California Adopts Major Changes to Warranty Reimbursement Requirements Effective January 1, 2020

On October 12, 2019, California governor Gavin Newsom signed into law Assembly Bill 179 (A.B. 179), a bill that will make significant changes to the warranty reimbursement provisions of the California Vehicle Code effective January 1, 2020. These changes are likely to result in dealers requesting substantial increases in the warranty reimbursement rates paid by motor vehicle manufacturers and distributors. A separate provision of A.B. 179 prohibits manufacturers from seeking to recover these increased costs through a surcharge on the wholesale price at which vehicles are sold to dealers in California or taking other “adverse action” against dealers who seek increased warranty reimbursement.

Changes To Reimbursement Rates

The present version of the California Vehicle Code, Cal. Veh. Code § 3065, requires manufacturers to “adequately and fairly” compensate dealers for labor and parts provided in connection with warranty repairs. Historically, this has resulted in manufacturers reimbursing dealers at the rate specified in the agreement between the manufacturer and dealer, typically the dealer’s effective or average retail labor rate plus either a set markup over the wholesale cost of any parts (typically 40%) or the manufacturer’s suggested retail parts price. Effective January 1, 2020, however, manufacturers will be required to reimburse dealers for warranty repairs “at rates equal to the franchisee’s retail labor rate and retail parts rate.”

To determine these rates, A.B. 179 adds a new Section 3065.2 to the California Vehicle Code. Under that provision, a dealer will be able to “establish or modify” its reimbursement rates once each calendar year by submitting to its manufacturer a written notice of its retail labor and parts rates together with 100 consecutive “qualified repair orders” or all repair orders completed in any consecutive 90 day basis. The manufacturer will be able to propose an adjusted retail rate or challenge the dealer’s requested retail rates, but the burden will be on the manufacturer to demonstrate that the dealer’s submission was materially inaccurate or fraudulent if the dealer files a protest with the California New Motor Vehicle Board.

Regulation of Labor Time Allowances

Manufacturers typically compensate dealers for the time involved in performing a repair pursuant to factory established flat rate labor times. Manufacturers develop these time allowances through actual studies performed by trained technicians. In contrast, dealers generally charge retail customers based on more generous third-party labor time estimates that are not based on actual time studies and are designed for use by independent repair shops, not franchised dealers. A.B. 179 requires manufacturers to use time allowances that are “reasonable and adequate” for a qualified technician to perform the work and to not “unreasonably deny” a dealer’s written request to modify its time allowances. These new requirements are sure to generate disagreement between manufacturers and dealers regarding the appropriate time allowances for warranty repairs.

Ban on Warranty Surcharges

California is not the first state to adopt warranty reimbursement requirements of this sort; manufacturers and dealers have been engaged in a lengthy battle over warranty reimbursement rates for years. In other states where dealer statutes have been amended to require reimbursement at “retail rates,” manufacturers have imposed surcharges on the wholesale prices at which vehicles are sold to dealers in order to offset the increased warranty costs incurred by the manufacturers. In response, dealer trade associations in many states have successfully lobbied for statutory bans on these surcharges. A.B. 179 likewise anticipates the possibility that manufacturers will seek to recoup their increased costs of compliance by imposing a ban on state level warranty surcharges.

Other changes made to the California Vehicle Code by A.B. 179 include provisions addressing manufacturer export policies, discrimination in connection with vehicle delivery, facility modifications, data management services, and the sale of service contracts.