2025 F&I Compliance Manual, 8th Edition
Service Department Compliance Manual
CNCDA’s Service Department Compliance Manual outlines key compliance requirements for dealership service departments. Topics include initial and revised estimates, customer authorization, invoices, and special requirements for unique service operations.
New Motor Vehicle Board Resources
The California New Motor Vehicle Board (NMVB) has a very extensive website which is very helpful in explaining how the Board works. The website is at www.nmvb.ca.gov. Below are some of the features of the website.
Guide to the New Motor Vehicle Board. The Board publishes a very detailed Guide to the New Motor Vehicle Board which includes the Board’s organization, jurisdiction, operations, and procedures. This Guide covers all aspects of the Board’s operations and also has sample forms. The Guide is a must for any dealer or dealer attorney desiring information about the Board or who is involved in any proceeding before the Board. The Guide is available at https://nmvb.ca.gov/publications/2023/Guide_to_the_New_Motor_Vehicle_Board.pdf and is periodically updated.
Informational Guide for Manufacturers and Distributors. The Board publishes an Informational Guide for Manufacturers and Distributions to help them comply with California’s vehicle franchise and manufacturer laws. The publication is for use by manufacturers and distributors in their market representation, dealer development, and legal departments. This publication is available by using the Publications tab on the homepage of the Board’s website.
Guide for Protests over Export Policies. The Board publishes an Export or Sale-For-Resale Prohibition Policy Protest Guide for help in filing protests under Vehicle Code §§ 3085, et seq.) This publication is available by using the Publications tab on the homepage of the Board’s website.
Administrative Law Judges Benchbook. The Board publishes an Administrative Law Judges Benchbook which is primarily for use by the administrative law judges or Board members acting as presiding officers in hearings before the Board. This Benchbook can be helpful for those practicing before the Board. It is not available on the Board’s website but can be obtained by a public records request to the Board. The Board provides Guidelines for Access to Public Records which can be seen by using the Publications tab on the homepage of the Board’s website.
Court Cases Dealing with the Board. The Board’s website has a list of various court cases dealing with the Board in the areas of the Board’s composition, constitutionality, and due process issues; exhaustion of administrative remedies; judicial review, jurisdiction; termination or modification of a franchise; establishment of an additional franchise or franchise relocation; hearing on protests; recovery of damages and injunctive relief; writ of mandamus; ex parte communications; and unlawful acts. This list is available by using the Publications tab on the homepage of the Board’s website.
Legal Program. The Board’s website has a Legal Program section which includes a detailed discussion about filing petitions and protests with the Board. It also contains the text of laws that apply to the Board in the California Vehicle Code and the California Code of Regulations, and a discussion of the Board’s rulemaking authority and process. This information can be found by using the Legal Program tab on the homepage of the Board’s website.
Final Decisions of the Board. The Board’s website allows access to copies of final decisions of the Board regarding petitions, protests, and dispositive motions. These decisions are available by using the Final Decisions tab on the homepage of the Board’s website.
New Motor Vehicle Board Forms. The Board publishes many forms for use in Board proceedings which are available by using the Forms tab on the homepage of the Board’s website.
Agenda and Minutes of Board Proceedings. Agenda and minutes of the Board’s meetings are available by using the Meetings tab on the homepage of the Board’s website.
Board Consumer Mediation Services. The Board offers an informal, no-cost, dispute resolution program for consumers with a complaint against new motor vehicle dealers, or vehicle manufacturers or distributors licensed to do business in California. See the Consumer Program tab on the homepage of the Board’s website for more details.
Arbitration Clauses in Franchise Agreements
A federal law enacted in 2002 prohibits manufacturers from forcing dealers in franchise agreements that are entered into, amended, altered, modified or extended after November 2, 2002, to use mandatory binding arbitration as the exclusive means to resolve disputes. The new law allows dealers the option, after the controversy has arisen, to elect either arbitration, or utilize the New Motor Vehicle Board.
It is important for dealers to remember that manufacturers cannot insist on binding arbitration for any franchise agreement. The two exceptions to keep in mind are franchise agreements that have not been amended, altered, modified, renewed, or extended since November 2, 2002, and agreements with manufacturers or their affiliates that are not franchise agreements. For example, captive finance company loan documents are not franchise agreements and are therefore not covered.
Some agreements between the manufacturer itself and a dealer can fall into a true grey area, such as facilities assistance agreements. Such agreements exist only to further operation of a franchise, but the argument can be made that such agreements do not, in and of themselves, qualify as franchise agreements and, therefore, are exempt. Dealers therefore should not assume that the federal law limiting arbitration clauses in franchise agreements will automatically nullify all factory-drafted arbitration clauses.
Text of the Law
Section 1226 of Title 15 of the United States Code: (a) Election of arbitration (1) Definitions. For purposes of this subsection-(A) the term “motor vehicle” has the meaning given such term in section 30102(6) of title 49; and (B) the term “motor vehicle franchise contract” means a contract under which a motor vehicle manufacturer, importer, or distributor sells motor vehicles to any other person for resale to an ultimate purchaser and authorizes such other person to repair and service the manufacturer’s motor vehicles. (2) Consent required. Notwithstanding any other provision of law, whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy. (3) Explanation required. Notwithstanding any other provision of law, whenever arbitration is elected to settle a dispute under a motor vehicle franchise contract, the arbitrator shall provide the parties to such contract with a written explanation of the factual and legal basis for the award. (b) Application. Subsection (a) shall apply to contracts entered into, amended, altered, modified, renewed, or extended after November 2, 2002.
