trade secret information and collection of fair and
reasonable licensing fees through licensing agreements.
To protect trade secrets, the CARB could impose
reasonable business conditions as a condition of
disclosure and impose punitive sanctions for the improper
release of proprietary information to competitors of the
vehicle manufacturer. These provisions, contend the
sponsor, would strike the balance between protecting
trade secrets and the public's interest in ensuring
consumer choices in the aftermarket parts market.
The potential costs to CARB of these activities is not
known.
SB 1146 (Burton)
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a) Implementation concerns
Both the CARB determination on the trade secret
issue and its finding to warrant disclosure of the
trade secret would be board rulings, and would
presumably be formal adjudications as the decision
would affect property rights significantly.
Constitutional due process guarantees imposing
procedural constraints on a governmental decision that
may deprive a person of a property interest within the
meaning of the due process clause of the fifth and
fourteenth amendments. Mathews v. Eldridge, 424 US
319 (1976). However, the due process clause
guarantees no particular form or procedure; the
process appropriate for a particular case is dictated
by the circumstances. Mitchell v. W. T. Grant 416 US
600 (1974). The hearing required by due process need
not be an evidentiary one; and only the most serious
deprivations require a full evidentiary hearing.
(See, e.g., Goldberg v. Kelly 397 US 254 (1970),
(welfare termination.)
SB 1146 is silent on this point. By omission, the
intent of the sponsor is to provide the form of
hearing required by law or the Constitution.
Government Code Section 11410.10 provides that the
Administrative Procedures Act ("APA") applies to a
decision by an agency if, under the federal or state
Constitution, an evidentiary hearing for determination
of facts is required for formulation and issuance of
the decision.
SHOULD THE BILL, TO REMOVE A POINT OF LITIGATION,
SPECIFY THAT THE APA APPLIES TO TRADE SECRET AND
DISCLOSURE DECISIONS?
Similarly, the bill is silent on the standards of
review upon appeal of an administrative ruling.
Section 11523 of the APA provides that judicial review
may be had by filing a writ of mandate, but does not
specify the standard of review. Code of Civil
Procedure Section 1094.5, applicable to review of
state agency decisions, provides for varying levels of
review - from substantial deference to the agency's
SB 1146 (Burton)
Page 19
fact determinations to independent review and judgment
of the evidence.
SHOULD, TO REMOVE A POINT IN LITIGATION, THE BILL
SPECIFY THE STANDARD OF REVIEW IN CASES OF APPEAL?
b) Opposition opposed to forced licensing
Opponents assert SB 1146 amounts to a forced licensing
regime, in violation of the intellectual property
holder's federal Copyright and Patent law protections.
To address this argument, SB 1146 was amended to
provide that its provisions are not intended to
authorize infringement of intellectual property rights
embodied in U.S. patents, trademarks or copyrights "in
so far as these rights are exercised consistently with
other federal law."
However, that provision does not unconditionally
protect patent and copyright laws. In fact, it
recognizes that the exercise of patent and copyright
rights are not free of public benefit considerations
and do not enable a copyright owner to obtain a
defacto monopoly over its market. (Sega Enterprises
Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir.
1992).)
Opponents also contend that mandatory licensing is
premature as an antitrust remedy in the absence of a
showing of an antitrust violation. Even if legal, the
administrative burdens and challenges would be so
significant that opponents say the system would be
"wildly impractical to administer."
Finally, on the issue of licensing, opponents contend
that just compensation is constitutionally required,
and that the substitute administrative licensing
scheme would not pass constitutional muster.
These issues will also, doubtlessly, be litigated
in the courts.
7. Should the car maker be subject to a $25,000 per day fine
SB 1146 (Burton)
Page 20
and potentially lose the ability to certify new cars and
engines for failing to correct a violation?
If the executive officer of CARB obtains credible
evidence of an auto maker's failure to comply with the
proposed disclosure or operation requirements, the board
would send a notice to the car maker warning of the
non-compliance. If the violation is not corrected within
30 days, the bill would require the board to immediately
fine the auto manufacturer $25,000 per day per violation
until the violation is corrected. If the violation is
not corrected after another 90 days, the bill would
require the board to halt the certification process for
any motor vehicles or engines submitted to the state
board for approval which has not yet been certified. The
bill would permit the manufacturer to request a hearing
prior to imposition of the financial and certification
penalties.
