The dealer statutes of many states require automobile manufacturers to reimburse dealers for parts and labor used in warranty repairs at the “average” retail rates charged by dealers for customer pay repairs. These laws often set out a formula—typically using a sequential series of a dealer’s customer pay repair orders—to determine the dealer’s “average” retail rates. This has given rise to a cottage industry of consultants who help dealers maximize their reimbursement rates by, among other things, analyzing customer pay repair orders to identify the sample set that will result in the highest possible calculation of their “average” retail rates. A recent administrative appeal in New York, Beck Chevrolet Co., Inc. v. General Motors LLC, No. FMD-201803 (N.Y. Dept. of Motor Veh. Admin. Appeals Bd. Oct. 29, 2019), may help put an outer limit on the lengths to which a dealer can go in manipulating its data to maximize the warranty reimbursement rates paid by the manufacturer.

New York’s Franchised Motor Vehicle Dealer Act, N.Y. Veh. & Traf. Law (“VTL”) § 465, requires manufacturers to pay dealers “reasonable compensation” for the parts used in warranty repairs, and defines “reasonable compensation” as the “price and rate, including average markup” over dealer cost that a dealer charges its non-warranty or retail customers for warranty-like repairs. The “average mark-up” by the dealer for parts “may be established by submitting . . . 100 sequential nonwarranty customer-paid service repair orders” for repairs within the past 180 days, and “declaring the . . . average markup” reflected in those qualifying repairs as the dealer’s “reimbursement rate.” A manufacturer can reject the declared “average markup” if it identifies “with specificity” errors in the computed rate; in that case, the dealer can either accept the alternative “average markup” computed by the manufacturer or protest the manufacturer’s refusal to accept the declared markup.

In March 2018, Beck Chevrolet submitted to General Motors a request for a change to the dealer’s warranty reimbursement rate for parts. Beck declared that its 100 qualifying repair orders reflected an average retail mark-up of 81.62% over dealer cost, and demanded that its then-current rate of 73% be increased accordingly. GM determined that Beck had improperly omitted two qualifying transmission repairs from its average mark-up calculation and, after factoring both transmission repairs back in, reduced Beck’s retail parts markup to 62.30% over dealer cost. In response, Beck objected to GM’s methodology—dividing the total markup dollar amount of the parts in the 100 qualifying repair orders (i.e., total dollar revenue amount minus total dollar wholesale cost) by the total wholesale cost (dealer’s cost) of the parts—even though Beck itself had used this method in its original rate declaration. Instead, Beck insisted that its average parts mark-up should be determined by calculating a percentage markup for each individual repair order (regardless of how many parts were included in the repair), and then adding the individual mark-up percentages of all 100 qualifying repair orders and dividing that sum by 100. Using this new method, and adding back in the omitted transmission repair orders, Beck claimed that its parts reimbursement rate should be 85.18%. GM rejected this claim.

Beck then filed an administrative action with the New York Department of Motor Vehicles (“DMV”) alleging that GM violated VTL § 465 by using an improper calculation method, including transmissions in the calculation, and lowering Beck’s reimbursement rate below the rate that it had previously established. After an evidentiary hearing in November 2018, an administrative law judge issued a written opinion concluding that GM’s average mark-up calculation method was reasonable under VTL § 465 because it accurately reflected the true retail prices paid by Beck’s customers, while Beck’s proposed calculation method would result in GM paying thousands of dollars more for parts used in warranty repairs than Beck’s retail customers actually paid for the same parts.

Beck took a further administrative appeal of this determination, and on October 29, 2019, the DMV Administrative Appeals Board affirmed the ALJ’s decision in GM’s favor. The Board found that “GM met its burden of showing that the 81.62% rate declared by Beck was unreasonable” due to Beck’s improper omission of “transmission repairs that were part of the 100 qualifying repair orders” and that were neither subject to exclusion pursuant to VTL § 465(1) nor typically excluded by GM or other GM dealers in calculating their warranty parts reimbursement rates. The Board also determined that GM’s downward adjustment of Beck’s warranty parts reimbursement rate from 73% to 62.30% constituted “reasonable compensation” under VTL § 465, noting that the New York dealer statute “does not define reasonable compensation for parts as the highest possible reimbursement rate for the dealer, which appears to have been the goal sought by Beck and the independent contractor hired by Beck’s counsel to prepare spreadsheet submissions on behalf of Beck.”

This decision demonstrates that, although state dealer laws may override contractual warranty reimbursement rates, these laws do not give dealers license to manipulate their data to achieve warranty reimbursement rates that force manufacturers to pay dealers prices for parts that far exceed the retail prices charged to non-warranty customers. Manufacturers should be vigilant in monitoring the tactics used by dealers and their consultants to inflate warranty reimbursement rates, including improper rate calculation methodologies and inappropriate exclusions of certain types of repairs.

John Skelton is a partner at Seyfarth Shaw LLP and co-head of the firm’s Franchise & Distribution practice group; Katherine Moskop is an associate at Seyfarth Shaw LLP. Mr. Skelton and Ms. Moskop represented GM in the matter discussed in this article.