California Vehicle Code § 11713.3(g)(1)(D): It is unlawful and a violation of this code for a manufacturer, manufacturer branch, distributor, or distributor branch licensed pursuant to this code to do, directly or indirectly through an affiliate, any of the following: Except as provided in paragraph (3), to obtain from a dealer or enforce against a dealer an agreement, provision, release, assignment, novation, waiver, or estoppel that does any of the following: (D) Requires a controversy between a manufacturer, manufacturer branch, distributor, distributor branch, or representative and a dealer to be referred to a person for a binding determination. However, this subparagraph does not prohibit arbitration before an independent arbitrator, provided that whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of, or relating to, that contract, arbitration may be used to settle the controversy only if, after the controversy arises, all parties to the controversy consent in writing to use arbitration to settle the controversy. For the purpose of this subparagraph, the terms “motor vehicle” and “motor vehicle franchise contract” shall have the same meanings as defined in Section 1226 of Title 15 of the United States Code. If arbitration is elected to settle a dispute under a motor vehicle franchise contract, the arbitrator shall provide the parties to the arbitration with a written explanation of the factual and legal basis for the award.
Discussion
It is important to recognize that binding arbitration between a dealer and its franchisor can only occur if all parties (the dealer and the manufacturer) agree, after a controversy has arisen, consent in writing to use arbitration to settle the controversy.
Protecting and Asserting Franchise Rights
Dealers enjoy a wealth of protections under the franchise laws. But it is important that dealers protect, preserve, and assert, where appropriate, their rights under these laws.
Recordkeeping
A critical element in protecting franchise rights is to have a good record retention and recordkeeping system in place with respect to all franchise matters, including agreements, documents, correspondence, email, memoranda, and reports (paper and web-based) issued by or exchanged with the franchisor. With the advent of web-based documents in lieu of paper documents, dealers should conduct a periodic (such as monthly) “data dump” of documents posted on the factory’s dealer reports and dealer documents website. Relying on the documents remaining on the website for years until needed is dangerous; not only can the factory change the documents at any time without notice, the dealer’s ability to access the documents can also change instantly, especially if a dispute between the dealer and factory were to arise.
If a dealer must assert franchise rights in court or before the New Motor Vehicle Board, the fight is almost always based on documents, and on what was done with or after receipt of documents. The better the recordkeeping system, the more credible will be the dealer’s story of their own franchise investment and operational history, and of the dealer’s efforts to “do the right thing” when the franchisor voiced any complaints.
Protests concerning an additional dealership, relocation, termination, or franchise modification all involve determination of good cause, including permanency of the investment. Dealers should have not only accounting records demonstrating their investment, but all other documents reflecting the investment, including agreements, promissory notes, leases, real estate purchase agreements, deeds, construction contracts, minutes discussing and/or approving any investment, etc. These documents help to give life to the dealer’s contention that a large, permanent investment has been made in the franchise. Another important area to have documented is all community benefit/charitable work in which the dealership is involved.
Respond to Factory Communications
Dealers must not ignore any communication from the franchisor alleging any sort of dealer failure or deficiency. The dealer must respond in a documented way to ensure the paper record is clear that the dealer cared about the issue and advised the franchisor of the dealer’s plan to address it, or of the dealer’s careful determination that the alleged failure or deficiency is incorrect or inapplicable to the dealer’s circumstances.
Dealers should also be aware most franchisor representatives complete a “contact report” after each visit. This document goes into the dealer file and purports to memorialize the discussion with the dealer. Dealers finding themselves in litigation will see extensive documentation of every performance, staff, advertising, or facility concern ever raised by manufacturer reps, as well as a few not previously discussed. Dealers can create their own record of events by sending a quick email to their rep thanking them for their visit and recounting the discussion.
Conduct Due Diligence before Signing any Document Requested by the Franchisor
When manufacturers want dealers to sign documents, they can apply relentless pressure, employing not only letters, email, and phone calls, but also personal visits by factory representatives. But dealers must conduct due diligence before signing anything from the factory. It is entirely possible that the document will modify or affect the dealer’s rights.
For example, a dealer who had asserted that the factory’s reassignment of the dealer’s PMA (primary market area) zip codes was ineffectual because it was done without giving the dealer notice and the right to protest the change was later asked to sign a dealer contract that was identical to the previous contract, with only the dates updated. The dealer was told that the factory was simply renewing the existing dealer agreement. But by signing that contract, the dealer became bound to a clause in the terms and conditions incorporated into it that provided that the dealer accepts the PMA as last announced by the manufacturer. Dealers should consider having all agreements that require a signature received from the factory reviewed by legal counsel prior to signing.
Keep Track of Deadlines
As summarized in this manual, several deadlines exist with respect to the assertion of dealer rights, including, for example, the time to rebut an incentive audit chargeback, the time to protest a reduction in warranty compensation, a time to file an add-point protest. Any communication from a manufacturer that states certain action by the factory is coming up should be carefully checked against any possible upcoming deadline by which the dealer’s rights must be asserted.
Additional Pathways to Enforce Franchise Laws
Basic Rule
Protests at the New Motor Vehicle Board are not the exclusive pathway to enforce California’s franchise law. Additional legal theories to enforce franchise laws include licensee actions under the Vehicle Code as well as various other legal theories.
