Pub. 4 Issue 1

On the plus side, federal law does require automakers to provide compensation to dealers for new vehicle inventory that cannot be sold due to a recall. The law provides that compensation may be provided in one of two ways: 1. Manufacturers may repurchase the affected vehicle at the price paid by the dealership, plus reimbursement for transportation charges, plus one percent of the vehicle’s cost per month (prorated from the date of the recall); or 2. Manufacturers may provide the dealership with the parts or equipment to fix the defect, plus reimbursement for the costs of installation, plus one percent of the manufacturer’s selling price of the vehicle per month (prorated from the date of the recall). Given the scope of recent recalls, the amount of compensation could be significant. Franchise documents or communications may set forth a process for applying for recall compensation. If not, dealers should inquire with their automakers about the procedures they have in place for filing recall compensation claims. A manufacturer that fails to comply with this law can be sued for damages, court costs, and attorneys’ fees, subject to a three-year statute of limitations. And while manufacturers have traditionally discouraged dealers from applying for compensation (taking a “c’mon, we’re all in this together” approach), recent efforts by the National Automobile Dealers Association are starting to yield positive results in this area— meaning dealers may want to make another attempt to seek the compensation to which they’re entitled. [Reference: 49 U.S.C. § 30116] Used Vehicles The federal Motor Vehicle Safety Act does not apply to used vehicles, nor (currently) does any state law equivalent. This means that dealers may sell and deliver used vehicles subject to recall without violating federal recall laws; it does not mean, however, that doing so is a good idea. First, selling a used vehicle subject to an open safety recall without disclosing that fact has been challenged by trial lawyer as constituting fraud by concealment of a material fact. Second, dealers who sell used vehicles that they are subject to a safety recall may face product liability actions if an accident occurs related to that recall—even if you do disclose the recall. Third, some state laws, such as those in California, generally prohibit the sale of a vehicle that fails to comply with state safety standards, as well as applicable Federal Motor Vehicle Safety Standards. Since non-adherence to Federal Motor Vehicle Safety Standards can trigger a recall, such recalls could indirectly implicate your used vehicle inventory. [Reference: California Vehicle Code §§ 24007 and 24011] Unlike with new vehicles, automakers currently have no legal obligation under federal or California law to compensate dealers for carrying costs relating to used vehicles subject to recall—even if a “Stop Sale Order” applies that, pursuant to your agreement with the automaker, renders a vehicle unsalable. [Reference: 49 U.S.C. § 30112] Franchise Agreements In addition to state and federal laws that may create legal obligations relating to recalled vehicles, your franchise agreement and other automaker contracts may create obligations on how you must handle recalls. This may range from a vague statement that you will assist the automaker in carrying out a recall or performing recall repairs, to very specific requirements. Be sure to consult your franchise agreement and other ancillary automaker contracts in deciding how you will deal with recalls. Be sure to pay close attention to limitations on the ability to sell vehicles as certified when subject to an open safety recall. The FTC has focused on such sales in enforcement activity. Also be sure to pay special attention to recalls for which the automaker provides a “Stop Sale Order.” An agreement with your automaker may require you to treat such vehicles differently. Even if the franchise agreement does not specifically provide a contractual prohibition from selling such used vehicles, these recalls generally involve a higher degree of safety concern. Furthermore, the issuance of such instructions could be construed by a court (of law or public opinion) as increasing individual dealer responsibility if the defect for which the vehicle was recalled causes damage or injury. Establishing a Dealership Recall Policy If notified by a franchised automaker of a recall covering a used vehicle currently offered for sale (or otherwise learning of a recall affecting used vehicle inventory), dealers must determine whether to withdraw that vehicle from sale. Since not all safety recalls are created equal (they range from true “Stop Sale Orders” to recalls for labelling concerns), dealers are advised to establish a policy, in consultation with counsel, on how to make this legal and practical determination.  ROCKY RECALL — continued from page 15 18 www.glancda.org