BILL ANALYSIS SENATE JUDICIARY COMMITTEE A Charles M. Calderon, Chairman B 1995-96 Regular Session 1 3 8 1 AB 1381 (Speier) As amended on July 3, 1995 Hearing date: July 11, 1995 Civil Code; Vehicle Code GEH:cb "LEMON LAW" CONSUMER DISCLOSURE HISTORY Related Pending Legislation: SB 1383 (Speier) Assembly Floor Vote: Not relevant Assembly Committee on Transportation Vote: Not relevant ANALYSIS REFLECTS AMENDMENTS TO BE OFFERED IN COMMITTEE KEY ISSUES 1. SHOULD THE AUTOMOTIVE CONSUMER NOTIFICATION ACT BE REPEALED, AND THEN RE-ENACTED IN A SUBSTANTIALLY DIFFERENT FORM, AS DESCRIBED IN THE BELOW-LISTED "KEY ISSUES"? 2. SHOULD MANUFACTURERS HAVE THE FOLLOWING NEW AND MODIFIED NOTIFICATION OBLIGATIONS WITH REGARD TO VEHICLES THEY REPURCHASE PURSUANT TO THE LEMON LAW? (more) A. TO RETITLE A REACQUIRED VEHICLE IN THE MANUFACTURER'S NAME? B. TO REQUEST DMV TO BRAND THE OWNERSHIP CERTIFICATE OF A REACQUIRED VEHICLE WITH THE TERM "FACTORY BUYBACK?" C. TO AFFIX A DECAL WITH THE TERM "FACTORY BUYBACK" TO A REACQUIRED VEHICLE'S LEFT DOORFRAME? 3. SHOULD THE CIRCUMSTANCES UNDER WHICH A WRITTEN NOTICE MUST BE (more) AB 1381 (Speier) Page 3 PROVIDED TO CONSUMERS PURCHASING A VEHICLE PREVIOUSLY REACQUIRED DUE TO A DEFECT BE SUBSTANTIALLY CHANGED IN THE FOLLOWING WAYS? A. SHOULD THE REQUIREMENT ONLY APPLY TO A MORE NARROWLY DEFINED SET OF "DEALERS" AND TO MANUFACTURERS INSTEAD OF APPLYING TO ALL "PERSONS" SELLING A MOTOR VEHICLE?" B. SHOULD CONSUMERS BE REQUIRED TO BE NOTIFIED THAT THE VEHICLE THEY ARE PURCHASING WAS REACQUIRED DUE TO A DEFECT ONLY IF IT WAS REACQUIRED PURSUANT TO AN "EXPRESS WARRANTY DISPUTE", INSTEAD OF TO ALL VEHICLES REQUIRED TO BE REACQUIRED AS A RESULT OF A BREACH OF ANY WARRANTY? C. SHOULD DEALERS BE REQUIRED TO PROVIDE WRITTEN NOTIFICATION ONLY IF THEY HAVE ACTUAL KNOWLEDGE THAT THE VEHICLE WAS REACQUIRED, INSTEAD OF IF THEY SHOULD HAVE KNOWN THAT IT WAS REQUIRED BY LAW TO BE REACQUIRED? D. SHOULD DEALERS ONLY BE REQUIRED TO PROVIDE WRITTEN NOTIFICATION IF THEY KNEW THAT THE VEHICLE WAS REACQUIRED AS A RESULT OF A DISPUTE WITH THE LAST RETAIL OWNER OF THE VEHICLE, INSTEAD OF IF THE VEHICLE HAD EVER BEEN REACQUIRED? 4. SHOULD THE REQUIRED CONTENTS OF THE CONSUMER NOTICE BE SUBSTANTIALLY CHANGED IN THE FOLLOWING WAYS? A. SHOULD THE NOTICE STATE THE VEHICLE IS A "FACTORY BUYBACK" DUE TO A "NONCONFORMITY" WHICH "HAS BEEN CORRECTED" INSTEAD OF STATING THAT IT "WAS RETURNED... DUE TO A DEFECT IN THE VEHICLE?" B. SHOULD THE NOTICE HAVE TWO DIFFERENT BOXES TO CHECK -- ONE FOR CARS BRANDED AS "FACTORY BUYBACKS", AND ONE FOR OTHER CARS RETURNED DUE TO A WARRANTY DISPUTE? PURPOSE The purpose of this bill is to make it easier for car dealers to comply with the requirements of the state's lemon disclosure laws. (more) AB 1381 (Speier) Page 4 Under existing law, there are three different statutes which affect the obligations of car manufacturers and dealers regarding "lemons." This bill directly affects only one of those statutes, the Automotive Consumer Notification Act (Section 1795.8 of the Civil Code), but to understand that Act, one must understand the other two statutes. The Song-Beverly Consumer Warranty Act (Section 1790 et. seq. of the Civil Code governs a number of issues related to defective consumer products. Section 1793.2(d)(2) in this Act requires a motor vehicle manufacturer to promptly replace a new motor vehicle or make equivalent restitution, if the manufacturer or its representative "is unable to service or repair ... [the vehicle] to conform to the applicable express warranties after a reasonable number of attempts." The Tanner Consumer Protection Act (Section 1793.22) clarifies, and expands upon, the basic lemon buy-back requirement in the Song-Beverly Act. it defines "nonconformity" as a nonconformity which "substantially impairs the use, value, or safety of the new motor vehicle to the buyer or lessee. It also creates a rebuttable presumption that a reasonable number of attempts has been made to conform a new vehicle to express warranties if within 1 year or 12,000 miles: 1) the same nonconformity has been subject to repair four or more times; or 2) the vehicle has been out of service for repair of nonconformities for 30 days or more. In addition to addressing