Text of the Law
Vehicle Code § 11726: Any licensee suffering pecuniary loss because of any willful failure by any other licensee to comply with any provision of Article 1 (commencing with Section 11700) or 3 (commencing with Section 11900) of Chapter 4 of Division 5 or with any regulation adopted by the department or any rule adopted or decision rendered by the board under authority vested in them may recover damages and reasonable attorney fees therefor in any court of competent jurisdiction. Any such licensee may also have appropriate injunctive relief in any such court.
Discussion
Although New Motor Vehicle Board protests can be an effective way to resolve disputes between dealers and manufacturers, the Board does not have the authority to hear protests involving violations of all franchise laws, nor can it adjudicate claims involving illegal actions outside of California’s franchise laws (such as contract disputes). The Board’s authority is also limited in other important ways, and it cannot provide a prevailing dealer with attorney’s fees.
For these reasons, a dealer may wish to consider alternative legal pathways to prosecute his or her claim against a manufacturer. One such pathway involves an action in Superior Court through Vehicle Code section 11726. An action based on this code section can be brought to enforce various franchise laws that cannot be prosecuted as protests at the New Motor Vehicle Board. For example, a dealer does not have the authority to file a protest to seek statutory indemnification (see Chapter 23), but the dealer would have the authority to prosecute an action to enforce this right via section 11726. Section 11726 also can provide a prevailing dealer with attorney’s fees.
Finally, dealers should consult their counsel to explore additional options for relief, which could take various forms depending on the nature of the manufacturer’s illegal action. For example, claims under California’s Unfair Competition Law (Business and Professions Code sections 17200 et. seq.) may provide an additional pathway to secure relief.
Petitions
Basic Rule
Under Vehicle Code section 3050(b), which prior to 2020 was section 3050(c), any person may petition the New Motor Vehicle Board to consider any matter concerning the activities of any person applying for or holding a license as a new motor vehicle dealer, manufacturer, manufacturer branch, distributor, distributor branch, or representative.
Text of the Law
California Vehicle Code § 3050(b): The board shall do all of the following:
(b) Consider any matter concerning the activities or practices of any person applying for or holding a license as a new motor vehicle dealer, manufacturer, manufacturer branch, distributor, distributor branch, or representative pursuant to Chapter 4 (commencing with Section 11700) of Division 5 submitted by any person. A member of the board who is a new motor vehicle dealer may not participate in, hear, comment, advise other members upon, or decide any matter considered by the board pursuant to this subdivision that involves a dispute between a franchisee and franchisor. After that consideration, the board may do any one or any combination of the following:
(1) Direct the department to conduct investigation of matters that the board deems reasonable, and make a written report on the results of the investigation to the board within the time specified by the board.
(2) (A) Undertake to mediate, arbitrate, or otherwise resolve any honest difference of opinion or viewpoint existing between any member of the public and any new motor vehicle dealer, manufacturer, manufacturer branch, distributor, distributor branch, or representative.
(B) The board does not have jurisdiction over a dispute pursuant to this paragraph involving any member of the public, including a consumer or other person who is not applying for or holding a license as a new motor vehicle dealer, manufacturer, manufacturer branch, distributor, distributor branch, or representative pursuant to Chapter 4 (commencing with Section 11700) of Division 5, unless that person has filed the dispute with the board or consents to jurisdiction by the board.
(3) Order the department to exercise any and all authority or power that the department may have with respect to the issuance, renewal, refusal to renew, suspension, or revocation of the license of any new motor vehicle dealer, manufacturer, manufacturer branch, distributor, distributor branch, or representative as that license is required under Chapter 4 (commencing with Section 11700) of Division 5.
California Vehicle Code § 512: A “representative” is any person regularly employed by a manufacturer or distributor for the purpose of negotiating or promoting the sale of the manufacturer’s or distributer’s vehicles to their franchisees or for regularly supervising or contacting franchisees or prospective franchisees in this state for any purpose.
Discussion
Jurisdiction for Common Law and Statutory Claims Originally Cognizable in the Courts
Vehicle Code § 3050(e) states: Notwithstanding subdivisions (b)[Petitions], (c) [Franchisee Protests], and (d) [Association Protests over Factory Export Policies], the courts have jurisdiction over all common law and statutory claims originally cognizable in the courts. For those claims, a party may initiate an action directly in any court of competent jurisdiction.
Vehicle Code § 3050(e) was effective on January 1, 1998. Before that date there were a series of appellate court cases in the 1990s wrestling with whether parties to lawsuits should have first exhausted their administrative remedies by going to the New Motor Vehicle Board first before filing an action in court. Many of the 1990 cases had ruled that for common law and non-protest cases, the parties did not have to go to the Board first. Vehicle Code section 3050(e) codified those decisions. Citations to court cases dealing with these issues can be found by using the Publications tab on the homepage of the Board’s website and finding the Exhaustion of Administrative Remedies and Jurisdiction sections under Court Cases, Chapter 49, New Motor Vehicle Board Resources.
Jurisdiction of the Board for Petitions under Vehicle Code § 3050(b)
There was a time when the Board accepted petitions to resolve controversies between dealers and factories. That all changed in 2003 with the court opinion of the California Court of Appeal in the case of Mazda of America, Inc. v. New Motor Vehicle Board and David J. Phillips Buick-Pontiac, Inc. (2003) 110 Cal.App.4th 1451. In that case a dealer, by a petition to the Board under Vehicle Code § 3050(c) (now § 3050(b)), asked the Board to resolve the legality of the factory’s turndown of a purchaser with whom the dealer had entered into an agreement to sell it business. The court decided that Vehicle Code § 3050(c) did not give the Board the authority to resolve and adjudicate a dispute between a dealer and a factory. The court in effect said that for purposes of the statute the dealer would not be considered to be a “member of the public” entitled to file a petition to resolve dealer-factory disputes. As a result the only persons who can petition the Board for an adjudication by the Board under Vehicle Code §3050(b)(2) are members of the public and not Vehicle Code licensees.
