On January 31, 2013, Senator Padilla introduced a bill in the California legislature aimed at curbing factory incentive and warranty charge-back abuse, providing better rates for warranty work, clarifying factory audit rights and dealer protest rights, and allowing freedom of choice in vendors when conducting facilities upgrades.

The bill would expand dealer rights in connection with a warranty audit.

Under existing law, a factory can audit dealer incentive records for 18 months, and warranty records for 12 months, after a claim is paid or credit issued. Factories are prohibited from denying (called disapproving) dealer incentive and warranty claims except for good cause (a legal term of art, the factors of which are specified in the Vehicle Code), and when a claim is disapproved, the factory's notice of disapproval must state the specific grounds upon which the disapproval is based. The dealer then has one year from receipt of that notice (as to an incentive compensation payment) to appeal the disapproval to the factory and file a protest with the New Motor Vehicle Board.

But there has been some confusion as to the extent of a dealer's rights under existing law.

SB 155 would clarify the scope and extent of dealer rights and would expand those rights. Under the proposed law, the factory would be required to provide the dealer with the specific grounds upon which any previously approved warranty claims will be charged back, if the factory disapproves of a previously approved warranty claim after an audit, and would prohibit a previously approved warranty claim from being charged back to the dealer except for "good cause." The bill would also require the factory to create and provide a reasonable appeal process so that the dealer can respond to any disapproval with additional supporting documentation or information rebutting the disapproval. It would also give the dealer a "cure" period and would prohibit a factory from disapproving a claim or charging back a claim based merely on extrapolation from a sample of claims. The bill would also limit the period by which a factory can audit a dealer's records to 6 months after a claim is paid or credit is issued. And the bill would extend the time by which a dealer would have to file a protest to one year from the later of the date of receipt of the notice of disapproval or the completion of any factory appeal process. It would also give the factory the burden of proof to establish "good cause" for the charge-back.

It would require factories to reimburse dealers for warranty diagnosis and would require flag rate reimbursement for warranty repairs and diagnosis at nationally recognized non-warranty flag rates.

Existing law requires a factory to properly fulfill its warranty agreement and adequately and fairly compensate each of its franchisees for labor and parts used to fulfill that warranty when the franchisee has fulfilled warranty obligations of repair and servicing. The factory also has to file a copy of its warranty reimbursement schedule or formula with the New Motor Vehicle Board.

Many dealers have complained that, over the years, factories have unilaterally and gradually reduced the amount of flat-rate labor time allocable to warranty repairs by an unreasonable amount, and have failed to properly reimburse dealers to repair vehicles to conform to the factory's warranty. Factories have also regularly denied dealer warranty and incentive payment claims for technical reasons without providing any rights to rebut the denial or correct technical errors through reasonable appeal processes, which has resulted in dealers not being reimbursed when performing warranty repairs or applying incentive money to a sale.

SB 155 would require factories to reimburse dealers adequately and fairly for diagnosis work performed under the warranty. More importantly, if the factory calculates warranty reimbursement on flag rate, this bill would allow dealers to submit claims using a published, nationally-recognized, flat-rate labor time guide, e.g., Chilton Labor Guide, as the basis for determining the amount of time allocable for warranty diagnostics and repairs, if (as most do) the dealer primarily uses that time guide to compute technician flat-rate compensation and charges for nonwarranty labor.

It would allow dealers to use vendors of their choice in conducting facilities upgrades.

Under existing law a factory can require a dealer to make a material alteration, expansion, or addition to a dealership facility if it is reasonable in light of all existing circumstances, including economic conditions. But factories often require dealers to purchase good and services for a facilities upgrade from specified vendors, many of which are located outside of the United States. These requirements are generally non-negotiable.

The new law will prohibit a finding that a factory-required facility upgrade is "reasonable" if it requires that the dealer purchase goods or services from a specific vendor when substantially similar goods or services are available from another vendor.

The bill would prohibit a factory from withholding warranty or incentive payments due to the failure of a dealer to meet any particular sales, or other, objective.

As we all know, factories measure dealership sales, service, and customer service performance against standards that are established unilaterally and without dealer input. Many of these performance standards are based on national or statewide performance averages that bear no resemblance to a dealer’s local market. Factories use a dealer's failure to "measure up" as a means for disqualifying a dealer from incentive programs, imposing unrealistic working capital requirements, and even terminating a franchise agreement.

This law would prohibit a factory from using benchmarks that may materially affect the dealer, including, but not limited to, the dealer’s right to payment under any incentive or reimbursement program, unless certain requirements are satisfied. The statutory scheme imposes several restrictions on what constitutes a "reasonable" benchmark that take into account local market conditions, among other things.

And it would limit the circumstances under which a factory can take adverse action against a dealer who sells a vehicle to a customer who then exports that vehicle.

Factories often implement punitive policies toward dealers when they sell vehicles that end up being exported, even when the export happens without the dealer's knowledge, resulting in dealers being charged back for incentive funding that the dealer accounted for in making the initial sale.

The bill would also prohibit a factory from taking or threatening to take any adverse action against a dealer because the dealer sold or leased a vehicle to a customer who then exports it to a foreign country, unless the adverse action is permitted by the franchise or other agreement with the factory and the dealer knew that its customer intended to export the vehicle. The bill would also create a rebuttable presumption in the dealer's favor, if the dealer registers the vehicle and collects applicable sales or use tax on its sale.

The bill was referred to the Senate Judiciary Committee on February 14, 2013. You can find the full text of the bill here. For more information on the bill or on the rights of franchised dealers, contact your attorney or the California New Car Dealers Association, who is promoting this legislation.