lemon buy-back requirements, the Tanner Act also imposes a lemon disclosure requirement for subsequent purchasers of lemons. Section 1933.22(f) prohibits any person from selling, leasing or transferring a vehicle which has been transferred back to a manufacturer pursuant to the lemon buyback provisions of the Song-Beverly Act or a similar statute of any other state, unless: "the nature of the nonconformity is clearly and conspicuously disclosed to the prospective ... [transferee], the nonconformity is corrected, and the manufacturer warrants to the new ... [transferee] in writing for a period of one year that the motor vehicle is free of the nonconformity. The Automotive Consumer Notification Act (Section 1795.8) expands upon the lemon disclosure provisions of the Tanner Act, imposing (more) AB 1381 (Speier) Page 5 disclosure requirements which are "cumulative with all other consumer notice requirements", including the disclosure requirements in the Tanner Act. This Act places disclosure obligations on any person, including any dealer or manufacturer, selling a motor vehicle that is known or should be known to have been required by law to be replaced or accepted for restitution pursuant to the Song-Beverly Act, or selling a motor vehicle that is known or should be known to have been required to be replaced or accepted for restitution due to the inability of the dealer or manufacturer to conform the vehicle to warranties required by any other applicable law of this, any other state, or federal law. Persons selling such vehicles must disclose the fact that the vehicle was required to be returned to the buyer in writing prior to the purchase. A dealer or manufacturer is required "to include as part of the titling documents" of the vehicle the following disclosure statement set forth as a separate document and signed by the buyer: "THIS MOTOR VEHICLE HAS BEEN RETURNED TO THE DEALER OR MANUFACTURER DUE TO A DEFECT IN THE VEHICLE PURSUANT TO CONSUMER WARRANTY LAWS." This bill repeals Section 1798,5, which contains the entirety of the present Automotive Consumer Notification Act. The bill adds two new sections, to be placed in the Civil Code immediately after the Tanner Act, which together are to be called the Automotive Consumer Notification Act. This proposed new Act is substantially different from the one it would replace. Each of the important differences is listed in the "key issues" section of this analysis (above); and each listed difference is described in more detail in bold type in each of the subsections of the "comment" section of this analysis (below). The bill also makes some conforming changes to other sections of the Civil Code and Vehicle Code. (more) AB 1381 (Speier) Page 6 COMMENT 1. Should the automotive consumer notification act be repealed, and then re-enacted in a substantially different form? According to the sponsors of this bill, the California Motor Car Dealers Association, this bill is "intended to remove all of the ambiguities contained in the current Automotive Consumer Notification Act, provide clarity and predictability to present title branding requirements; and broaden current buyback disclosure requirements." This bill has recently been amended to remove the provisions which were designed to clarify what car dealers and manufacturers believe is the main ambiguity in the lemon laws -- the definition of "nonconformity" and the definition of a "reasonable number of repair attempts." Toyota Motor Sales has written the committee to urge it to reinsert the bright line tests which were deleted from the bill. A number of consumer groups, and individual consumers, oppose this bill. They take exception to the claim that it broadens or clarifies current disclosure requirements, and argue that it weakens and confuses what they believe are California's already inadequate disclosure laws. Motor Voter, the organization which sponsored the original Tanner Act, writes: "Because any state with a lemon branding/disclosure statute in effect invites auto manufacturers to dump lemons in its borders, Motor Voters urges that California adopt language at least as strong as that recommended in the National Association of Attorneys' General (NAAG) model bill. Some states ... have gone beyond the NAAG bill to forbid lemons with a history of life-threatening safety defects from being resold within their (more) AB 1381 (Speier) Page 7 state. North Dakota forbids any lemons from being resold within their state. California should be moving in that direction, not backwards." The specific issues of dispute between the proponents and opponents are discussed in the comments which follow. 