California franchise law helps dealers resist export and resale claims chargebacks

In 2013 the California New Car Dealers Association (CNCDA) was successful in having a new California Vehicle Code statute enacted that will help dealers defend themselves from factory chargeback claims for vehicles that are exported or resold outside the United States. Effective January 1, 2014, Vehicle Code Section 11713.3(y) provides that it is unlawful for a manufacturer or distributer to:

…take or threaten to take any adverse action against a dealer pursuant to an export or sale-for-resale prohibition because the dealer sold or leased a vehicle to a customer who either exported the vehicle to a foreign country or resold the vehicle in violation of the prohibition, unless the export or sale-for-resale prohibition policy was provided to the dealer in writing prior to the sale or lease, and the dealer knew or reasonably should have known of the customer’s intent to export or resell the vehicle in violation of the prohibition at the time of sale or lease. If the dealer causes the vehicle to be registered in this or any other state, and collects or causes to be collected any applicable sales or use tax due to this state, a rebuttable presumption is established that the dealer did not have reason to know of the customer’s intent to export or resell the vehicle.

In the dealer agreement, most manufacturers prohibit the dealer from selling vehicles for resale in the U.S. or for resale or use outside the U.S. Manufacturers often have a separate written export policy which elaborates on the provisions of the dealer agreement. Manufacturers may also have requirements for the delivery of vehicles to retail customers with a process for explaining the vehicle’s safety and driving features.

The new California statute should significantly help dealers in resisting export chargeback and resale claims from manufacturers. A breakdown of the statute shows how it helps:

It is unlawful for the manufacturer to take or threaten to take any adverse action against a dealer because the dealer sold or leased a vehicle to a customer who exported the vehicle or sold it for resale unless:

the manufacturer’s policy regarding exports or sell-for-resale was provided to the dealer in writing prior to the sale or lease, and
the dealer reasonably should have known that the customer intended to export or resell the vehicle in violation of the prohibition.

If the dealer has the vehicle registered in California or any other state and collects sales or use tax due, there is a rebuttable presumption that the dealer did not have reason to know that the customer intended to export or resell the vehicle.

Consequences for a manufacturer violating the statute

If a manufacturer takes or threatens to take action against the dealer in violation of the statute, the manufacturer can be subject to prosecution for a criminal misdemeanor. The DMV can also take action against the manufacturer to suspend or revoke the manufacturer’s California license. It would be risky for a manufacturer to pursue a claim unless it was clear that the dealer knew, or reasonably should have known, that the customer intended to export or resell the vehicle.

Manufacturer written policies

Before any manufacturer makes export chargeback claims, the manufacturer must have provided to the dealer a written policy prohibition of the sale for export or sale-for-resale. The manufacturer prohibition must be clear and free from any ambiguities.

For a valid claim the manufacturer must show that the dealer knew or should have known of the customer’s intent to export or resell the vehicle. If the dealer registers the vehicle in the customer’s name and collects sales or use tax, there is a “rebuttable presumption” that the dealer had no reason to know of the customer’s intent to export or resell the vehicle. The words “rebuttable presumption” are found in the California Evidence Code and mean that in any export or sale-for-resale chargeback proceeding, if the vehicle was registered and tax paid, it is assumed that the dealer had no intent to sell the vehicle for export or resale. The manufacturer would have to prove that the dealer intended to sell the vehicle for those purposes, and the manufacturer would have to establish that fact by what in the law is known as a “preponderance of evidence.” A preponderance of evidence can be envisioned by a scale with all of the dealer’s evidence on one side and the manufacturer’s evidence on the other side. Whichever side weighs more (i.e. is more convincing) is the side who will win the dispute. Which evidence weighs more heavily does not depend so much on the amount of evidence (number of witnesses, number of documents, etc.), but is based upon who has the most convincing evidence and the probability of its accuracy i.e., one party’s evidence has more convincing force than the evidence opposed to it.

Use of no-export addendum to contracts and leases

To buttress their claim that they have done everything possible to avoid factory claims for chargeback of incentives when vehicles have been exported, some dealers use a “Non-Export Addendum” which they attach to the customer’s purchase or lease contract. This addendum has the purchaser or lessee represent that the vehicle will be used in the United States and is not purchased or leased for resale outside the United States. If such an addendum is used, the dealer should check with the dealer’s attorney to avoid a single document rule violation. See Chapter 24 of the California New Car Dealers Association (CNCDA) F&I Compliance Manual authored by attorneys Manning, Leaver, Bruder & Berberich and distributed to members of CNCDA. Here is a link to the Table of Contents for the manual: http://manningleaver.com/sites/default/files/attachments/publications/ca...

What transactions does the new law apply to?

The new law is effective January 1, 2014. If a sale or lease of vehicles before that date is in question, it appears that the new law will apply to those transactions as well as to those occurring on or after that date.

What if a dealership believes that it has already received unfair chargebacks?

