Now is a good time to review your CPO inspection process

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Certified Pre-Owned vehicles can attract more buyers and add profit to your bottom line, but don’t underestimate the importance of properly complying with the factory’s guidelines. Improper certification is a claim we see increasingly raised by consumer attorneys against dealers, and the CPO inspection is not limited to check-marking the appropriate boxes on the manufacturer’s CPO checklist.

California law prohibits dealers from advertising for sale or selling a used vehicle as “certified” where the dealer “knows or should have known” of conditions declared by the legislature as making a vehicle uncertifiable[1]. Under this statute, a dealer is also required to provide the buyer with a completed inspection report indicating all components inspected[2]. However, the inspection reports must be filled out completely and in compliance with all manufacturer requirements. A violation of this provision is actionable under Business and Professions Code§§ 17200 or 17500, as well as the Consumers Legal Remedies Act, Civil Code§§ 1750, et seq.

We are seeing an increase in the number of lawsuits filed against dealerships and manufacturers involving sales of used CPO vehicles that allege the dealer did not properly certify the vehicle, and that the manufacturer did not properly train, supervise and monitor the dealer when certifying used vehicles for sale. As vehicle manufacturers are becoming embroiled in CLRA lawsuits—suits which were historically brought solely against dealers—these manufacturers are now starting to tender their defense and indemnification to the dealers under their dealer agreements. When that happens, the profits realized by the dealership in connection with the CPO sale quickly vanish. Moreover, CLRA claims filed against both the manufacturer and the dealer can drive a wedge between the manufacturer and the dealer, causing the dealer to fend off both the plaintiff and the manufacturer as the manufacturer attempts to place blame at the feet of the dealer. Some manufacturers have even attempted to use violations by the dealer of the process set forth in the CPO manual as a defense to liability or reason the dealer should be held liable to the plaintiff.

Vehicle Code§ 11713.18(a)(6) prohibits a dealer from selling as certified a vehicle that has sustained damage “in an impact, fire, or flood, that after repair prior to sale substantially impairs the use or safety of the vehicle.” While the manufacturer’s CPO guidelines may allow vehicles to be certified where impact damage was limited and involved only one or two body panels, you must decide whether that damage substantially impairs the value or safety of the vehicle because even though the vehicle meets the manufacturer’s requirements, it may not be certifiable by law in California.

The single most common allegation in consumer litigation involving pre-owned vehicles in general, and CPO vehicles in particular, is the non-disclosure of repaired prior collision damage. Dealers must be proactive to minimize the risk of these lawsuits and now is a good time for you to examine your CPO process, review earlier audits for recurring issues, and give consideration to the following:

  • Are the technicians performing the CPO inspections factory-trained?
  • Do your technicians have the manufacturer’s CPO manual handy, and are they familiar with its contents?
  • Do your technicians have access to CarFax/AutoCheck/NMVTIS and other condition reports before they begin a CPO inspection?
  • Do you have an appropriate and effective CarFax acknowledgement and disclosure?
  • Do your technicians use paint thickness gauges to measure paint thickness in areas prone to body damage repairs? Are they trained to look for paint overspray, variations in paint texture, and dirt or debris embedded in painted surfaces?
  • Are your technicians trained to look for signs of prior repairs, such as variations in the gaps between body panels and chips in the paint on fender bolts and hood hinges?
  • What have your technicians been trained to do if they find signs that a body panel has been repainted?

CPO guidelines vary by manufacturer and are revised and updated periodically. Technicians conducting the inspections must follow the guidelines in effect at the time. In Brooks v CarMax Auto Superstores California, LLC, (2016) 246 Cal.App.4th973, Jessica Brooks purchased a used Jeep from CarMax that was advertised and sold as certified under the CarMax Certified Quality Inspection (“CQI”) program. A signed CQI Certificate, stating CarMax checks over 125 points, including but not limited to the items listed on the Certificate and certifying that it passed the inspection program, is placed in the glovebox before the vehicle is offered for sale. Brooks argued that the CarMax program failed to comply with Vehicle Code§ 11713.18, and therefore violated the Consumers Legal Remedies Act and Business and Professions Code§ 17200. At trial, the court entered judgment for CarMax, finding the procedures implemented by CarMax complied with its guidelines, and that its guidelines met the statutory requirements. The Court of Appeal affirmed the trial court’s decision.

However in Gonzales v CarMax Auto Superstores California, LLC, 840 F.3d 644 (2016), the United States District Court granted summary judgment in favor of the dealership under similar facts and theories as asserted against CarMax by Jessica Brooks, however the Court of Appeals reversed the District Court’s dismissal, finding that the CQI’s “unmarked list of components” did not provide the buyer with a form indicating the specific results of the inspection.

Although the federal Court of Appeals in Gonzales reached a different conclusion than the state Court of Appeal reached in Brooks, we believe both appellate decisions would have supported the dealership if the CarMax CQI Certificate provided detailed information on each component inspected, similar to that contained in a standard manufacturer-supplied CPO inspection report.

In conclusion, review your procedures to confirm the technician knows and follows the current CPO guidelines. By assuring your technicians are experienced, properly trained, have all vehicle information at their disposal, and know when and how to investigate issues beyond the checklist will improve your CPO audit results and help reduce unnecessary lawsuits. And be sure the sales department is using all disclosure forms required by the CPO manual in the sale process. This requires knowledge and training of the sales staff of the CPO process and disclosure requirements.

[1] Vehicle Code§§ 11713.18(a)(1), (2), (5).

[2] Vehicle Code§11713.18(a)(6).