2. Should manufacturers have the following new and MODIFIED notification obligations? The car dealers believe that, under present law, they do not have enough information to know if a car they are selling was REACQUIRED as lemon. They therefore do no know if required disclosures should be made or not. The dealers believe that the new requirements imposed upon manufacturers by this bill will make it much easier for car dealers to fulfill their disclosure obligations, and that, as a result, consumers will be better informed. a. Retitling vehicle in manufacturers' name Under this bill, manufacturers would have a new obligation to retitle a reacquired vehicle in their name. This appears to a be a noncontroversial requirement which will help track lemons as they get transferred back to the manufacturer buy the buyer, and then get re-transferred from the manufacturer to dealers. b. Branding title with "factory buyback" Under this bill, the present obligation to "brand" the ownership certificate of a vehicle would clarified in two ways: first, the obligation would be placed on manufacturers to request DMV to place the brand; and second, the brand must use the exact words "factory buyback." The present statute does not specifically state that a lemon's ownership certificate must be "branded" with a label. It merely states that the manufacturer or dealer must include the required one-sentence disclosure statement (more) AB 1381 (Speier) Page 8 "as part of the titling documents" on a separate sheet of paper. Evidently, in practice, this requirement has been implemented through branding ownership certificates with the term "warranty return." The main controversy about this provision is the term "factory buyback." Consumer groups believe that it is "euphemistic." Motor Voters believe it is "fraudulently misleading" because it "could mean a vehicle was repurchased merely because the original owner failed to make payments, or because it had been a rental." They are concerned that "even the most dangerously defective vehicle, with bad brakes or faulty steering, would be deceptively characterized as merely a 'factory buyback.'" Consumer groups prefer either the term "defective vehicle", which is recommended in the NAAG model bill, or the term required by the previous version of this bill, "lemon buyback." Toyota raises concerns with the language that a manufacturer "request" DMV to brand the title. This language is not clear as to what happens if DMV does not brand the title, or delays in branding the title. Is there no remedy? Is the manufacturer prevented from transferring the vehicle unless there is a brand? Toyota is concerned about the latter interpretation because DMV's "infamous sophisticated' computer system ... is notoriously slow." SHOULD A LESS EUPHEMISTIC BRANDING TERM BE REQUIRED? SHOULD THE CONSEQUENCES OF DMV FAILURE TO BRAND, OR DELAY IN BRANDING, BE SPECIFIED? c. Affixing decal on doorframe Under this bill, manufacturers would have a new obligation to affix a decal with the term "factory buyback" to a reacquired vehicle's left doorframe. Although this provision imposes a new notification requirement, consumer groups are unimpressed. They believe that a little sticker on the door jam is a meaningless warning, and that it will only be used against consumers by (more) AB 1381 (Speier) Page 9 claiming that they should have been on notice that their car was a lemon because it was affixed with the decal. Toyota is concerned about manufacturers having "vicarious liability for third party tampering with decals." They argue that manufacturers have no control over the removal of the decals in the chain of commerce. 