This proposal may raise proportionality concerns as a
single uncorrected violation would adversely affect the
auto maker's ability to bring in new lines and new
engines. Opponents contend that a certification penalty
is too severe and excessive. They contend that a fine
and injunctive relief would provide sufficient relief.
8. Opponents contend that the bill violates the Contracts
Clause and Commerce Clause and may be preempted
The auto manufacturers contend that many of their
computer programs are actually the intellectual property
of another company, that the auto maker is simply using
the product under license and a confidentiality
agreement. Thus, opponents argue, SB 1146's compelled
disclosure of trade secret and proprietary information
would require the manufacturer to violate the
confidentiality clauses in their contracts or else face
financial and certification sanctions for a failure to
disclose.
The auto makers also contend that SB 1146 would violate
the Commerce Clause of the US Constitution. Opponents
point out that because of the fungibility of the
information required to be disclosed, information
revealed in California under SB 1146 would be available
SB 1146 (Burton)
Page 21
for use elsewhere. Thus, disclosure in California would
operationally destroy trade secret and licensing rights
recognized under the law of other states. Citing Partee
v. San Diego Chargers Football Co., 34 Cal.3d 378 (1983)
and NCAA v. Miller 10 F.3d 633, opponents contend that
"where States have attempted to regulate interstate
enterprises in a manner that would effectively impose one
State's laws throughout the nation, both the California
and the federal courts have had little trouble finding
Commerce Clause violations."
Finally, they argue that expansion of the Service
Information Rule to provide information to aftermarket
parts manufacturers would be preempted as being contrary
to Congressional intent. "Congress sought to balance the
need of all mechanics for information from the devices,
thereby preserving competition with service and repair
shops unaffiliated with manufacturers, with the right of
those manufacturers to protect their trade secrets,
promoting further innovation in OBD technology." MEMA,
supra, at 465.
9. Proposed findings
SB 1146 would make the following proposed legislative
findings and declarations:
(a) There are over 26 million registered motor vehicles
in California. These vehicles are heavily relied upon
by California residents to conduct their everyday
activities.
(b) The use of these motor vehicles result in hundreds
of tons of pollutants being emitted into California's
air every day, significantly affecting air quality and
public health and safety. To prevent unnecessary
pollution, it is in the best interest of this state to
ensure that the ability of California motorists to
obtain service, repair or replacement of faulty
emissions-related components of their motor vehicle
are not limited by the arbitrary withholding of
service, repair, or parts information by vehicle
manufacturers.
(c) Recent emissions standards adopted and implemented
by the State Air Resources Board for motor vehicles
manufactured after 1993 have resulted in the
SB 1146 (Burton)
Page 22
development by vehicle manufacturers of "onboard
diagnostic computers," that interface with the many
component parts of a vehicle's emissions control
system. Essential service, repair or parts information
and tools for interfacing with a vehicle's onboard
diagnostic computer system are not readily available
to independent automotive repair technicians and
facilities. Accordingly, consumers may be restricted
to having the service and repair of faulty
emissions-related components of a motor vehicle
performed only by franchised dealerships, and
consumers may also be forced to purchase replacement
parts manufactured solely by or on behalf of the
vehicle manufacturer. This restriction of consumer
choice and options is contrary to the history of
automotive repair, which saw the advent of independent
repair technicians and facilities and of independent
aftermarket parts manufacturers as healthy market
competitors to vehicle manufacturers and their
dealerships.
(d) The arbitrary withholding of essential service,
repair or parts information or tools by vehicle
manufacturers from independent automotive repair
technicians and independent aftermarket parts
manufacturers may result in improper and needlessly
costly repairs which could also endanger the public
and result in anticompetitive effects harmful to the
best interests of the state.
Opponents object to the findings, contending that they
are erroneous and prejudicial. For example, opponents
assert that there is no evidence that "essential service,
repair or parts information and tools for interfacing
with a vehicle's onboard diagnostic computer system are
not readily available to independent automotive repair
technicians and facilities." In fact, those tools and
information are currently available under the Service
Information Rule.
10. The law of antitrust and anticompetitive effects
Section 2 of the Sherman Anti-Trust Act provides: "Every
person who shall monopolize or attempt to monopolize ?
any part of the trade or commerce among the several
States ? shall be deemed guilty of a felony."
SB 1146 (Burton)
Page 23
In order to establish an attempted monopolization claim,
"a plaintiff must prove (1) that the defendant engaged in
predatory or anticompetitive conduct with (2) specific
intent to monopolize and (3) a dangerous probability of
achieving monopoly power." Spectrum Sports, Inc.
v.McQuillan, 113 S. Ct. 884 (1993).
