Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ill. App.: Nissan’s warranty work reimbursement surcharge violated Illinois motor vehicle dealer law, (Feb 24, 2014)

By Peter Reap, J.D., LL.M.

Nissan North America, Inc.’s “Warranty Supplemental Cost Recovery” charge imposed on all new Infiniti vehicles purchased by Infiniti dealers in Illinois violated Section 6 of the Illinois Motor Vehicle Franchise Act, which set out the dealer law’s warranty work reimbursement procedures, an Illinois appellate court has determined (Nissan North America, Inc. v. Motor Vehicle Review Board, February 20, 2014, Smith, F.).

Background. Section 6 of the dealer law pertains to automotive warranty agreements and warranty repairs, and attempts to strike a balance regarding the issue of reimbursement as between manufacturers that sponsor these agreements and their dealers that are required to complete the repairs, the court noted. Section 6(a) directs that a manufacturer “shall properly fulfill any warranty agreement and adequately and fairly compensate each of its motor vehicle dealers for labor and parts.” Section 6(b) discusses what is “adequate” and “fair” compensation. Subsequent subsections of section 6 define how the “prevailing retail price” is calculated, what parts are covered, and who qualifies as a franchiser.

Also significant to the case is subsection (g), which the legislature added to section 6 in 2001. That subsection permits a manufacturer and a majority of its dealers to agree to a uniform warranty reimbursement policy that would allow the manufacturer to pay those dealers entering into the written agreement a price less than the dealers’ prevailing retail price for parts used in warranty repairs as specified in subsection (b). Section 6(g)(2) then describes that, if such an express written contract between the manufacturer and a majority of its dealers exists, the manufacturer may recover its costs from the remaining, minority dealers who did not join in the written agreement but who continue to receive their prevailing retail price for parts used in warranty repairs pursuant to subsection (b).

Finally, section 6(g)(4) states: “If a franchiser and its franchisees do not enter into an agreement pursuant to paragraph (1) of this subsection (g), and for any matter that is not the subject of an agreement, this subsection (g) shall have no effect whatsoever.”

Nissan does not have a written agreement with a majority of its Illinois Infiniti dealers setting a uniform reimbursement rate for parts or labor used in warranty repairs pursuant to section 6(g)(1) of the Act. Instead, Nissan pays its dealers their prevailing retail prices, as outlined in section 6(b), for parts and labor they expend during their warranty repairs.

In 2007, without notice to its dealers, and in an effort to offset the increased costs of doing business in Illinois with respect to warranty repairs for which, again, Nissan had not established a written agreement with a majority of its dealers setting a uniform parts reimbursement rate, Nissan began imposing an across-the-board surcharge on the wholesale invoice of each new vehicle it was selling to its dealers. Nissan listed the surcharge as a “Warranty Supplemental Cost Recovery” charge; it ranged from as low as $90 at one time to as high as $245 by 2009. Nissan imposed the charge on all new Infiniti vehicles sold to all Illinois dealers, regardless of their actual individual warranty reimbursements.

Two dealers, the plaintiffs in the instant case, demanded that Nissan remove it from the total cost it charged its dealers for new Infiniti vehicles. Nissan refused, and the dealers protests with the Illinois Motor Vehicle Review Board, asserting that this surcharge violated section 6 of the Act.

In his proposed decision, the hearing officer concluded that, by imposing this surcharge, Nissan was effectively reducing the amount that it was reimbursing its dealers on parts used for warranty repairs without any written agreement with a majority of its dealers otherwise in place, in direct violation of section 6. Accordingly, and after finding it inappropriate to consider any constitutional challenges raised by Nissan, the hearing officer recommended to the Board that it uphold Fields’ and Yampa’s protests and declare that Nissan’s Warranty Supplemental Cost Recovery surcharge violated section 6 of the Act.

The Board issued a final order adopting the hearing officer’s proposed decision as its own and a trial court upheld the Board’s final administrative decision. Nissan appealed.