3. Should the circumstances under which a written notice must be provided to consumers be substantially changed? a. Narrower set of sellers Under this bill, the consumer notification requirement would only apply to a more narrowly defined set of "dealers" and to manufacturers, instead of applying to all "persons" selling a motor vehicle. The Consumer Attorneys of California (CAOC) are concerned that this bill removes disclosure responsibilities from "persons" who are not manufacturer or dealers, arguing that no justification has been provided for this narrowing of existing law. They are specifically worried that lienholders who reacquire, and then resell vehicles would be exempted from the bill. The car dealers point out that, under the bill, a manufacturer who assists a lienholder in reacquiring a vehicle would be responsible for making the required disclosures. Present law contains a definition of dealer which is broader than the Vehicle Code definition of dealer (VC Section 265) used in this bill. The Vehicle Code definition excludes "persons regularly employed as salespersons by vehicle dealers... while acting in the scope of their employment." By contrast, the present Act's definition expressly includes "officers, agents, and employees" of a car sales business. SHOULD THE DISCLOSURE REQUIREMENTS APPLY TO ALL PERSONS, OR ALTERNATIVELY, SHOULD THE PRESENT DEFINITION OF "DEALER" BE RETAINED? (more) AB 1381 (Speier) Page 10 b. Limiting notification requirement to "express warranty disputes" Under this bill, consumers would be required to be notified that the vehicle they are purchasing was reacquired due to a defect only if it was reacquired pursuant to an "express warranty dispute", instead of to all vehicles required to be reacquired as a result of a breach of any warranty? The car dealers argue that under present law, only cars deemed to be lemons under the lemon buyback law, or similar laws, are subject to the disclosure requirements. They contend that this bill represents an important expansion of the notification requirement, because, in addition to requiring title branding and notice for lemon buybacks, it requires notice (but not title branding) for any vehicle reacquired pursuant to an "express warranty dispute." Consumer groups disagree with the car dealers characterization of both present law and this bill. They point out that existing law requires notice and title branding for any car which is reacquired because of nonconformity to warranties under any law of the state. The opponents argue that this requirement in existing law is much broader than this bill's proposed requirement because the warranties do not have to be "express", and because there does not have to be a "dispute" about the warranties. Consumers Union (CU) is concerned that "auto companies would claim that no 'dispute" existed if a consumer asks for a repurchase because of an obvious, serious safety defect and the auto company complied. CU also believes that vehicles reacquired pursuant to an implied warranty also should be disclosed to buyers. The applicable implied (more) AB 1381 (Speier) Page 11 warranties under the Uniform Commercial Code would be the implied warranty of merchantability and the implied warranty of fitness for particular purpose. The car dealers believe that these arguments are overly picky, and they assert that any car reacquired because of an allegation that it was defective would be covered by the term "express warranty dispute." c. Actual knowledge versus "should have known" Under this bill, dealers are required to provide written notification only if they have "actual knowledge" that the vehicle was reacquired, instead of if they "should have known" that it was required by law to be reacquired. This is one of the most significant changes made by this bill. Car dealers argue that the "should have known" standard in presently law is unworkable and unfair. They argue that lemons are reacquired by manufacturers, not dealers, and that dealers have no way of knowing if a car they are selling was previously reacquired as a lemon, unless the manufacturer tells them. That is why the dealers have imposed new obligations on the manufacturer designed to retitle the car, request the brand, affix a decal, and prepare and sign the original copy of the consumer disclosure form. CAOC argues that requiring disclosure only when the dealer has actual