In the Mazda case, however, the court stated that a dealer could file a petition with the Board and have the Board consider the activities of the factory or any other licensee. After the Board’s consideration the Board may (1) direct the DMV to conduct an investigation of the matter the Board deems reasonable and make a written report to the Board, and/or (2) order the DMV to exercise all power it has with respect the license held by the factory, another dealer, or any other person or entity licensed under Chapter 4 (commencing with Section 11700) of Division 5 of the Vehicle Code. For example, if a dealer believed another dealer was competing unfairly with illegal advertising, such a dealer could file a petition with the Board and ask the Board to take the action noted above, especially if the filing dealer was not receiving any response to a complaint that had been made to the DMV. Vehicle Code § 3050(b) might also be interpreted as allowing a petition for the Board to consider other activities or practices not covered by Vehicle Code §§ 11700-11762.
Process for Filing Petition with the Board; Contents of Petition; Answer to Petitions
The petition process begins with the filing by any person of a petition with the Board and requesting that the Board consider the matter and take action on it. There is a $200 filing fee.
Section 555 of Title 13 of the California Code of Regulations provides for the content of the petition as follows:
The petition shall set forth in clear and concise language the nature of the matter which the petitioner wishes the Board to consider. The petition shall comply substantially with the following requirements:
(a) Include the name, mailing address and telephone number of the petitioner; the name, mailing address and telephone number of his or her attorney or authorized agent if any, and the name and address of the licensee or applicant for license (hereinafter referred to as “respondent”) whose activities or practices are in question. All correspondence with petitioner and notices to petitioner shall be addressed to petitioner’s said address, if he or she appears in person, or to the address of his or her attorney or agent, if he or she is represented by an attorney or agent. Petitioner shall promptly give the executive director and respondent written notice by mail of all subsequent changes of address or telephone number.
(b) Insofar as is known to petitioner, include the names, residence addresses and business addresses of persons and the dates, places and specific actions or practices involved in the matter.
(c) If the actions or practices described in the petition are believed to be in violation of law, a concise recitation of applicable law and citation to the applicable statutes or other authorities.
(d) If the petitioner desires that the board mediate, arbitrate or resolve a difference between the petitioner and respondent, recite that fact and describe the relief or disposition of the matter which petitioner would consider acceptable.
(e) The petitioner may submit, as exhibits to the petition, photographic, documentary or similar physical evidence relevant to the matter referred to in the petition, in which event an appropriate description of the exhibits shall be set forth in the petition sufficient to identify them and to explain their relevancy.
(f) The petitioner shall set forth in the petition an estimate of the number of days required to complete the hearing.
(g) The petitioner shall set forth in the petition a request for a prehearing conference if one is desired. Section 558 of the California Code of Regulation provides that the responding party must file an answer to the petition within 30 days of the date of service of the petition and provides the form and content of the answer.
Notice to Respondent; Board’s First Consideration
Section 557 of the California Code of Regulations provides: (a) Upon the filing of a petition with the board, a copy of the petition shall be transmitted by the executive director of the board to each member of the board for consideration. Unless, within 10 days of receipt of a copy of the petition, any member of the board notifies the executive director of an objection, the executive director shall set the matter for a hearing before an administrative law judge designated by the board.
(b) If any member of the board gives notice of objection within 10 days of receipt of a copy of a petition, the petition shall be first considered by the board at its next meeting to determine what action shall be taken in regard to the petition. Upon receipt by the executive director of a notice of objection, the executive director shall notify the parties named in the petition that there has been an objection and that the matter will be considered by the board at its next meeting. The parties shall also be given a minimum of 10 days prior notice of the time, date, and location of the board meeting at which the petition will be considered.
Board resolution of Petitions under Vehicle Code §§ 3050(b)(1) and (3) without a Hearing
The New Motor Vehicle Board’s Guide to the New Motor Vehicle Board states the following with regard petitions under Vehicle Code §§ 3050(b)(1) and (3) which are discussed above.
“If the petitioner is a licensee or member of the public seeking relief under Vehicle Code section 3050(c)(1) and/or (3), these petitions would not be submitted to the Board for first consideration (13 CCR 557), as the authority for first consideration, limits first consideration to matters in which a hearing is sought, i.e., Vehicle Code section 3050(c)(2) petitions. These petitions would be agendized for consideration of the relief requested by the Petitioner at the next regularly scheduled meeting. Such petitions are not assigned to an ALJ and are not subject to the normal evidentiary hearing process. The Board members, at a noticed meeting, would hear from the parties by way of written and oral arguments, and consider granting the relief requested. After consideration, the public members of the Board shall take final action and issue a written decision that either grants the appropriate relief pursuant to Vehicle Code section 3050(c)(1) or (c)(3), or orders the petition dismissed. The public members of the Board may also request further briefing and/or the submission of further evidence and continue the matter to a later open meeting for consideration and final action.”
For petitions seeking adjudication by the Board between a member of the public and a licensee under Vehicle Code § 3050(b)(2) the Board retains the authority to mediate the matter or appoint an administrative law judge to hear the matter.
Processes for Board Adjudication under Vehicle Code § 3050(b)(2)
The processes for Board Adjudication under Vehicle Code § 3050(b)(2) between a member of the public and a licensee are very similar to the processes for protests set forth in Chapters 41 and 42. Here is a list of some of the important ones. Some of the items on this list may also apply to petitions under Vehicle Code § 3050(b)(1) and (3).
