Experts: Dealers should prepare now for new laws

Franchised dealers in California should start preparing now for new laws that likely will lead to more revenue for recall jobs and set new rules for handling customers' data.

The laws, which take effect Jan. 1, could have significant effects on dealers' operations going forward and lead to extra revenue in the service department, experts told Automotive News.

California Gov. Gavin Newsom recently signed AB 179, changing the state's dealer franchise law to allow dealers to recover costs for warranty and recall repairs at rates closer to what retail customers pay. He also signed AB 1146, which creates an exception to a new state data privacy law so that automakers and new-car dealers can notify consumers when their vehicles need warranty or recall work.

Both bills were backed by the California New Car Dealers Association. Newsom's predecessor, then-Gov. Jerry Brown, last year vetoed similar changes to the dealer franchise law on the grounds that adopting the complicated reimbursement formula could lead to unforeseen outcomes.

The revision to California's franchise law adds definition to a reimbursement rate for recalls and warranties that previously was based on a "reasonableness" standard, which was vague and skewed the balance of power toward the automaker, said Brian Maas, president of the state dealer association.

In general, dealers could earn almost 40 percent less when doing recall and warranty jobs because automakers reimbursed at lower rates than what retail customers paid, he has said.

Now, the law will require manufacturers' reimbursement rate to dealerships for parts and labor on warranties and recalls to be set at "rates equal to the franchisee's retail labor rate and retail parts rate," according to the legislation. Dealers will calculate those rates using a formula that draws on data from past repair jobs.

"It sounds simple. It's a rather tedious and time-consuming process," said Len Bellavia, founding partner of Bellavia Blatt PC, a law firm based in Mineola, N.Y., that represents franchised auto dealers in all 50 states.

Bellavia said at least 30 states have clearly defined reimbursement formulas in state law, similar to California's. The change could mean an extra $10,000 a month in revenue for an average franchised dealer, he said. Dealers will have to formally apply to their manufacturers to make the change.

"It's a staggering amount of money, and once dealers become educated as to how the process works, most of them jump on board," Bellavia told Automotive News.

Tully Williams, fixed ops director for the Niello Co. in Sacramento, Calif., estimated that the new warranty reimbursement rates could bring in an additional $5,000 to $10,000 per month at each of the group's 10 stores.

That revenue likely will help the fixed ops departments boost profit margins, which is needed because service technicians are scarce and salaries are rising to attract and retain them, Williams said.

"We might feel a little more comfortable" with the extra cushion, he said.

"I would hope [the manufacturers] realize that this is not greed that we're asking for," Williams added. "This is just help running our day-to-day store, and we are reinvesting that into our people and our facilities."

The Alliance of Automobile Manufacturers and the Association of Global Automakers, trade groups that represent automakers, opposed the franchise law revisions. The alliance wrote in a letter to the bill's sponsor this summer that the legislation "changes this proven method of reimbursement by allowing dealers to self-select warranty claims to be used as the cost basis of all future warranty compensation."

The alliance declined to comment to Automotive News. The Association of Global Automakers did not respond to a request for comment.

The statute exempts manufacturer service promotions, routine maintenance and certain other jobs from counting toward the dealership's retail rate.

If they haven't already, California dealership executives should sit down with parts and service managers to make sure the dealership's retail customer repair orders match its retail pricing schedule, since their reimbursement rates will be based on consecutive repair orders, Bellavia said. That would ensure the orders sent to automakers accurately reflect what customers pay and aren't too generous with discounts, such as for employees or family and friends.

"It's the same rule you'd apply any time of the year," he said. "You want to be especially vigilant."

Dealers also could hire outside consultants or attorneys that have done warranty reimbursement work and can help prepare the applications, he said.

"This is the easiest way to make their fixed operations more profitable," he said.

The extra revenue also could help fill the service department talent pipeline, said Michael Charapp, a partner at Charapp & Weiss LLP, a McLean, Va., law firm that represents dealers.

"More realistic rates on the work being paid by manufacturers and distributors will allow [dealers] to be more competitive in the salary and benefit opportunities they can provide to their employees," Charapp said. "It's a major work force development issue."

Major recalls can occupy a service department for a month or more, he said. If those jobs bring in less than what customers would pay, he added, "that's not a pleasant situation for those who are responsible for turning the wrenches."

Starting Jan. 1, automakers and new-vehicle dealers also will be exempt from the new California Consumer Privacy Act to be able to notify consumers if their vehicles are subject to a recall or warranty. They would be able to keep some vehicle and owner information — including the VIN, make and model, odometer reading and the name and contact information of the registered owner — only for that purpose.

The state privacy act gives consumers the right to request that a business provide the personal data collected about them, as well as the reasons for collecting it. Consumers also have the right to opt out of having their information sold and to request that a business delete their data.

The right to delete data came into conflict with federal requirements that consumers be notified when their vehicles are recalled, experts said.

"That's an example of where public safety preempts consumers' right to privacy," Bellavia said.

While the privacy act takes effect in January, the state attorney general's office has until July 1 to adopt rules for businesses that will need to comply with the new law. Bellavia said dealers should begin a good-faith compliance effort by attending seminars and other training sessions, and making sure all dealership employees are trained.

California Attorney General Xavier Becerra recently released draft regulations for the California Consumer Privacy Act and scheduled four public hearings in December. Written comments are due Dec. 6.

Charapp said California's data law will be closely watched elsewhere in the country, as other states may move to adopt similar legislation.

"I think they'll be pressured to do California-type protections," he said, "but those protections need to be realistic so they don't overreach."