Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ill. App.: Auto manufacturer barred from imposing warranty cost recovery surcharge on dealers, (May 2, 2014)

By Edward L. Puzzo, J.D.

Auto manufacturer Nissan could not impose a warranty cost recovery surcharge on its Illinois dealers, in connection with the reimbursement of warranty repairs performed by the dealers, without the prior existence of a written uniform warranty reimbursement agreement with a majority of the dealers, the Illinois Appellate Court has ruled (Nissan North America, Inc. v. Motor Vehicle Review Board, April 30, 2014, Smith, F.). The imposition of such a surcharge without a uniform warranty reimbursement agreement violated the Illinois Motor Vehicle Franchise Act.

Background. Nissan North America is the manufacturer and distributor/franchisor of Infiniti vehicles. Under the dealer agreement with Nissan, retail dealers are required to perform warranty repairs on qualifying Infiniti vehicles under the new vehicle warranty issued by Nissan. Dealers cannot charge consumers for parts or labor expended in performing warranty repairs, but Nissan will reimburse the dealer for parts and labor used in these warranty repairs. Under the dealer agreement, Nissan can change the wholesale price it charges dealers for new vehicles at any time without notice, but there is no specific provision in the agreement authorizing Nissan to recoup from dealers costs that it expends in connection with reimbursing dealers for parts and labor used in warranty repairs.

In 2007, Nissan imposed a "warranty supplemental cost recovery" surcharge on all new Infiniti vehicles purchased by Infiniti dealers in Illinois. Infiniti dealers Fields and Yampa Valley challenged the imposition of this fee with the Motor Vehicle Review Board, as a violation of the Illinois Motor Vehicle Franchise Act. The Board ruled against Nissan, as did the lower court, whereupon Nissan appealed.

Reimbursement policy. The appellate court explained that Section 6(g) of the Illinois Motor Vehicle Franchise Act permitted a manufacturer and a majority of its dealers to agree to a written uniform warranty reimbursement policy allowing reimbursement at less than the prevailing retail price for parts used in warranty repairs. However, the parties stipulated here that such an agreement did not exist between Nissan and Illinois Infiniti dealers, and that Nissan had been reimbursing dealers for warranty repairs at their prevailing retail rates. In the view of the Motor Vehicle Review Board, the "warranty supplemental cost recovery" surcharge effectively reduced Nissan's reimbursements to dealers for warranty repairs. Doing this without the existence of written uniform warranty reimbursement policy with the dealers, the mechanism provided by Section 6(g), violated the Illinois Motor Vehicle Franchise Act, the Board had ruled. Nissan argued that the "warranty supplemental cost recovery" surcharge was not prohibited by the plain language of the statute.

The court opined that Nissan was technically correct that the statute did not expressly prohibit the cost recovery surcharge, but noted that it did not permit such a charge either. Section 6 (g) permitted reimbursement at less-than-retail prices, but this was conditioned on the existence of a written agreement with a majority of its dealers for a uniform reimbursement policy setting the price. Only then could the manufacturer impose a cost recovery surcharge on the minority of dealers not covered by the agreement and who still received reimbursement at full retail cost. The written uniform warranty reimbursement agreement described in Section 6 (g) provides the one and only exception for a manufacturer's obligation to reimburse warranty costs at full retail price, stated the court.

Surcharge and wholesale price. Nissan also argued that the provision in the dealer agreement allowing it to set the wholesale price of vehicles should encompass the imposition of a "warranty supplemental cost recovery" surcharge. The court disagreed, stating that the imposition of the surcharge was not an adjustment to the wholesale price and was an extra charge unrelated to the wholesale price. It was a clear violation of Section 6(g), the court ruled.

Surcharge and dealer agreement. Nissan next argued that the dealer agreements it had with Infiniti dealers Fields and Yampa Valley predated the 2001 enactment of Section 6(g), making imposition of that section impermissibly retroactive. The court explained that if application of a newly enacted statute would impact a party's vested rights, it should not be applied. But here, Nissan never had the right to impose the contested surcharge under the pre-existing dealer agreements. In addition, the surcharge was not imposed until 2007, well after the statute was enacted. Thus application of Section 6(g) would have no retroactive effect, the court ruled.

The case is Docket No. 1-12-3795; 2014 IL App (1st) 123795.

Attorneys: Kenneth S. GoodSmith and D.R. Edwards (GoodSmith Gregg & Unruh LLP), and Daniel L. Goldberg, James C. McGrath, and Christina Chan (Bingham McCutchen LLP), for Nissan North America, Inc. Lisa Madigan, Attorney General, for Motor Vehicle Review Board. Ira M. Levin and Eric P. VanderPloeg (Burke, Warren, MacKay & Serritella, P.C.) for M.E. Fields, Inc., and Yampa Valley Enterprises, Inc.

Companies: Nissan North America, Inc.; Motor Vehicle Review Board; M.E. Fields, Inc., Yampa Valley Enterprises, Inc.

Cases: FranchisingDistribution IllinoisNews