knowledge that the car was reacquired by the manufacturer is inconsistent with the basic principles of products liability law. Under California case law, all businesses, including retail sellers, in the chain of commerce of a product are held strictly liable for defects in the project, and for failures to warn about those defect, regardless of whether the business knew, of the defect or the failure to warn. The theory is that retailers are in a much better position than consumers to know about defects, and retailers profit from selling defective products, so it is fair to impose liability on them for damages caused by the defects. Car dealers respond to this argument by pointing out that this bill does not relieve dealers of their strict (more) AB 1381 (Speier) Page 12 liability for defects under common law, but the dealers miss the central point of the argument: If basic tort liability for defects and failures to warn does not require actual knowledge, why should the less onerous statutory disclosure law requires actual knowledge? SHOULD THE BILL BE AMENDED TO REINSTATE LIABILITY FOR DEALERS WHO SHOULD HAVE KNOWN A CAR WAS A LEMON? (more) AB 1381 (Speier) Page 13 d. "Last retail owner" Under this bill, dealers are only required to provide written notification to consumers if they knew that the vehicle was reacquired as a result of a dispute with the last retail owner of the vehicle, instead of if the vehicle has ever been reacquired. The car dealers have not provided any justification for this seemingly inappropriate limitation -- if a dealer has actual knowledge that a car was reacquired due to a warranty dispute, should the dealer be allowed to conceal that fact, just because the warranty dispute was with the original owner, not with the last retail owner? SHOULD THE "LAST RETAIL OWNER" BE LIMITATION BE REMOVED? 4. Should the required contents of the consumer notice be substantially changed in the following ways? a. Changes in wording Under this bill, the consumer notice would be accomplished by filing out a statutory form. That form would state that the vehicle is a "factory buyback" due to a "nonconformity" which "has been corrected", instead of stating that the vehicle "was returned to the manufacturer or dealer due to a defect in the vehicle." Consumer groups believe that the present warning clearly informs consumers that they are being a vehicle which was previously returned due to a defect. Motor Voters argues that the legal term "nonconformity" is "confusing and carried far less import than 'defect." Consumers Union believes it is inappropriate to state on the disclosure form nonconformity has been corrected, because it minimizes the import of the fact that the car was returned because it was defective. (more) AB 1381 (Speier) Page 14 b. Two different boxes Under this bill, instead of consumer notice being accomplished by use of a single declarative sentence, the required statutory form would have two different boxes to check, with each box being described by a sentence. One of the boxes is for cars branded as "factory buybacks", and the other box is for other cars returned due to a warranty dispute. Car dealers believe it is important for consumers to be aware of the distinction between cars that were required by the lemon buyback law to be reacquired, and cars which were reacquired voluntarily to resolve a warranty dispute -- so called "warranty buybacks." Consumer groups believe this distinction further dilutes the effectiveness of the warning, and that it is misleading because dealers may voluntarily buyback the worst vehicles, because the defects are so obvious, and the manufacturers' liability is clear. SHOULD THE REQUIRED DISCLOSURE IN PRESENT LAW BE RETAINED, INSTEAD OF THIS BILL'S CONFUSING FORM? Support: California Motor Car Dealers Association Opposition: Center for Auto Safety; Motor Voters; Consumers Union; Consumer Attorneys of California; Consumer Action; Consumer Federation of America; 13 individuals (identifying themselves as owners or previous owners of lemons) Prior Legislation: SB 788 (1989) Chaptered SB 2568 (1991) Vetoed SB 1762 (1992) Chaptered ********** (more) AB 1381 (Speier) Page 15 (more) AB 1381 (Speier) Page 16 AB 1381 (Speier) Page 17