Analysis

Nissan insisted that its Dealer Agreement with the dealers, and specifically the provision contained therein giving it the right to set the wholesale price of its vehicles, controlled; and, that, because it otherwise reimbursed its dealers at the prevailing retail price charged by them for parts and labor for warranty repairs in accord with section 6(b), it did not commit any violation of that section by also imposing this completely unrelated surcharge. Second, Nissan argued that section 6(g) cannot be considered here because it was enacted in 2001, well after Nissan entered into the Dealer Agreements with the plaintiff dealers, thereby rendering any application of that section impermissibly retroactive. And, finally, Nissan claimed that, even if section 6(g) applies, subsection (g)(4) makes clear that it has “no effect whatsoever” in light of the present circumstances.

Legality of the surcharge. Nissan was technically correct that section 6(b), itself, does not contain express language prohibiting any sort of extra, separate charge upon dealers as a method of cost recovery, the court observed. However, at the same time, it does not contain any language permitting such a charge, either. Yet, what was more significant was that Nissan’s interpretation of section 6(b) ignored the express language of section 6(g), which, when read in conjunction with section 6(b) as is required pursuant to the rules on statutory interpretation, made clear that Nissan’s surcharge did, in fact, violate the statute.

To interpret this statute the way Nissan would have the court would require the court to stop reading section 6 after subsection (b) and to ignore subsection (g) in its entirety, thereby rendering it meaningless. To the contrary, these two subsections worked in tandem. Subsection (b) does not expressly bar cost recovery. However, subsection (g) does place conditions on it, which, principle among them, included the manufacturer’s procurement of a written agreement with the majority of its dealers and the imposition of any cost recovery upon only those minority dealers that refuse to participate in the agreement. In imposing this charge, Nissan chose not to follow the conditions and requirements set forth in subsection (g) to obtain warranty cost recovery from its dealers it otherwise could have under the Act. This it could not do, in light of the plain language of section 6, the court held.

Nissan cited its standard Dealer Agreement and concluded that, because this contract gives it the right to set the wholesale price of its vehicles and because it otherwise reimburses its dealers in accordance with section 6(b), it did not commit any violation of the statute by also imposing the unrelated Warranty Supplemental Cost Recovery surcharge. Again, however, such reasoning would require ignoring section 6(g) in its entirety, the court explained. While there is no cost recovery bar expressed in section 6(b), section 6(g) provides the one, and only, method for a manufacturer to recoup its warranty costs.

Moreover, that Nissan’s standard Dealer Agreement gives it the right to set the price of its vehicles was irrelevant, the court said. In any event, Nissan’s right was limited to just that: setting the wholesale price of the vehicles it sells to its dealers. There is no provision in the Dealer Agreement that allowed Nissan to recover its warranty costs. And, the Warranty Supplemental Cost Recovery charge, itself, was not an adjustment to the wholesale price of its vehicles. To the contrary, the record showed that it was a separate, “supplemental,” charge that has nothing to do with the wholesale price. Instead, it was a distinct line-item charge that was not even included in the MSRP of the vehicles (as other charges were), and it was an extra charge that was imposed only upon the dealers themselves. By its very name and description, it was not a charge unrelated to the warranty reimbursement mandate of section 6(b). Nissan was trying to insert a loophole in the law that section 6(g) prevents, rendering its warranty surcharge a clear violation of section 6(b), the court ruled.

Retroactive application of statute. The court rejected Nissan’s next argument that section 6(g) could not be considered because it was enacted in 2001, long after Nissan entered into the Dealer Agreements with the two dealers.

The application of a statute is impermissibly retroactive if the legislature expressly prescribes its reach to actions that have taken place prior to its enactment, or if its application would impair the rights a party possessed when it acted, would increase a party’s liability for past conduct, or would impose new duties with respect to actions already taken, the court noted.