Under antitrust law, a 60 to 65 percent market share
establishes a prima facie case of market power and
creates a genuine issue of dangerous probability of
monopolization. (Intergraph Corp. v. Intel Corp. 3 F.
Supp. 2d 1255, 1275 (1998); See also United States v.
Microsoft Corp., 980 F.Supp. 537 (1997) - approximately
80 percent market share in PC operating system software
constitute monopoly power.)
If rivals are alleged to have conspired to monopolize,
one court recognized that the plaintiff could aggregate
the market shares of the rivals. Rebel Oil v. Atlantic
Richfield Co., 51 F.3d 1421,1437 (9th Cir. 1995).
The use of monopoly power, however lawfully acquired, to
foreclose competition, to gain competitive advantage, or
to destroy a competitor, is unlawful. (U.S. v. Griffith,
334 U.S. 100 (1948).)
Recent cases, strongly cited by the sponsor, have also
suggested a new concept, known as "monopoly leveraging."
In Berkey Photo Inc. v. Eastman Kodak Co., 603 F.2d 263,
276 (2d Cir. 1979), cert. denied, 444 U.S. 1093, that
court noted: "The use of monopoly power attained in one
market to gain a competitive advantage in another is a
violation of Section 2, even if there has not been an
attempt to monopolize the second market." Even conduct
by a monopolist that is otherwise lawful may violate the
antitrust laws where it has anticompetitive effects.
(Image Technical Services, Inc. v. Eastman Kodak Co. 125
F.3d 1195, 1207 (9th Cir. 1997).) However, not all
circuits or districts are in accord. (See, e.g., Fineman
v. Armstrong World Indus. Inc. 980 F.2d 181, 206 (3rd
Cir. 1992), holding that "in order to prevail upon a
theory of monopoly leveraging, a plaintiff must prove
threatened or actual monopoly in the leveraged market.")
SB 1146 (Burton)
Page 24
Finally, a refusal to deal "may be unlawful because a
monopolist's control of an essential facility (sometimes
called a 'bottleneck') can extend monopoly power from one
stage of production to another, and from one market to
another. (Intergraph Corp. v. Intel Corp., supra, citing
MCI Communications Co. v. ATT, 708 F.2d 1081, 1132 (7th
Cir. 1983.) The antitrust laws impose on firms
controlling an essential facility the obligation to make
the facility available on non-discriminatory terms.
(Id.)
In the abstract and under circumstances not evidenced
thus far, proponents arguably may be able to show that an
auto maker's conduct in controlling the OBD II
information constitutes a Sherman antitrust violation
where the OBD II system is found to be an essential
facility. "Courts have held that antitrust laws protect
customers and purchasers in cases when a monopolist
refuses to deal in order to control a downstream market."
Intergraph Corp. v. Intel Corp., supra, at 1277, citation
omitted.
Support: Alliance of State Automotive Aftermarket
Associations; Automotive Engine Rebuilders Ass'n.;
Automotive Parts and Accessories Ass'n.; Automotive
Parts Rebuilders Ass'n.; Automotive Repair
Coalition; Automotive Service Councils of
California; Automotive Service Industry Ass'n.;
Automotive Trade Organization of California;
Automotive Warehouse Distributors Association;
California Automotive Teachers; California Service
Station and Automotive Repair Ass'n.; California Tow
Truck Ass'n.; Coalition for Automotive Repair
Equity; Consumers for Auto Safety and Reliability;
California State Automobile Ass'n.; Automobile Club
of Southern California; Car Owners Standing
Together; Chambers of Commerce of Imperial,
Lancaster, and Mountain View; Small Business of
America; Independent Automobile Dealers Ass'n.;
Motor Equipment Manufacturers Ass'n.
Opposition: Alliance of Automobile Manufacturers; Ass'n of
International Automobile Manufacturers; California
Motor Car Dealers Ass'n.; California Manufacturers
Ass'n.; Delphi Automotive Systems Corp.; General
SB 1146 (Burton)
Page 25
Motors Corp.; Ford Motor Co.; Daimler-Chrysler;
Honda North America, Inc.; Toyota Motor Sales,
USA, Inc.; Nissan North America; NUMMI Motors
HISTORY
Source: Automotive Aftermarket Legislation Coalition;
California Consumer
Choice Coalition
Related Pending Legislation: None Known
Prior Legislation: None Known
Prior vote: Senate Transportation: 8 - 1
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