- The Board may allow discovery by processes similar to those in civil litigation in California See Vehicle Code § 3050.1.
- A party may disqualify a Board member or administrative law judge. See 13 California Code of Regulations §§ 551.7 and 551.2(b).
- A party may file a motion to intervene in the petition proceeding. See 13 California Code of Regulations § 551.13.
- The Board may order a mandatory settlement conference. See Vehicle Code § 3050.4.
- The Board may adopt stipulated orders and decisions. See Vehicle Code § 3050.7.
- Three members of the Board constitute a quorum. See Vehicle Code § 3050.1 for disputes between licensees.
- See 13 California Code of Regulations § 556 for the form and filing of the petition.
- Additional evidence and argument may be submitted in support of the petition. See 13 California Code of Regulations § 556.
- See 13 California Code of Regulations § 556 for actions that may be taken by the Board over petitions.
- The Board decision must be in writing and served on the parties. See 13 California Code of Regulations § 556.
- The Board may dismiss the petitions. See 13 California Code of Regulations § 551.8.
- See 13 California Code of Regulations § 580 for the procedure at hearings.
- The Board may allow amicus curiae briefs. See 13 California Code of Regulations §551.13.
Informal Mediation for Vehicle Code § 3050(b)(2) Petitions
Prior to initiating a petition to the Board for adjudication of a controversy between a member of the public and a licensee, either party may request that the Board mediate the controversy. See 13 California Code of Regulations §§ 551.14-551.17 for the mediation process and the right to convert the mediation to a petition.
Protests Involving Additional Manufacturer Illegal Acts
Basic Rule
Vehicle Code sections 11713.3 and 11713.13 prohibit dozens of specific actions by manufacturers. The Vehicle Code contemplates that such actions may be prosecuted by dealers in Superior Court pursuant Vehicle Code section 11726 (see Chapter 46 on such legal actions in Superior Court).
Various specific subdivisions within Vehicle Code section 11713.3 and 11713.13 are also prosecutable as protests at the New Motor Vehicle Board, and in such protests the manufacturer has the burden of proof to establish that their conduct was lawful. These include protests involving performance standards, vehicle and parts allocation, facility and equipment policies, DC fast charging requirements, and unlawful manufacturer competition.
Text of the Law
California Vehicle Code § 3065.3: (a) No franchisor shall establish or maintain a performance standard, sales objective, or program for measuring a dealer’s sales, service, or customer service performance that is inconsistent with the standards set forth in subdivision (g) of Section 11713.13.
(b) No franchisor shall allocate vehicles or parts in a manner inconsistent with the standards set forth in subdivision (a) of Section 11713.3.
(c) No franchisor shall impose a facility or equipment policy inconsistent with the standards set forth in subdivision (a), (b), (c), or (k) of Section 11713.13.
(d) No franchisor shall compete with a dealer in violation of subdivision (o) of Section 11713.3.
(e) A franchisee may file a protest with the board for determination of whether a franchisor has complied with this section and in that proceeding the franchisor shall have the burden of proof.
Discussion
Vehicle Code section 3065.3 was created by AB 179 (2019) and subsequently amended by AB 473 (2023). Originally, the statute only established a protest right for unlawful manufacturer performance standards. However, the 2023 amendments expanded the statute to authorize dealer protests involving vehicle and parts allocation, facility and equipment policies, DC fast charging requirements, and unlawful competition.
In any protest filed under section 3065.3 the manufacturer has the burden of proof to establish that its conduct was lawful. This “burden shifting” requirement is valuable for dealers. To put it simply, in the event of a “tie” the party with the burden of proof should lose. Ordinarily, the party filing a legal action has the burden of proof, but in some cases where the legislature has determined there is an asymmetric power relationship between the parties (e.g., employee/employer, franchisee/franchisor) the defendant may have the burden of proof to establish their contact is lawful.
Protests against Establishment or Relocation of a Dealership
Almost nothing rivals the interest and very often the confusion generated in dealers when provoked by a rumor, or receipt of notice, that a new dealer of the same line-make is going to be established in the dealer’s area, or an existing dealer of the same line-make is going to be relocated in the area. Immediate questions arise as to what is meant by relevant market area; how is the distance measured; how far does an existing dealer have to move to constitute a relocation; when is the reopening of a point the addition of a new dealer; what can be done to prevent the addition, relocation or reopening; how much time there is to file a protest; how long a protest will take to be decided; and inevitably, of course, how much a protest will cost and what the chances are of prevailing?
These cases are extremely complicated, time consuming and usually very expensive. The protesting dealer or dealers have the burden of proof to show that good cause exists for not allowing the establishment or relocation in question. Statistically, dealers who have filed protests in this area have had considerable difficulty in sustaining this burden of proof. This is not to say, however, that you should not file a protest. Dealers do prevail in some of the cases and in other cases the dealer’s case is strong enough to support a reasonable settlement at the time of the mandatory settlement conference.
Duty of Manufacturer or Distributor to Give Notice
A franchisor intending to establish an additional franchise of the same line-make, or relocating an existing franchise within a relevant market area where the same line-make is then represented, is required to give written notice of such intention to the New Motor Vehicle Board and to each dealer of the same line-make located within the relevant market area. The written notice shall contain on the first page, in at least 12-point bold type and circumscribed by a line to segregate it from the rest of the text, the following statement:
“NOTICE TO DEALER: You have the right to file a protest with the NEW MOTOR VEHICLE BOARD in Sacramento and have a hearing on your protest under the terms of the California Vehicle Code if you oppose this action. You must file your protest with the Board within 20 days of your receipt of this notice, or within 20 days after the end of any appeal procedure that is provided by us to you. If within this time you file with the Board a request for additional time to file a protest, the Board or its executive director, upon a showing of good cause, may grant you an additional 10 days to file the protest.”
