Pub. 57 2016-2017 Issue 1

26 parity surcharges.” InMaine, that surcharge took the formof a $500 price adjustment on each new car sold to Maine dealers. Several states have responded to such manufacturer attempts to pass on the costs of warranty work by enacting “recoupment bars” as was discussed during panel two at theWorkshop.These provisions unequivocally prohibit manufacturers from recov- ering from the dealers the costs associated with reimbursing dealers for warranty-related parts and labor. 56 The rate of reimbursement for warranty-related parts and labor has typically been governed by the franchise agreement. To understand why nearly every state has deemed it necessary and in the public interest to regulate this area, it is important to appreciate how this type of regulation has evolved. Historically, manufacturers preferred to reimburse dealers for parts used in warranty work at a national rate of cost plus x%. Because the cost of labor varies considerably across the U.S., however, the treatment for labor cost reimbursement has been different. Regarding these latter reimbursements, adjustments weremade based on where the dealer was located with the calculation being roughly tied to local market conditions affecting the rates dealers charge for labor. Nonetheless, what was and remains uniform in the context of reimbursement for warranty labor is that manufacturer unilaterally determines the number of hours or units of time that a particular warranty repair will take. In this regard, it needs to be stressed that, absent state regula- tion in this area, a so-called “free market” approach would mean that manufacturers would have absolute discretion in determining what compensation dealers would receive for the warrantywork they are contractually required to performunder the terms of their franchise agreements. Failure to do these repairs is grounds for termination in most, if not all, of these agreements. While, clearly, manufacturers have an interest in seeing that this work is done properly for customer retention and satisfaction reasons, it is also obvious that, as we explain below, manufacturers will spend the absolute minimum required because manufacturers naturally viewwarranty as an expense. Several decades ago, the state legislatures began to identify a significantmarket failurewhen it came tomanufacturers fulfill- ing thewarranty commitments and other similar promises they had made to the consumers that bought their products. The first so-called “lemon law” was passed in Connecticut in 1982. Today, every state has some form of similar law that provides consumers with the right to receive a refund or replacement vehicle if a manufacturer could not remedy a covered defect during a certain time period or after a specified number of unsuccessful repair attempts. This state intervention into the free marketplace is an example of the type of regulation that the states found necessary when it comes to ensuring that consumers receive what they were promised in the warranty on the vehicle. And the state legislatures have made a similar judgement in enacting laws that ensure dealers receive reason- able compensation for warranty work. As was made clear during panel two by Messrs. Appleton and Sox, TR. II; 2-4, decades of allowing the manufacturer to dictate unilaterally the amount to be paid for warranty parts and labor resulted in dealers being undercompensated for war- ranty work. Lacking the ability to negotiate collectively over the rates paid to them, dealers turned to the only viable option open to them– petitioning the state legislatures. It was not lost on these legislatures that one outcome of this “free market” approach to warranty work was the very real possibility that dealers were unwillingly (and perhaps even unknowingly) sub- sidizingmanufacturers by permitting them to recoup, through underpayment, a portion of the cost of the warranty coverage they used to market their vehicles to consumers. Dealers are required to invest substantial sums in service facili- ties that meet the specifications set by the manufacturers. For example, there are requirements as to the number of square feet dedicated to this purpose, the number of individual service bays, and the size and characteristics of customer reception andwaiting areas. In addition, themanufacturers mandate the training required for technicians. Dealers must also employ other service-related employees, purchase and stock special tools and an inventory of parts so that warranty work can be done on an expedient basis, and incur myriad other expenses in providing warranty repair services to their customers. Manu- facturers understandably are very specific on how these repairs are to be carried out, and these requirements often are spelled out in ever-changing warranty and policy procedure manuals that can easily run into hundreds of pages. Dealers also incur other costs connected with warranty re- pairs which are not readily apparent to casual observers. For example, some manufacturers require dealers to provide (1) loaner vehicles or shuttle service for service customers who leave  NADA RESPONSE — CONTINUED FROM PAGE 25 56 See, e.g., Conn. Gen. Stat. Ann. § 42-133s (“A manufacturer or distributor may not otherwise recover its costs from dealers within this state”) (original statute enacted in 1982); Fla. Stat. Ann. § 686.405 (“A licensee shall not recover or attempt to recover, directly or indirectly, any of its costs for compensating a motor vehicle dealer under this section.”) (original statute enacted in 1970); Haw. Rev. Stat. § 437-56; Me. Rev. Stat. tit. 10, § 1176 (“A manufacturer or distributor may not recover, or attempt to recover, from dealers its cost for reimbursing a dealer for warranty work as required by this section.”) (original statute enacted in 1975); Me. Rev. Stat. tit. 10, § 1176 (“A franchisor may not otherwise recover its costs for reimbursing a franchisee for parts and labor pursuant to this section.”); N.M. Stat. Ann. § 57-16-7 (“A manufacturer may not otherwise recover all or any portion of its costs for compensating its dealers licensed in this state for warranty parts and service either by reduction in the amount due to the dealer or by separate charge, surcharge or other imposition.”) (original statute enacted in 1973); Wash. Rev. Code Ann. § 46.96.105 (“A manufacturer may not otherwise recover all or any portion of its costs for compensating its dealers licensed in this state for warranty parts and service either by reduction in the amount due to the dealer or by separate charge, surcharge, or other imposition.”).