WARRANTY CLAIMS – Motor Vehicle Dealers

Franchisor’s Notice of Compensation for Warranty Reimbursement

Vehicle Code section 3065(a) requires every new motor vehicle manufacturer or distributor (franchisor) to properly fulfill every warranty agreement made by it and to adequately and fairly compensate its dealers (franchisees) for labor and parts used to perform warranty diagnostics, repair, service, and all other conditions of the obligations, including costs directly associated with the disposal of hazardous materials that are associated with a recall repair.

Manufacturers and distributors are required to file copies of their warranty reimbursement schedules or formulas with the Board, which must be reasonable with respect to the time and compensation allowed to the dealer for the performance of warranty diagnostics, repair, and service. 

Protest of the reasonableness of the Warranty Reimbursement Schedule or Formula

The reasonableness of the warranty reimbursement schedule or formula is determined by the Board if a dealer files a protest. (Veh. Code § 3065(a)) In determining the adequacy and fairness of the compensation, the dealer’s effective labor rate charged to its retail customers is considered together with other relevant criteria. (Veh. Code § 3065(b))

The time to file the protest is not subject to any specific statutory time limitations. However, failure to file a protest within a reasonable time could result in a dealer losing the right to a hearing before the Board.

If there is a hearing, the franchisee has the burden of proving that the warranty reimbursement schedule or formula is not reasonable, but the franchisor has the burden of proof to establish that a franchisee acted with intent to defraud the franchisor when the issue is material. (Veh. Code § 3066(c))

A successful dealer protest will require the franchisor to amend or replace the schedule or formula for all California franchisees.

Protest of Pre–Repair Challenges to the Reduction in Time and Compensation (Labor Time Guides) Applicable to Specific Parts or Labor Operations

Manufacturers and distributors are prohibited from imposing a fixed percentage or other reduction in the time and compensation allowed to the dealer for warranty repairs not attributable to a specific repair.

The time and compensation applicable to a specific warranty repair may be reduced only upon 15 days’ prior written notice to the dealer.

A franchisee can file a protest to challenge the reduction in time and compensation applicable to specific parts or labor operations. The protest needs to be filed within 6 months "following the franchisee’s receipt of the notice of the reduction." If there is a hearing, the franchisor has the burden of "establishing the reasonableness of the reduction and adequacy and fairness of the resulting compensation." (Veh. Code §3065(a))

A successful dealer protest of a proposed reduction in time and compensation will require the franchisor to reverse the reduction for all California franchisees.

Approval of Warranty Claims

Vehicle Code section 3065(d)(1) requires that warranty claims be approved or disapproved within 30 days after their receipt by the franchisor. Any claim not specifically disapproved in writing within 30 days from receipt by the franchisor shall be deemed approved on the 30th day.

Approved warranty claims must be paid within 30 days of approval. However, Vehicle Code section 3065(d)(5) provides that failure to approve or pay within these time limits, in individual instances for reasons beyond the reasonable control of the franchisor, do not violate Article 4 (pertains to motor vehicles other than RVs).

Disapproval of Warranty Claims for a Defective Part

Vehicle Code section 3065(c) requires the franchisor that disallows a franchisee’s warranty claim for a defective part on the basis that the part was not defective must return the part to the franchisee at the franchisor’s expense, or reimburse the franchisee for the part, at the franchisor’s option.

Disapproval of Warranty Claims

A franchisor shall not disapprove a claim unless the claim meets one of the following categories:

1. False;
2. Fraudulent;
3. Repairs were not properly made;
4. Repairs were inappropriate to correct a warranty failure due to an improper act or omission of the franchisee; or
5. Material noncompliance with reasonable and nondiscriminatory documentation and administrative claims submission requirements.

A franchisor who disapproves a claim is required to notify the franchisee in writing of the disapproval 30 days after receipt by the franchisor and each notice shall state the specific grounds upon which the disapproval is based. (Veh. Code § 3065(d)(3))

Protest of Initial Disapproval of Warranty Claims

A franchisee can file a protest of the initial disapproval of a warranty claim within 6 months after receipt of the written notice. If there is a hearing, the franchisor has the burden of proof.

