Most states, including Virginia, require manufacturers to reimburse dealers for labor on warranty repairs at the dealer's "retail" rate. Many (if not most) manufacturers comply with this requirement by paying the dealer its "posted" hourly labor rate, or the rate that the dealer regularly quotes and charges to its retail customers. On August 14, 2012, however, the Virginia Court of Appeals issued a decision that appears to reject this standard industry practice. The Court ruled that, under the Virginia statute, the manufacturer and dealer should add up all "amounts" shown on the dealer’s repair orders, including fees and surcharges that the dealer passes along to its customers (such as waste disposal fees and computer-use fees), and then divide the total amount by the number of labor hours actually expended. Navistar, Inc. v. New Baltimore Garage, Inc., No. 2343-11-4 (Va. Ct. App. Aug. 14, 2012).

The case involved a manufacturer's US$57,333.60 chargeback covering all warranty claims submitted by a dealer from May 2007 to May 2008. The manufacturer had discovered, in May 2008, that the dealer was actually quoting a US$90 per hour rate to retail customers while the manufacturer was paying US$102 per hour, which the dealer had represented to the manufacturer as its "posted" rate. The manufacturer charged back an amount equal to US$12 per hour for all warranty labor hours paid for a one-year period (i.e., the maximum audit and chargeback period then permitted by the Virginia statute).

The Commissioner of the Virginia Department of Motor Vehicles disallowed the chargeback. The Commissioner relied on the dealer’s expert witness, who testified, based on a one-month sample of repair orders, that the rate the dealer was receiving from retail customers was higher than the rate it received from the manufacturer when the actual number of hours expended on each repair was taken into account.

The Court of Appeals reversed and remanded the case to the Commissioner. In so doing, however, the Court rejected not only the position of the Commissioner and the dealer but also the manufacturer's position that the hourly labor rate for warranty work should be based on the "posted" retail rate or the rate that the dealer regularly quotes and charges as its base rate to retail customers. The Court pointed out that the Virginia statute requires the manufacturer to compensate the dealer in an amount not less than "the amounts charged by the dealer… to retail customers for non-warranty service." The Court pointed out that the statute "does not mention approved hourly labor rates or quoted hourly labor rates," but instead "speaks of amounts." The Court also said that, where the manufacturer pays for repairs "based on predetermined standard repair times," a straight comparison of the approved warranty rate to the dealer’s posted or quoted rate "may prove misleading" because the actual time spent on repairs may be different from the "predetermined" time.

Based on its interpretation of the statutory language, the Court prescribed a detailed process for determining, in the specific context of the dealer's challenge to the chargeback, whether the hourly rate being paid by the manufacturer was greater or less than the hourly rate the dealer was charging to retail customers. The Court said that the Commissioner should:

  1. calculate the dealer's "total billing" (including surcharges and fees and excluding repair work specified in the statute) separately for non-warranty work and for warranty work for the entire time period of the chargeback;
  2. divide that "total billing" in each category by the total number of labor hours expended in that category; and
  3. compare the two amounts to determine if the warranty rate paid by the manufacturer was less than or greater than the non-warranty rate paid by the dealer's retail customers.

While the Court indicated that the same or a similar procedure should be used when a dealer requests a rate increase, it is uncertain how the procedure would apply in that situation. The Virginia statute provides that, when a dealer requests an increase in parts or "service" compensation, the request should be based on "100 consecutive repair orders or all repair orders over a 90-day period.” Typically, such statutes have been read to require the dealer and manufacturer to base the compensation rate on the dealer’s retail repairs, not to do a comparison between the warranty compensation and the non-warranty compensation. Accordingly, it is unclear what relevance, if any, the dealer's warranty repair orders would have in determining a rate increase.

We are aware that many manufacturers base the approved warranty labor rate for each dealer on that dealer's posted rate and/or the hourly rate the dealer regularly charges to retail customers (provided that the rate is reasonable, which is often determined by a survey of the posted or regular hourly rates of competitive dealers in the community or marketing area). Unless it is reversed by the Virginia Supreme Court, the Navistar decision will prohibit this standard industry practice in Virginia, at least in situations where there is a disagreement between the manufacturer and the dealer as to the hourly rate to be paid. There are also unresolved questions as to what role, if any, the manufacturer's "predetermined standard repair times" will play in establishing an hourly labor rate on a "going forward" basis.