The relevant market area is as any area within a radius of 10 miles from the site of the proposed new dealership. The distance is 10 miles as the crow flies from the proposed new site and not the actual driving distance. If a dealer of the same line-make is outside this 10-mile radius, the dealer has no right to file a protest. If a dealer is outside this 10 mile radius, but nevertheless contends that his or her franchise will be substantially affected by the addition or relocation, consideration should immediately be given upon learning of the proposed addition (being outside the 10 mile radius, no written notice will be received) as to whether such addition or relocation would constitute a modification of the dealer’s franchise under Vehicle Code section 3060 as explained in Chapter 42, Franchise Termination or Modification. A dealer not within the 10-mile relevant market area, but who claims that the new point or relocation will have an adverse effect on the dealer, may file a motion to intervene in any pending Board proceeding to present issues affecting that dealer.
With respect to relocations, a franchisor is not required to give any notice, and no protest is allowed, where the relocation is less than 1 mile from the existing location of the dealership and also is to a location within the same city where the existing dealership is located.
The reopening of a dealership in a relevant market area that has not been in operation for 1 year or more is deemed to be the establishment of an additional dealership and a notice of intent to reopen must be given, and a protest is available to dealers of the same line-make in the relevant market area. Conversely, if the dealership has only been out of operation for less than a year, it may be reopened without notice and no protest is available.
No protest is available for the establishment of a dealership that is both within the same city, and within one-quarter mile from, the location of a dealership of the same line-make that has been out of operation for less than 90 days.
Vehicle Code section 3062(c) exempts from the notice requirements any display of vehicles at a fair, exposition, or similar exhibit if no actual sales are made at the event and the display does not exceed 30 days. The statute further provides that a new vehicle dealer is not prohibited from establishing a branch office for the purpose of selling vehicles at a fair, exposition, or similar exhibit, even where the event is sponsored by a financial institution such as a credit union, or by a dealer and a financial institution; however, the establishment of such a branch office must be in accordance with the provisions of Vehicle Code section 3062. In other words, to open such a branch office, the manufacturer must give the notice required by section 3062 to the Board and to any dealers of the same line-make within the 10 mile relevant market area, and any such dealer of the same line-make in the relevant market area has a right to file a protest with the Board.
Upon giving the notice, the franchisor cannot proceed to establish the new franchise or relocate an existing one until the time expires for the filing of a protest, and in the event a protest is filed, until such time as the protest is finally determined.
If a manufacturer or distributor gives a dealer approval to conduct an off-site sale where there is an existing dealership of the same line-make within a radius of 10 miles of the location proposed for the off-site sale, this action is subject to protest by the dealer whose franchise is located in that area.
Satellite Warranty Facilities
If a franchisor seeks to enter into a franchise that authorizes a satellite warranty facility to be established at, or relocated to, a proposed location which is within two miles of any dealership of the same line-make, the franchisor must first give notice in writing of the franchisor’s intention to establish or relocate a satellite warranty facility at the proposed location to the Board and each franchisee operating a dealership of the same line-make within two miles of the proposed location. Within 20 days of receiving the notice, or within 20 days after the end of any appeal procedure provided by the franchisor, any franchisee required to be given the notice may file with the Board a protest to the establishing or relocating of the satellite warranty facility. When such a protest is filed, the Board shall inform the franchisor that a timely protest has been filed, that a hearing is required, and that the franchisor shall not establish or relocate the proposed satellite warranty facility until the Board has held a hearing if the Board has determined that there is good cause for not permitting the establishment or relocation of a satellite warranty facility. In the event of multiple protests, hearings may be consolidated to expedite the disposition of the issue.
“Satellite warranty facility” means any facility operated by a franchisee where authorized warranty repairs and service are performed and the offer for sale or lease, the display for sale or lease, or the sale or lease of new motor vehicles is not authorized to take place.
Right to File Protest and Time within Which to File
Just as in termination cases, a dealer or dealers objecting to the proposed establishment or relocation of a dealership of the same line-make within the relevant market area may by the filing of a protest automatically stay the action contemplated by the franchisor until the protest is determined.
The protest must be filed within 20 days of a dealer’s receipt of the franchisor’s notice of intent, and must be accompanied by the $200 filing fee made payable to the Board. The statute also permits the executive director or the Board upon request and a showing of good cause therefore to extend the time to file a protest an additional 10 days. In the event the franchisor has an available appeal procedure for contesting its decision to add or relocate a dealer and this procedure is utilized by the dealer, the 20-day period to file a protest does not begin until the end of the franchisor’s appeal procedure. Any dealer relying on the manufacturer’s appeal procedure to extend the filing date should consult with an attorney to make sure this is handled properly. To be on the safe side, you can file your protest within 20 days from receipt of the factory notice and then ask the Board to put the proceedings on hold while you utilize the franchisor’s appeal process.
Upon receiving a notice from a franchisor of its intent to establish or relocate a dealership of the same line-make in the relevant market area, it is important that a dealer act immediately in obtaining an attorney. There are many issues to consider on whether to file a protest and your attorney will need all the time he or she can get.