Franchisor Provided "Reasonable" Appeal Process

Vehicle Code section 3065(d)(3) requires franchisors to provide a reasonable appeal process that allows the franchisee at least 30 days after receipt of the written disapproval notice to provide additional supporting documentation or information rebutting the disapproval.

If the disapproval is based upon noncompliance with documentation or administrative claims submission requirements, the franchisor shall allow the franchisee at least 30 days from the date of receipt of the notice to cure any material noncompliance.

If the disapproval is rebutted and material noncompliance is cured before the applicable deadline, the franchisor shall approve the claim.

There is potentially two 30–day time periods: (1) reasonable appeal; and (2) opportunity to cure.

Final Denial of Warranty Claim

If the franchisee provides additional supporting documentation or information purporting to rebut the disapproval, attempts to cure noncompliance relating to the claim, or otherwise appeals denial of the claim and the franchisor continues to deny the claim, the franchisor shall provide the franchisee with a written notification of the final denial within 30 days of completion of the appeal process, which shall conspicuously state "Final Denial" on the first page.

Protest of Final Denial of Warranty Claim following a Franchisor’s Appeal Process

A franchisee can file a protest of the final denial of a warranty claim following a franchisor’s appeal process within 6 months after receipt of the written notice. If there is a hearing, the franchisor has the burden of proof.

Audits of Franchisee Warranty Records

Audits of franchisee warranty records may be conducted by the franchisor on a reasonable basis, and for a period of 9 months after a claim is paid or a credit issued.

A franchisor shall not select a franchisee for an audit, or perform an audit, in a punitive, retaliatory, or unfairly discriminatory manner.

A franchisor may conduct no more than one random audit of a franchisee in a 9–month period.

The franchisor’s notification to the franchisee of any additional audit within a 9–month period shall be accompanied by written disclosure of the basis for that additional audit. (Veh. Code § 3065(e))

Disapproval of Previously Approved Warranty Claims

Previously approved claims shall not be disapproved or charged back to the dealer unless the claim meets one of the following categories:

1. False;
2. Fraudulent;
3. Repairs were not properly made;
4. Repairs were inappropriate to correct a warranty failure due to an improper act or omission of the franchisee; or
5. Material noncompliance with reasonable and nondiscriminatory documentation and administrative claims submission requirements.

These are the same categories for initial disapproval of a warranty claim.

A franchisor shall not disapprove or chargeback a claim based upon an extrapolation from a sample of claims, unless the sample of claims is selected randomly and the extrapolation is performed in a reasonable and statistically valid manner.

If the franchisor disapproves of a previously approved claim following an audit, within 30 days after the audit, the franchisor shall provide to the franchisee a written disapproval notice stating the specific grounds upon which the claim is disapproved.

Protest of Warranty Claim Disapproval of a Previously Approved Claim Following an Audit

A franchisee can file a protest of the warranty claim disapproval of a previously approved claim following an audit within 6 months after receipt of the written notice. If there is a hearing, the franchisor has the burden of proof.

Franchisor Provided "Reasonable" Appeal Process

Vehicle Code section 3065(e)(3) requires franchisors to provide a reasonable appeal process that allows the franchisee a reasonable period of not less than 30 days after receipt of the written disapproval notice to respond to any disapproval with additional supporting documentation or information rebutting the disapproval and to cure noncompliance, with the period commensurate with the volume of claims under consideration.

If the franchisee rebuts any disapproval and cures any material noncompliance relating to a claim before the applicable deadline, the franchisor shall not chargeback the franchisee for that claim.

Final Denial of Warranty Claim Following an Audit

If the franchisee provides additional supporting documentation or information purporting to rebut the disapproval, attempts to cure noncompliance relating to the claim, or otherwise appeals denial of the claim and the franchisor continues to deny the claim, the franchisor shall provide the franchisee with a written notification of the final denial within 30 days of completion of the appeal process, which shall conspicuously state "Final Denial" on the first page.

