Judge rejects challenge to GM's surcharge

A federal judge in Milwaukee has shot down a challenge to a General Motors plan to impose a surcharge on all new vehicles sold to Wisconsin dealerships that opt for higher-than-contractual reimbursement rates for warranty labor and parts.

U.S. District Judge Pamela Pepper ruled Sept. 24 that GM has the right to collect surcharges for stores that choose to use a state law that lets them claim reimbursement based on their own retail markup for parts — sometimes more than 100 percent — and on labor rates that use third-party time guides that allow more time than GM's own labor time guides.

GM's standard reimbursement structure is a store's retail labor rate plus a 40 percent markup on parts, a compensation structure that the automaker calls "generous," according to court documents.

In 2016, GM announced plans to impose a surcharge of $219 per vehicle for stores that choose the higher parts reimbursement option and of $389 per vehicle for stores that request both higher parts and labor reimbursement.

Dealerships that choose the more generous option — 35 of them in Wisconsin — "cost GM millions of dollars per year more than anticipated to deliver warranty service to customers," the automaker argued in court papers. "As a result, GM seeks to increase the wholesale price of the vehicles it sells to the 35 dealers that are contributing to those costs."

Thirteen stores sued GM, claiming the proposed surcharges violate a Wisconsin Motor Vehicle Dealer Act requirement that manufacturers pay "reasonable compensation" for warranty work. The suit also contends the surcharges unfairly discriminate because some dealerships could end up financially ahead, even with the surcharges, depending on how many new vehicles they buy and how much warranty compensation they get.

In her decision, Pepper rejected the stores' request for an injunction and an order finding GM's plan illegal.

She acknowledged that the surcharge for stores that voluntarily request the higher warranty reimbursement rates "would impact the dealership's bottom line" and "might require the dealership to charge its customers a higher retail price. But it is a stretch to say that this kind of indirect impact mandates the conclusion that the cost recovery program denied dealers the 'reasonable compensation' required by the plain language" of the dealer law, Pepper said.

Wisconsin is not the only state where dealers and automakers are tussling over warranty reimbursement rates and surcharges. In Indiana, the Secretary of State's Office in August ordered GM to pay restitution to dealers who it found were unfairly surcharged as a result of seeking increased warranty reimbursements. GM is appealing.

And in California, in September, Gov. Jerry Brown, in a surprise move, vetoed a wide-ranging bill backed by the California New Car Dealers Association over his concerns regarding a formula automakers would have had to use to pay dealers for warranty and recall repairs. While automakers applauded the veto, the dealers association said it would probably introduce a similar bill in the next legislative session. Brown is term-limited, and a new governor will be elected in November.

In the Wisconsin case, GM hasn't asked Pepper to throw out two other claims for breach of contract and violation of the Wisconsin dealer law, and the automaker has said it's willing to try resolving the dispute without the need for a trial.

Pepper said, "It may be that 'something is rotten in the state of Denmark.' There may be something problematic with GM's plan to increase wholesale car prices only for those dealerships that receive compensation under the" dealer law. But she noted that the dealerships reserved their right to challenge GM's plan "in other ways."

Dealership lawyer James Bartzen, of Madison, Wis., and a GM spokesman both declined to discuss the case. Reflecting the highly sensitive nature of the conflict, four of the dealers involved also declined to comment to Automotive News, while several other dealers and general managers didn't respond to questions.

Chris Snyder, executive vice president and general counsel of the Wisconsin Automobile & Truck Dealers Association, said: "When manufacturers are allowed to assess surcharges, it has a quieting effect on dealers to seek a reimbursement rate that deviates from what the manufacturer unilaterally decides they want to pay."

The association isn't part of the litigation but participated in an unsuccessful mediation process.

"The end result," Snyder wrote in an email, "is customers who no longer have a warranty (cash customers) end up subsidizing warranty repairs because fixed service department expenses (much of which are imposed by the manufacturer) cannot be met at the reimbursement rate the manufacturers want to pay."

Melissa Burden and Mike Wayland contributed to this report.