Joint Actions to Exclude Competitors Usually Illegal
The law is clear that joint action among competitors to exclude another competitor from a market is per se illegal, i.e., regardless of proper motives, good excuses or any other considerations, such conduct is always illegal. At first glance, this principle of law would appear to prohibit any joint action between similarly situated dealers in connection with a protest over the establishment of an additional dealership. However, there is a very narrow exception to the illegality of joint conduct when petitioning a government agency, whether it be the executive, legislative or judicial branches. The exception is known as the Noerr-Pennington Doctrine (“Noerr Doctrine”) and it provides that the antitrust laws do not apply to the petitioning of government for some sort of governmental action. The Noerr Doctrine is subject to strict scrutiny by the court and the conduct must meet a good faith standard. For example, the Noerr Doctrine will not apply if it is found that the action was brought with improper intent and for a sham purpose (i.e., the protesting party was not really looking for government action at all, but used the protest process as a mere cover or camouflage for a program to harm competitors).
There is no clear-cut rule as to when or under what circumstances the Noerr Doctrine will be applicable, or what, if any, particular action could be subject to challenge under the sham purpose exception. Nor is there any stock answer for how much leeway a dealer has, or what areas may safely be discussed, in discussions with other dealers concerning the issues involved in the protest. It would appear to be permissible for a dealer to ask other similarly situated dealers whether they will be filing a protest and what attorney, if any, will be representing them in the protest action. It would also appear to be permissible to remind other dealers of the deadline date for initiating the protest action. Joint consultation and action extending beyond routine inquiries could be risky, and you should have the advice of legal counsel in these situations.
Often the franchisor will have solicited waivers from the dealers eligible to file protests prior to sending the notice. See Chapter 4, Franchise Laws–Waivers Illegal, for rules applicable to establishment or relocation waivers. When this occurs, it is important that you get as much information as possible from the representative of the franchisor who seeks such a waiver, making an inquiry about the reasons and facts upon which the franchisor intends to rely. A summary of any meeting or phone calls in this regard should immediately be prepared and retained for transmittal to your attorney upon receiving the franchisor’s notice of intent.
Interested Parties
Unlike termination cases where it is usually strictly between the franchisor and dealer, the party seeking to become the new dealer or seeking to relocate within the relevant market area occasionally files an appearance in the proceedings and is denominated “the interested party.” The interested party may be represented by counsel and is entitled to introduce evidence at the hearing in support of the establishment or relocation. It is the usual practice not to permit the interested party to initiate discovery, and it is also the usual practice not to permit the interested party or his or her attorney to cross-examine witnesses at the hearing. However, the interested party or his or her attorney may attend depositions and the restriction on cross-examination at the hearing is sometimes waived; and if not, is relatively meaningless because it can be done through the attorney representing the franchisor.
Form and Content of Section 3062 Protest
The form, mailing and service requirements except as to time, are the same as those for a protest under Vehicle Code section 3060 explained in Chapter 42, Franchise Termination or Modification, and that chapter should be reviewed in connection with this chapter. The content is also similar except for that portion of the protest strictly relating to the issues relative to why the establishment of the new dealership or relocation of an existing dealership of the same line-make should not be allowed.
Board’s Procedures upon Receiving a Protest
The Board’s procedures upon receipt of a termination protest under Vehicle Code section 3060, including the holding of a pre-hearing conference by tele-phone with all parties, the holding of a mandatory settlement conference, the entering into of a stipulated decision, and the setting of the protest for hearing as set forth earlier in this chapter are equally applicable to protests under Vehicle Code section 3062. See Chapter 42, Franchise Termination or Modification.
Special Significance of Mandatory Settlement Conference in Establishment or Relocation Cases
Trials of Vehicle Code section 3062 cases can be extremely long, and it is not unusual for hearings on these protests to take three or more weeks of actual trial time. Frequently the hearing or trial dates are spread out over a month to two-month period. In addition to the time and legal expense involved, expert testimony is usually required and this involves substantial additional expense.
Because of the time, expense and uncertainty involved in litigation, coupled with the tendency of the decisions in these cases to favor increased competition as being good for the automobile consuming public, serious consideration should always be given to some form of settlement.
There are in many cases legitimate concerns and reasons to support a protest, and in these instances many of these concerns can be realistically addressed and dealt with at a settlement conference. The executive director and Board are authorized to order a mandatory settlement conference and one is routinely held in these cases. There are a variety of forms a settlement might take, examples of which are straight cash settlements, an agreed delay of the establishment or relocation for a specified period of time, promotional advertising money, special allocations of cars, and other forms of special assistance.
Burden of Proof and Issues to Be Determined
In Vehicle Code section 3062 cases, the burden of proof is on the dealer to establish that there is good cause not to permit the establishment of an additional or relocation of an existing dealership. The Board has sustained very few relocation protests in its history.
In determining whether good cause has been established by the protesting dealer, the Board shall take into consideration the existing circumstances, including, but not limited to, all of the following:
- The permanency of the investment. The Board is unlikely to find a dealer’s investment to not be permanent. The number of years in business, investment or commitment in property, and investment in the facility are typically determined to be permanent. However, the Board may determine an investment that is minimal, temporary, or speculative is not permanent.
- The effect on the retail motor vehicle business and the consuming public in the relevant market area: This good cause factor requires the Board consider what would be the likely impact of the proposed establishment or relocation to existing dealers. In the case of a proposed establishment, the likely impact will be to increase customer convenience and competition. In a relocation protest, this increase will be far less significant because a new consumer option is not being added to the market. The Board’s analysis is limited to the Relevant Market Area (“RMA”) The RMA is a statutorily created ten (10) mile radius from the location of the proposed new dealership or site of the proposed relocation.