Protest of Final Denial of Warranty Claim Following an Audit Following the Franchisor’s Appeal Process

A franchisee can file a protest of the final denial of a warranty claim following an audit following the franchisor’s appeal process within 6 months after receipt of the written notice. If there is a hearing, the franchisor has the burden of proof.

Franchisor Chargeback for Warranty Claims

Vehicle Code section 3065(e)(5) provides that the franchisor shall not chargeback the franchisee until 45 days after receipt of the written disapproval of a previously approved claim following an audit or final denial of warranty claim following an audit following the franchisor’s appeal process, whichever is later.

Any chargeback to a franchisee for warranty parts or service compensation shall be made within 90 days of receipt of that written notice.

If the franchisee files a protest pursuant to this subdivision prior to the franchisor’s chargeback for denied claims, the franchisor shall not offset or otherwise undertake to collect the chargeback until the Board issues a final order on the protest.

If the Board sustains the chargeback or the protest is dismissed, the franchisor shall have 90 days following issuance of the final order or the dismissal to make the chargeback, unless otherwise provided in a settlement agreement.

In summary, days 45–90 are the only days to chargeback a dealer for warranty claims. A manufacturer or distributor cannot chargeback a dealer on day 44 or before, or after day 91. But if a protest is filed prior to a chargeback, then the franchisor cannot chargeback the dealer during the above time period. It must wait until the Board decides the protest and if the protest is dismissed or the Board sustains the chargeback, then the franchisor can chargeback the dealer but must do so within 90 days after the Board action (or within time period allowed by settlement agreement, if any).

However, if a false claim was submitted by a franchisee with the intent to defraud the franchisor, a longer period for an audit and any resulting chargeback may be permitted if the franchisor obtains an order from the Board.

How to File a Protest

The following are guidelines to consider when filing a protest, however, the applicable Vehicle Code sections (3000 et seq.) and regulations (13 CCR § 550 et seq) should be consulted as well. The Board’s legal staff is also available to provide information concerning the procedural aspects of filing a protest. The staff can be contacted at (916) 445–1888.

PLEASE NOTE: THE BOARD’S STAFF IS NOT PERMITTED TO PROVIDE LEGAL ADVICE CONCERNING THE MERITS OF A PARTICULAR MATTER.

Most types of protests have specific statutorily imposed time limits for filing. A protest is deemed to be filed upon its receipt by the Board via regular mail, email, or facsimile, or upon mailing of the protest, if sent by certified or registered mail. In order to ensure your protest is timely filed by the Board, it should be personally delivered or sent by certified mail, return receipt requested.

There are three things that must accompany each protest submitted:

1. The protest for vehicles other than RVs;
2. A $200.00 filing fee or a request for a fee waiver upon good cause shown; and
3. Proof of service that the manufacturer or distributor was served with a copy of the protest.

If any of the above are not enclosed, the protest may not be processed until any missing items have been received.

Required Elements of a Protest

The required content of a protest under Vehicle Code section 3065 is described in Section 586 of Title 13 of the California Code of Regulations. A protest involving warranty reimbursement must:

1. Be in writing and be signed by the franchisee or its attorney;
2. Set forth in clear and concise language the factual contentions of the franchisee with respect to the protest;
3. Set forth the franchisee’s mailing address and telephone number and the name, address, and telephone number of its attorney or authorized agent, if any. [All correspondence and notices to the franchisee shall thereafter be addressed to that address, if the dealer principal is presenting it’s own case, or to the address of the dealer’s attorney or agent, if so represented];
4. Indicate either that the franchisee does or does not desire to appear before the Board;
5. Set forth the number of days required to complete the hearing;
6. Indicate that the franchisee requests a pre–hearing conference if one is desired;
7. Be accompanied by a $200 filing fee in the form of a check, money order, or credit card payable to the New Motor Vehicle Board or a request for a fee waiver; and
8. Be accompanied by a completed proof of service signifying that a copy of the protest was served upon the franchisor.

In addition, the franchisee may submit as exhibits to the protest any physical evidence relevant to the matter with an adequate description in the protest.