If a dealer has already been charged back for exporting or sales-for-resale, you should contact an attorney familiar with automobile dealer law to see if a claim can be made to recover the chargebacks. If a chargeback took away any dealer incentive compensation, then the new provisions of Vehicle Code Section 3065.1, effective January 1, 2014, regarding incentive program compensation can apply and you may have enforceable rights before the California New Motor Vehicle Board, However, there are time limits under the statute to enforce your rights. An attorney can also advise you whether there might be other avenues to pursue recovery of the chargebacks. Additionally, California Vehicle Code Section 11726 provides that if a manufacturer violates the provisions of the Vehicle Code, a dealer can recover in court its pecuniary damages and attorney fees.

Process for processing incentive claims and contesting chargebacks

Vehicle Code Section 3065.1 provides a process for processing and contesting incentive claims and chargebacks under factory incentive programs as follows:

Claims must be approved or disapproved within 30 days. Any claim not disapproved is deemed approved on the 30th day.

(a) All claims made by a franchisee for payment under the terms of a franchisor incentive program shall be either approved or disapproved within 30 days after receipt by the franchisor. When any claim is disapproved, the franchisee who submits it shall be notified in writing of its disapproval within the required period, and each notice shall state the specific grounds upon which the disapproval is based. Any claim not specifically disapproved in writing within 30 days from receipt shall be deemed approved on the 30th day.

Grounds for disapproval

(b) Franchisee claims for incentive program compensation shall not be disapproved unless the claim is false or fraudulent, the claim is ineligible under the terms of the incentive program as previously communicated to the franchisee, or for material noncompliance with reasonable and nondiscriminatory documentation and administrative claims submission requirements.

Factory appeal process after disapproval of claim to be provided to dealer within 30 days after disapproval.

(c) The franchisor shall provide for a reasonable appeal process allowing the franchisee at least 30 days after receipt of the written disapproval notice to respond to any disapproval with additional supporting documentation or information rebutting the disapproval. If 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 written disapproval 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.

If claims denied after appeal, factory must provide written notification of “Final Denial” within 30 days after appeal process.

(d) 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.

Dealer has 6 months after Final Denial to file protest with the California New Motor Vehicle Board.

(e) Following the disapproval of a claim, a franchisee shall have six months from receipt of the written notice described in either subdivision (a) or (d), whichever is later, to file a protest with the board for determination of whether the franchisor complied with subdivisions (a), (b), (c), and (d). In any hearing pursuant to this subdivision or subdivision (a), (b), (c), or (d), the franchisor shall have the burden of proof.

Approved claims must be paid in 30 days.

(f) All claims made by franchisees under this section shall be paid within 30 days following approval. Failure to approve or pay within the above specified time limits, in individual instances for reasons beyond the reasonable control of the franchisor, do not constitute a violation of this article.

Audits of dealer incentive records can be conducted for 9 months after an incentive claim has been paid. No more than one audit in 9 month period. Audits may not be punitive or retaliatory.

(g) (1) Audits of franchisee incentive records may be conducted by the franchisor on a reasonable basis, and for a period of nine months after a claim is paid or 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 nine-month period. The franchisor’s notification to the franchisee of any additional audit within a nine-month period shall be accompanied by written disclosure of the basis for that additional audit.

Grounds for chargeback of previously paid claims after audit. Extrapolation from samples must be reasonable and statistically valid.

(2) Previously approved claims shall not be disapproved and charged back unless the claim is false or fraudulent, the claim is ineligible under the terms of the incentive program as previously communicated to the franchisee, or for material noncompliance with reasonable and nondiscriminatory documentation and administrative claims submission requirements. A franchisor shall not disapprove a claim 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.

Disapproval of claims after an audit must be within 30 days. A reasonable appeal process must be provided within 30 days after disapproval.

(3) If the franchisor disapproves of a previously approved claim following an audit, the franchisor shall provide to the franchisee, within 30 days after the audit, a written disapproval notice stating the specific grounds upon which the claim is disapproved. The franchisor shall provide a reasonable appeal process allowing 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 any material noncompliance, with the period to be 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.

If factory denies claims after appeal process, factory must provide a “Final Denial” within 30 days after completion of appeal process.

(4) 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.

Factory may not chargeback dealer until after 45 days after the written notice in (3) or (4) above, whichever is later.

(5) The franchisor shall not chargeback the franchisee until 45 days after the franchisee receives the written notice described in paragraph (3) or (4), whichever is later. If the franchisee cures any material noncompliance relating to a claim, the franchisor shall not chargeback the dealer for that claim. Any chargeback to a franchisee for incentive program compensation shall be made within 90 days after the franchisee receives that written notice. 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.

Dealer has 6 months to file protest with New Motor Vehicle Board. If the filing occurs prior to a chargeback, no chargeback may be made until final board decision.

