Third Circuit Rules that Car Manufacturers’ Wholesale Price Increases Designed to Recover Warranty Costs to Dealers is Consistent with New Jersey Franchise Protection Act
The Third Circuit’s to-be-published opinion in Liberty Lincoln-Mercury, Inc. v. Ford Motor Company, confirms that the New Jersey Franchise Protection Act, N.J.S.A. § 56:10-1 to § 56:10-31, permits motor vehicle franchisors to use permissible cost-recovery systems to recoup the increased cost of reimbursing New Jersey motor vehicle dealers under the Act, but also clarifies that such a cost-recovery system must allow individual dealers to retain the ability to mitigate the increased costs imposed.
The Franchise Protection Act provides that every “motor vehicle franchisor shall reimburse each motor vehicle franchisee for such 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.” N.J.S.A. § 56:10-15(a). Because retail prices in New Jersey are generally higher than in other states, New Jersey dealers are often reimbursed for warranty products and services at higher rates than their counterparts in other states.
To counteract these increased costs, Ford Motor Company initially imposed a surcharge on New Jersey dealers which was determined by the actual amount of warranty claims submitted by the dealer; the more warranty claims by a dealer, the greater the surcharge. This program was found to violate the Act because it left dealers no choice, but to bear the full cost of retail-rate warranty reimbursements without an ability to mitigate the increased costs imposed. See Liberty Lincoln, Inc. v. Ford Motor Co. (Liberty II), 134 F.3d 557, 564 (3d Cir. 1998). Thereafter, Ford imposed a new cost-recovery program which applied “a flat surcharge for every wholesale vehicle sold in New Jersey, rather than a varied surcharge between Dealers.” The result is a proportionate increase based on “the number of vehicles the Dealer purchased, regardless of how many warranty repairs the dealer submitted to Ford.”
A group of New Jersey dealers claimed Ford’s new cost-recovery system violated the Franchise Protection Act. The Third Circuit held that Ford’s new cost-recovery system is a bona fide wholesale price increase, which “the text of the [Franchise Protection Act] clearly permits.” The court clarified that the Act “regulates warranty reimbursements but does not impose limitations on wholesale vehicle transactions”—an important distinction to ensure permissibility of a motor vehicle franchisor’s cost-recovery system. To otherwise “read a restriction against wholesale price increases into the statute would improperly establish a rule unsupported by  statute.” As such, because the new cost-recovery system requires a flat surcharge assessed on all wholesale vehicles sold in New Jersey, it allows dealers to choose to purchase from Ford—thereby mitigating the increased costs—and retain control over the volume, timing, and profitability of those vehicles.
Motor vehicle manufacturers/franchisors should be aware of the Third Circuit’s decision in Liberty Lincoln and other decisions which have reached similar conclusions. See Acadia Motors v. Ford Motor Co., 44 F.3d 1050 (1st Cir. 1995). To ensure that they do not run afoul of the requirements of the New Jersey Franchise Protection Act and similar statutes in other states, motor vehicle franchisors should structure their cost-recovery programs as wholesale price increases so that individual dealers have the ability to mitigate the increased costs imposed.