HEARING PROCEDURES

General Considerations

When a protest is filed, the Board begins hearing proceedings that are similar to a formal civil trial. These proceedings may include the scheduling of various pre–hearing conferences, settlement conferences, authorization to engage in discovery, identification of witnesses, and so on. Sanctions may be imposed by the Board if a party fails to comply with discovery orders or fails to participate properly in a settlement conference.

All hearings on protests filed pursuant to Vehicle Code section 3065 may be considered by the entire Board or may, at its discretion be conducted by one of the Board’s Administrative Law Judges. (For limitations on Board Member participation, see Board Member Participation in the Protest Process, below.) At the hearing, oral argument is heard, evidence is admitted, testimony is received, and a written decision is rendered. Vehicle Code section 3066 describes the hearing procedures in detail.

Notice of Appearance

Respondents in Board proceedings are required to file a written notice of appearance within 15 days of receipt of the protest (13 CCR § 585.1). Failure to timely file a notice of appearance will result in all proceedings in the matter being suspended until the notice is filed.

Interested Individuals

Vehicle Code section 3066 permits any interested individual to submit an application to the Board for permission to appear at the hearing on any protest for the purpose of submitting direct evidence concerning the issues raised in the protest.

Request for a fee waiver

Any Protestant or Respondent may submit a request for a fee waiver, requesting that the Executive Director, upon a showing of good cause, waive the filing fee (13 CCR § 553.40).

PRE–HEARING PROCEDURES

Telephonic Pre–Hearing Conference

Once a protest has been filed and processed, a notice of telephonic pre–hearing conference is sent to the parties or counsel thereof. During the initial pre–hearing conference, the parties may address any preliminary motions, and establish a discovery schedule, a settlement conference date, and/or a hearing date. Generally, the parties do not proceed with discovery until all preliminary motions have been resolved.

Preliminary Motions

All issues concerning timeliness and jurisdiction are resolved prior to addressing the merits of a protest. If the respondent contends the protest was not timely submitted or the Board lacks jurisdiction, it will file a Motion to Dismiss the Protest. After the motion has been received, a briefing schedule is established and a telephonic hearing is scheduled. In the event of live testimony, the hearing will be conducted in–person (13 CCR § 551.19). If the Motion is dispositive, i.e., granted, the matter is submitted to the Board and will be considered at the next Board meeting. If the matter is not dispositive, i.e., denied, a pre–hearing conference will be scheduled for the parties to establish a discovery schedule, a settlement conference date, and/or a hearing date.

Discovery

The Board or its Executive Director may authorize the parties to engage in discovery procedures as set forth for civil actions in the Code of Civil Procedure Title 4 (commencing with Section 2016.010) of Part 4. The provisions of Chapter 13 (commencing with Section 2030.010) of that title, providing for written interrogatories, do not apply to Board proceedings. The Board can issue subpoenas for the attendance at deposition or hearing of non–parties, or a subpoena duces tecum for the production of papers, records, and books by a witness or deponent (13 CCR § 551.2).

During the initial pre–hearing conference, the parties generally establish a discovery schedule for the production of documents, exchange of witness lists, and deposition cut–off. Discovery must be completed no later than 15 days prior to the commencement of the hearing. Once a discovery schedule is established, it can be modified by stipulation of the parties.

Mandatory Settlement Conference

In any protest, the Board or its Executive Director may order a mandatory settlement conference. The failure of a party to appear, to be prepared, or to have authority to settle the matter may result in any or all of the following:

1. The Board, its Executive Director, or an Administrative Law Judge designated by the Board or its Executive Director may suspend all proceedings before the Board in the matter until compliance;
2. The Board, its Executive Director, or an Administrative Law Judge designated by the Board or its Executive Director may dismiss the proceedings or any part thereof before the Board with or without prejudice;
3. The Board, its Executive Director, or an Administrative Law Judge designated by the Board or its Executive Director may require all the Board’s costs be paid by the party at fault;
4. The Board, its Executive Director, or an Administrative Law Judge designated by the Board or its Executive Director may deem that the party at fault has abandoned the matter (Veh. Code § 3050.4).