(6) Within six months after either receipt of the written notice described in paragraph (3) or (4), a franchisee may file a protest with the board for determination of whether the franchisor complied with this subdivision. 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. In any protest pursuant to this subdivision, the franchisor shall have the burden of proof.

Longer period for audit if dealer submits fraudulent claim.

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

Government action against exporters

On September 11, 2013, the U.S. Attorney in South Carolina filed a court action for forfeiture of 12 high end vehicles and approximately $190,000 in bank accounts which the U.S. claims were involved in an exporting scheme. Click here to see a copy of the complaint. The U.S. alleges in part the following facts which are typical in an exporting scenario:

a. Automobile manufacturers generally prohibit the sale of new automobiles produced for sale inside the United States to individuals or companies intending to export the new automobiles outside the United States. The unauthorized export of vehicles destined for sale in the United States to foreign countries disrupts the manufacturers' distribution markets, causes market infringement problems, harms franchise dealerships abroad, and makes it difficult for manufacturers to issue recall and safety notices.

b. However, luxury automobiles often carry a higher purchase price, and high taxes and tariffs overseas. As a result, individuals will frequently attempt to export new vehicles from the United States to foreign countries in contravention of this prohibition.

c. To deter the purchase of luxury automobiles in the United States for immediate export to overseas nations, many luxury automobile manufacturers enter into contractual relationships with their licensed dealerships. These relationships prohibit dealerships from selling a vehicle to individuals or companies who intend to export that vehicle. These contractual relationships include provisions permitting manufacturers to implement a "charge back" as a financial penalty against a dealership if that dealership is discovered to have sold a vehicle that is subsequently exported. The charge back often requires the dealership to pay back any incentives or rebates tied to that vehicle, and also may reduce the number of authorized vehicles provided as the following year's inventory at that dealership.

d. As a result of these contractual relationships, dealerships take steps to protect themselves from purchasers who intend to export the vehicle. Dealerships often require purchasers of vehicles to sign agreements acknowledging an automobile manufacturer's export policy, which agreements are common throughout the United States. Many manufacturers also maintain an "Auto-Exporters" list, which is updated daily, and which is accessible by all of their dealerships. The list is comprised of individuals, their associates, and companies engaged in the exporting of vehicles produced for sale within the United States. Dealerships are obligated to check this list when selling vehicles, so as to confirm that the prospective purchaser is not on the list. Dealerships are prohibited from selling a vehicle to a person or company identified on the list.

e. However, individuals have devised a variety of schemes in order to mislead dealerships into selling them vehicles which they then very rapidly export overseas for a large profit. One such scheme involves the use of straw buyers by vehicle brokers. This scheme is designed to mislead the dealership into believing that the straw buyer is the true ultimate purchaser of the vehicle, and that the vehicle is not being purchased for export. A vehicle broker may receive an order for a specific vehicle, or vehicle type, from an overseas buyer. The vehicle broker may then contact various dealerships to find such vehicle, but will not inform the dealership the vehicle is actually intended for export from the United States. The broker then recruits the straw buyer to make the purchase, and pays the straw buyer a fee. During the purchase process, the dealership is not informed that the straw buyer is actually acting as a front for the broker, and is not informed that the vehicle is being purchased for export.

f.       If a broker purchases a vehicle from a dealership knowing the vehicle is destined for export, yet hides this fact from the dealership, either by using a straw buyer, or through other similar methods, the broker has obtained a thing of value, that is, a vehicle, which the dealership would not have sold had the true facts been disclosed. Had the dealership known the vehicle was destined for export, the dealership would not have sold the vehicle. The broker has acquired such vehicle by means of such scheme and artifice to defraud by false pretenses, representations, and promises. Thus, the misrepresentations involved in carrying out the scheme are material. Further, in order to carry out the scheme, the straw buyer typically faxes or emails a copy of the official bank check for verification of funds to the dealership, which constitutes a wire transmission in interstate commerce. Moreover, the straw buyers must apply for title to state agencies in order to acquire title to the vehicle. Such titles are ordinarily sent via the United States mails. The use of the wires and mails as part of the scheme constitute a violation of 18 U.S.C. §§ 1343 (wire fraud) and 1341 (mail fraud).

g.     After purchase, the vehicles purchased in this fashion are exported, or attempted to be exported, from the United States to another country. When any vehicle is shipped overseas, a Shipper Export Declaration (hereinafter "SED") must be filed with the United States Customs and Border Protection, United States Department of Homeland Security (hereinafter "CBP"). The SED includes information about the vehicle including the vehicle identification number (hereinafter "VIN") as well as information related to the title the vehicle was issued in the state the vehicle was sold.

h.     Frequently, individuals engaged in this scheme will submit false information on the SED in an attempt to conceal that the vehicle is, in reality, a new vehicle, and likely a vehicle involved in the type of scheme discussed above. 13 U.S.C. § 305 states that it is unlawful to knowingly submit false or misleading export information through the SED, or any successor document, or to knowingly report any information on or use the SED to further any illegal activity.