- Whether it is injurious to the public welfare for an additional franchise to be established: This good cause factor goes to the heart of the Board’s determination of whether there exists good cause to prevent the proposed establishment or relocation. Here, the Board will not be swayed by adverse financial impact to existing dealers alone. It must be established the increased competition would threaten the continued viability of the protesting dealer or dealers. Any increase in competition and consumer convenience would be short-lived if it can be shown the proposed market action would eliminate the continued viability of the existing dealer(s).
- Whether the existing dealers of the same line-make in the relevant market area are providing adequate competition and convenient consumer care in the market area, including the adequacy of motor vehicle sales and service facilities, equipment, supply of parts, and qualified service personnel: Again, it is difficult to establish consumer convenience and competition would not increase from the addition of a second point. Nevertheless, the goal here is to develop evidence demonstrating the market is adequately served by the existing dealer network. This good cause factor fits hand in glove with the Board’s consideration of the likely impact to the public welfare. Evidence for this factor may include brand registration performance, customer satisfaction scores, adequacy of facilities in the existing dealer network, and customer convenience based on drive time or distance. This factor is again limited to the RMA, but the Board will consider the effect of dealers located just outside the RMA.
- Whether the establishment of an additional dealer would increase competition and therefore be in the public interest. This is at least the third occasion where the Board must make findings concerning the likely increase in competition. Increased competition generally benefits the public welfare. Nevertheless, increased competition that rises to the level of ruinous competition will adversely impact the public welfare. The failure of established business is detrimental to consumers with existing relationships. Moreover, ruinous competition can cause dealers to engage in aggressive business practices that adversely impact consumers.
The Board is required to issue proposed findings on each of the good cause factors. However, no single finding is determinative of the ultimate question of whether good cause has been established to prevent the proposed market action. The Board will balance the interests of the dealer(s) in maintaining viable business(es), the manufacturer’s interest in promoting sales, and the public’s interest in adequate competition and convenient service.
There comes some point in time when and where “overdealering” begins and beneficial competition ends. The evidence which may be presented on this issue can get extremely intricate. To establish that the addition or relocation of a dealership will so tip the scales that it would be better for the public to have one, two or three (or whatever the number depending on the particular market area) healthy dealers as opposed to adding an additional dealer which renders one or more of the existing dealers less healthy involves consideration of a wide spectrum of demographic, marketing, economic, sales and service detail.
This chapter cannot cover all of the intricacies and varieties of evidence which are typically introduced in section 3062 hearings, but some examples are provided to give you some appreciation of what is frequently involved.
Based upon registrations and similar data, manufacturers and distributors regularly compile a wealth of statistics comparing the sale and penetration of their product with total industry sales and/or with their leading competitors. Polk registrations, for example, are supplied according to census tracts nationally.
At any given time, a particular relevant market area, primary market area, metro area, region or zone can be analyzed by zip code, or census tract, to reveal total sales, percentage of total sales of each line-make, and a given dealer’s percentage of sales. These sales may be plotted on a zip code map, or by census tract, and various overlays may be placed on the map to show, for example, the boundaries of each dealer’s primary or relevant market area, or the population of the particular area, or the demographic makeup of the area. Further overlays may be placed on the overlay depicting a particular dealer’s primary market area which will pinpoint all of the dealerships of the same line-make and the dealerships of the leading competitors. Cross/sell data can then be depicted showing, for ex-ample, the percentage of sales a dealer makes in the dealer’s primary market area versus the dealers of the same line-make or versus competing dealers, the percentage of sales the dealer makes in adjoining market areas, the percentage of sales each dealer of the same line-make makes in the dealer’s primary market area, and so forth, depending upon the particular point a party is seeking to establish. The same comparisons as well as many more can be made for the metro area, zone, region or nation.
The evidence can get more complicated when you factor in such things as availability of product, population and economic trends, drive times between dealerships, the relative importance of location near a freeway or shopping center, the buying habits of the public, and profit per new car sold and per each particular model sold (compared to other dealers of the same line-make in the same market area, metro area, zone or region and compared to zone, regional or national averages). Obviously, if a protesting dealer’s gross profit and average grosses per unit and per model are extremely high, or even higher than other dealers of the same line-make in the dealer’s market area, metro area, zone or region, the protesting dealer is going to have an extremely difficult time explaining, let alone sustaining the burden of proof, that increased competition would be harmful to the public.
On the issue of adequacy of service provided in the relevant market area, many comparisons of charges among dealers of the same line-make for various types of repairs are frequently introduced into evidence. This gets more involved when taking into consideration comparisons of the dealer’s flat rate, warranty rate and hourly rate with other dealers of the same line-make. Frequently, a variety of statistics are introduced based on the units in operation of a given line-make in a dealer’s primary market area and the relevant market area, and based on the number of units in operation, the percentage of these which are being serviced by the protesting dealer, and what percentage are being serviced by the surrounding competing dealers.
Finally, at these hearings, expert witnesses frequently can come up with conflicting opinions based on the same evidence and statistics.
The foregoing was designed to show some of the evidence that is considered relevant to the issues in establishment and relocation cases and give better appreciation of what to look for when contemplating a protest.
Conduct of Hearing and Decision of the Board
The conduct of the hearing, decision by the Board and the right of appeal from the Board’s decision is exactly the same as discussed in Chapter 42, Franchise Termination or Modification.