HEARINGS ON THE MERITS

Changes to a Hearing Date

Except in cases of a franchisee who deals exclusively in motorcycles, the Board or its Executive Director may accelerate or postpone the date initially established for the hearing.

For the purpose of accelerating or postponing a hearing date, good cause must be shown. The hearing may not be rescheduled for a date more than 90 days from the date of the Board’s original order. Good cause includes, but is not limited to, the effects upon, and any irreparable harm to the parties or interested persons or groups, if the request for a change in the hearing date is not granted.

Application for a continuance of the hearing date must be in writing, and filed with the Executive Director at least 10 days prior to the start of the hearing. Otherwise, a continuance will not be granted except in cases of extreme emergency such as serious accident or death.

Peremptory Challenges

A party in a Board proceeding is entitled to one disqualification of the assigned merits Administrative Law Judge without cause (13 CCR § 551.12). Parties are not entitled to a peremptory challenge for law and motion hearings, settlement conferences, and rulings on discovery disputes. Except for the convenience of the Board, or for good cause shown, the filing of a peremptory challenge will not result in a continuance of the merits hearing.

Intervention

Any person, including a Board Member, may file a motion to intervene in a pending protest (13 CCR § 551.13).

Amicus curiae Briefs

The Board, its Executive Director, or an Administrative Law Judge designated by the Board or its Executive Director may, in his or her discretion, allow the filing of amicus curiae briefs (13 CCR § 551.13).

Venue

A party to a Board proceeding, by means of a motion may request a change in venue (the location of the hearing, (13 CCR § 551.10 et seq.).

DECISIONS OF THE BOARD

Administrative Procedure Act

Decisions of the Board, i.e., Proposed Decisions, Proposed Orders, or Proposed Rulings, are determined after the consideration of evidence introduced in a Board proceeding, conducted in accordance with the Administrative Procedure Act (Gov. Code § 11500 et seq.).

Stipulations of Fact

A hearing initiated by the filing of a protest may be held in whole or in part on a stipulation of fact, in which the parties define matters not in dispute, and other parts of the dispute which have been resolved. Such stipulations are of value as they tend to facilitate and expedite conflict resolution. (See 13 CCR § 587 for procedural details for stipulation of fact before the Board.)

Stipulated Decisions

The Board may adopt stipulated decisions and orders without a hearing, pursuant to Vehicle Code section 3066, to resolve one or more issues raised by a Protestant (Veh. Code § 3050.7(b).)

Failure to Appear at a Hearing

Any party who fails to appear at a hearing may not be entitled to a further opportunity to be heard except in cases where good cause for such failure is shown to the Board or to the Administrative Law Judge within 5 days thereafter. The lack of such a showing may, in the discretion of the Board or the Administrative Law Judge, be interpreted as an abandonment of interest by the party in the subject matter of the proceeding 13 CCR § 589.

Board Member Participation in the Protest Process

In Article 4 protests, Dealer members of the Board are prohibited from hearing, commenting, advising public members upon, or deciding any matter that involves a dispute between a franchisee and a franchisor, unless all parties stipulate otherwise (Veh. Code § 3066(d)).

Proposed Decisions

Matters submitted to the Board for decision are presented at open, public meetings. The Board deliberates in closed Executive Session before reporting its decision publicly. The deliberations of the Board are in private and are not reported.

All decisions of the Board are issued in writing, and contain findings of fact and a determination for each issue presented. The Board has the option to sustain, conditionally sustain, overrule, or conditionally overrule the protest. Board decisions become final when delivered to the parties.

If the Board fails to act within 30 days after the close of a hearing, within 30 days after the Board receives a proposed decision from the Administrative Law Judge, or within a period which may be mutually agreed upon by the parties, then the proposed action of the franchisor is deemed to be approved (Veh. Code § 3067).

* Section 586(b) and (c) of Title 13 of the California Code of Regulations require a manufacturer and distributor to file the warranty reimbursement schedule or formula with the Board no later than 30 days after the date the license is issued or within 30 days after the date of renewal of the license if no schedule or formula has previously been filed with the Board.  Additionally, any addition, deletion, change or modification to the information on file with the Board must be updated with the new information on or before the date the changes become effective.