May a Car Manufacturer Increase Wholesale Prices In Order to Avoid Incurring the Cost of a Statute Meant to Protect Dealerships?

Should courts interpret a statute that was meant to protect car dealerships in such a way that it does very little protecting? Should car manufacturers be able to circumvent statutes implemented to protect dealerships by simply increasing wholesale prices?

These questions underlay a case heard in the United States Court of Appeals for the Third Circuit. Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 676 F.3d 318 (3d. Cir. 2012).  Ford Motor Co., concerned the fact that Ford provided warranties to buyers of new Ford cars. These buyers were allowed to take their car to any dealership for repair or replacement of defective parts, regardless of where the buyers purchased the vehicle. Prior to the enactment of the New Jersey Franchise Protection Act (“NJFPA”), Ford would reimburse its dealers 40% more than the cost of making the parts for vehicle repairs under warranty. However, since the enactment of the NJFPA Ford was required to pay their dealers the retail price of the parts, which resulted in higher costs to Ford.

In an attempt to recoup that increased cost, Ford came up with a Dealer Parity Surcharge (“DPS”). The amount of the surcharge varied among dealers; the more warranty work a dealer performed, the higher the surcharge amount. The dealers filed suit against Ford based upon the wrongful implementation of DPS.

The District Court determined that DPS violated the NJFPA. In affirming the decision, the Third Circuit noted that NJFPA “did not preclude cost-recovery systems effected through wholesale vehicle price increases.” The Court nevertheless, “rejected Ford’s contention that the DPS constituted such a system.” Id. at 322.

Subsequently, Ford utilized a new protocol for surcharges called the New Jersey Cost Surcharge (“NJCS”). NJCS is based upon the total cost of Ford to comply with the NJFPA across New Jersey. Unlike DPS, this resulted in across the board (rather than individualized) increases in the wholesale price of vehicles. The result of the NJFPA is a flat surcharge for every dealer which increased according to the number of vehicles the dealer purchased, rather than how many warranty repairs the dealer submitted.

Thereafter, the dealers brought another suit against Ford, claiming that the NJCS was unlawful because it violated the NJFPA. Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 676 F.3d 318 (3d. Cir. 2012).  The Third Circuit held that NJCS does not violate NJFPA and thus was not unlawful.

The NJFPA provides that:

“The motor vehicle  franchisor shall reimburse each motor vehicle franchisee for such [warranty] services as are rendered and for such parts as are supplied, in an amount equal to the prevailing retail price charged by such motor vehicle franchisee for such services and parts in circumstances where such services are rendered or such parts supplied other than pursuant to warranty; provided that such motor vehicle franchisee’s prevailing retail price is not unreasonable when compared with that of the holders of motor vehicle franchises from the same motor vehicle franchisor for the identical merchandise or services in the geographic area in which the motor vehicle franchisee is engaged in business.”

In holding that the NJCS did not violate the NJFPA, the Court examined the ruling by a Maine court  interpreting a similar statute. Acadia Motors, Inc. v. Ford Motor Co. (Acadia), 44 F.3d 1050 (1st Cir.1995). In Acadia, the Court held a flat surcharge imposed on all wholesale vehicle prices was lawful. The Court reasoned that, since the statute said nothing about wholesale or retail prices, it appeared to
leave the manufacturer free to increase wholesale prices, resulting in a corresponding increase in retail prices.

Similarly, in Ford Motor Co, the Court held that the New Jersey statute was enforceable because it did not directly address the increase of wholesale or retail prices. Thus, although the NJFPA regulated warranty reimbursements, it does not regulate wholesale price increases nor did it regulate retail price increases. 

Therefore, the Court, in Ford Motor Co held that the DPA was unlawful but the NJCS was lawful. While the NJCS was a bona fide wholesale price increase, the DPA surcharge was unlawful because it was based
on how many warranty reimbursements individual dealers submitted. The NJCS was lawful because it was a flat surcharge assessed on all wholesale vehicles sold
within the State.

In the end, NJFPA did not protect dealers against Ford increasing its wholesale prices, nor did it protect consumers against dealerships increasing the dealerships’ retail prices. Thus, it is highly questionable as to whether the public interest was served by this decision.

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