There was no express legislative prescription with respect to retroactivity and section 6. Moreover, the court just concluded that Nissan did not have a vested right to impose the Warranty Supplemental Cost Recovery surcharge. Again, the Dealer Agreement that the two dealers signed in 1991 and in 1994, respectively, did not expressly give Nissan the right to apply a surcharge to compensate for the cost of complying with section 6(b). Ultimately, as Nissan had no vested right that became displaced at the time section 6(g) was enacted, retroactive application of that section was, contrary to Nissan’s insistence, not improper, the court held.

Section 6(g)4. Nissan argued that, even if section 6(g) did apply here, subsection (g)(4) indicated that it had no effect. Nissan hinged its reasoning on the isolation of the language of that subsection, which states that if a manufacturer does not enter into an agreement with a majority of its dealers concerning warranty reimbursement pursuant to section 6(g)(1), “this subsection (g) shall have no effect whatsoever.” From this, Nissan argued that nothing in section 6(g) or 6(b) prohibits it from coming up with its own method of warranty reimbursement if it chooses not to enter into an agreement with its dealers.

However, this is not what section 6(g) says or means, the court reasoned. Rather, section 6(g)(4) clarifies that the only cost recovery method allowed by section 6, as found in subsection (g), can be used only where the manufacturer and a majority of its dealers have come to an agreement to do so. That is, if, and when, such an agreement is reached, the manufacturer may then proceed to recover costs against its minority dealers. But, if, and when, such an agreement is not reached, the one and only opportunity for cost recovery, as found in section 6(g), is lost and cannot be used by the manufacturer. To interpret section 6(g)(4) as Nissan did would render section 6(g) of the Act, and the conditions it prescribes, utterly meaningless, the court commented. Additionally, the cases cited by Nissan were unpersuasive.

Constitutionality. Finally, Nissan raised constitutional claims, including that the Act, as applied by the Board, violated the contracts clauses of the federal and state constitutions, and that it violated the dormant commerce clause of the federal constitution. The court disagreed.

Nissan argued that section 6 of the Act violates the contracts clauses because it acts as a “cost recovery bar,” thereby prohibiting it from exercising its contractual rights under its Dealer Agreement regarding wholesale pricing in order to recover its higher costs of having to comply with the statute. However, the court had already discussed this argument’s lack of merit earlier, it noted. Nissan did not have a contractual right to cost recovery under its Dealer Agreement.

Moreover, even if there were a contractual relationship that was being impaired, Nissan could not show that the impairment was substantial or that the statute did not serve an important public purpose. Accordingly, section 6 of the Act did not violate the contracts clauses of our state or federal constitutions.

Similarly, Nissan’s constitutional challenge pursuant to the dormant commerce clause failed, the court held. A statute is valid under the commerce clause, and does not violate the dormant commerce clause, when it evenhandedly effectuates a legitimate local public interest, the effect on interstate commerce is only incidental, and the burden on commerce is not clearly excessive to the local benefits.

Nissan asserted that the dealer law violated the dormant commerce clause because, via its cost recovery bar in favor of in-state Illinois dealers, it discriminated against out-of-state manufacturers, dealers and consumers by requiring them to bear higher costs. However, Nissan’s argument was premised on faulty interpretation. The Act does not bar a manufacturer’s ability to recover its costs for the warranty reimbursement mandate of section 6. The language of the Act itself does not say this, and the Board’s interpretation of that language did not promote this, according to the court. Rather, cost recovery is merely limited to the conditions prescribed in section 6(g), conditions which Nissan chose not to follow to recover its costs.

In addition, the Illinois Supreme Court had already conclusively determined that the Act does not violate the commerce clause.

The case is No. 1-12-3795.

Attorneys: (GoodSmith Gregg & Unruh LLP) for Nissan North America, Inc. Illinois Attorney General’s Office for Motor Vehicle Review Board.

Companies: Nissan North America, Inc.

Cases: FranchisingDistribution IllinoisNews