Pub. 57 2016-2017 Issue 1

25 FALL 2016 facturers and the magnitude of the salutary dealership invest- ments that dealers make, the various states have put into place a series of well-structured laws concerning dealer networks. The laws that have been adopted do not prevent manufacturers from adjusting their market representation, but do encourage thoughtfulness and fairness in the process and ensure that any adjustments that are made take into account the public interest. As such, these laws reflect a prudent exercise of state legislative authority. B. Warranty Reimbursement In his introductory remarks to panel two on warranty reim- bursement, the FTCmoderator stated that the inquiry into the warranty reimbursement laws presents the question of whether or not “such direct regulation ultimately is in the interest of U.S. consumers.” TR. II; 1. The answer to this question is unequivocally yes. State laws regulating manufacturer reimbursement rates for dealer-performedwarrantywork have been enacted in virtually every state because they prevent manufacturers from exploit- ing their superior market position to undercompensate dealers and to deprive consumers of the full benefit of the vehicle they purchased. Although the details vary, the majority of such laws peg the reimbursement rates for warranty repairs to the prices associatedwith comparable non-warranty repairs. Prob- lematically, however, the same market power and economic incentives that caused dealers to be undercompensated for warranty repairs in the first place givemanufacturers incentives to circumvent these state laws by attempting to recoup money paid for warranty repairs through other mechanisms. 53 Several states have responded to such circumvention efforts by enacting “recoupment bars” (which expressly stop manufacturers from recouping warranty-related reimbursement costs fromdealers) and laws that permit dealers to resubmit claims that have been rejected due to “clerical” mistakes in the original submission. As noted above, the relationship between an auto dealer and its manufacturer is governed by a written franchise agreement. These agreements cover a broad range of subjects, includ- ing how manufacturers and dealers implement and execute manufacturer-backedwarranties onnewautomobiles. Standard franchise agreements mandate that dealers perform warranty repair work irrespective of whether a dealer sold the vehicle to be serviced. In turn, manufacturers promise to reimburse dealers for their warranty work. The vast majority of states have regulated this aspect of the manufacturer-dealer relationship for decades. Several states simply require that a manufacturer’s compensation for war- ranty work be “reasonable,” “adequate,” or “fair.” 54 The bulk of the states, however, require that manufacturers tether their warranty work reimbursement rates to the retail price of similar non-warranty work. North Carolina, for example, mandates that dealer compensation for warranty work will “under no circumstances . . . be in an amount less than the dealer’s current retail labor rate and the amount charged to retail customers for the manufacturer’s or distributor’s original parts for nonwarranty work of like kind, provided such amount is competitive with the retail rates charged for parts and labor by other franchised dealers within the dealer’s market.” N.C. Gen. Stat. Ann. § 20-305.1. 55 In response to state laws tying reimbursement for warranty work to retail rates, some manufacturers have attempted to recoup the costs imposed by those laws by instituting “warranty  NADA RESPONSE — CONTINUED ON PAGE 26 53 Means of such circumvention included surcharges on new automobiles and audits that penalize dealers not because warranty repairs were not performed and compensation was therefore not owed but because dealers find it difficult at times to perfectly comply with the extremely complex rules and regulations manufacturers have imposed for pro- cessing warranty claim submissions. In the latter case, this results in mistakes in submission of warranty claims that are commonly described by dealers as “clerical” mistakes. 54 See, e.g., Cal. Veh. Code § 3065 (“The warranty reimbursement schedule or formula shall be reasonable with respect to the time and compensation allowed to the franchisee for the warranty diagnostics, repair, and servicing, and all other conditions of the obligation.”); Kan. Stat. Ann. § 8-2415 (“manufacturer or distributor shall pay reasonable compensation to any authorized new vehicle dealer”) (original statute enacted in 1980); R.I. Gen. Laws Ann. § 31-5.1-6 (“Every manufacturer shall properly fulfill any warranty agreement and adequately and fairly compensate each of its motor vehicle dealers for labor and parts.”) (original statute enacted in 1974); S.C. Code Ann. § 56-15-60 (“Every manufacturer, distributor, wholesaler, distributor branch or division, factory branch or division, or wholesale branch or division must fulfill properly a warranty agreement and compensate adequately and fairly each of its motor vehicle dealers for labor and parts.”) (original statute enacted in 1962); Wyo. Stat. Ann. § 31-16-117 (“No schedule of compensation shall fail to include reasonable compensation for diagnostic work, repair service and labor.”) (original statute enacted in 1988). 55 See also Ala. Code § 8-20-7 (original statute enacted in 1981); Del. Code Ann. tit. 6, § 4903 (“With respect to parts and labor warranty reimbursement, reasonable compensa- tion shall not be less than the rate charged by such dealer for like services to nonwarranty customers for nonwarranty parts, service and repairs, provided such rate is reason- able.”) (original statute enacted in 1983); Idaho Code Ann. § 49-1626 (“The schedule of compensation for warranty parts and labor shall not be less than the rates charged by the dealer for similar service to retail customers for nonwarranty parts and labor”) (original statute enacted in 1988); Minn. Stat. Ann. § 80E.04 (“The hourly labor rate paid to and the reimbursement for parts purchased by a dealer for warranty services shall not be less than the rate charged by the dealer for like service to nonwarranty customers for nonwarranty service and repairs.”) (original statute enacted in 1981); Nev. Rev. Stat. Ann. § 482.36385 (“The dealer’s compensation for parts and labor to satisfy a warranty must not be less than the amount of money charged to its various retail customers for parts and labor that are not covered by a warranty.”) (original statute enacted in 1977); S.D. Codified Laws § 32-6B-61(“The hourly labor rate paid to the dealer for warranty services may not be less than the rate charged by the dealer for like service to nonwarranty customers for nonwarranty service. Reimbursement for parts used in the performance of warranty repair may not be less than the current retail rate customarily charged by the vehicle dealer for such parts.”) (original statute enacted in 1990); Va. Code Ann. § 46.2-1571 (“Compensation of a dealer for warranty parts, service and diagnostic work shall not be less than the amounts charged by the dealer for the manufacturer’s or distributor’s original parts, service and diagnostic work to retail customers for nonwarranty service, parts and diagnostic work installed or performed in the dealer’s service department unless the amounts are not reasonable.”) (original statute enacted in 1989); W. Va. Code Ann. § 17A-6A-13 (“in no event may the compensation of a dealer for warranty labor and parts be less than the rates charged by the dealer for like service to retail customers for nonwarranty service and repairs”) (original statute enacted 1982).