Justices Agree to Eye Case That Pits Automakers Against Car Dealers

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General Motors headquarters. Photo: iStockphoto[/caption] The Pennsylvania Supreme Court has signed on to consider not one but two issues of first impression involving the power balance in the contractual relationship between car dealerships and auto manufacturers.

In a dispute between General Motors and several local dealerships over reimbursements for warranty repairs, a three-judge panel of the Commonwealth Court ruled 2-1 last August that GM was within its rights to enforce contractual terms that are not specifically authorized by Pennsylvania’s Board of Vehicles Act. The Supreme Court granted allocatur May 14 in General Motors v. Bureau of Professional and Occupational Affairs. The Commonwealth Court's ruling reversed a final order of the State Board of Vehicle Manufacturers, Dealers and Salespersons. The board had found that GM violated Section 9 of the act by imposing a $122-per-vehicle cost recovery surcharge on franchise dealerships that elected to be reimbursed for parts at the statutory retail rate, rather than a contractually agreed-upon rate. In addition, the board found that GM violated the act by forcing those dealerships to also accept retail reimbursement for labor. Under GM’s contract with its franchise dealerships, according to the Commonwealth Court's precedential majority opinion, the dealerships could elect to be reimbursed for the cost of labor incurred in performing warranty repairs on customers’ cars in one of two ways: under the retail rate as provided for in the act (Option A), or under a contractually agreed-upon base rate that is periodically adjusted according to the Consumer Price Index (Option C). Similarly, the contract allows dealerships to be reimbursed for the cost of parts under either the statutory retail rate or the contractually agreed-upon rate of 40 percent of dealer cost, the opinion said. Under revised terms of the contract, communicated to the dealerships by GM in 2012, any dealers that elected retail reimbursement for parts would automatically be required to accept retail reimbursement for labor, according to the opinion. Several dealerships—intervenors Budd Baer Inc., Mel Grata Chevrolet and Turner Automotive of New Holland—protested and the board sided with them. But Judge Julia K. Hearthway, writing for the majority of the appellate panel, said the board’s decision “reflects a misapprehension of the basis for GM’s conversion of protesting dealers’ labor rate reimbursement from Option C to Option A.” “GM’s action was grounded in the parties’ agreement, not the act,” Hearthway said, noting that the consequences of electing statutory retail reimbursement for warranty parts on a dealership’s eligibility for reimbursement for warranty labor is an issue of first impression. “GM was not seeking unilaterally to invoke Section 9(a)(3) of the act; GM was proceeding according the terms of its contract with protesting dealers. That contract offers Option C reimbursement for warranty labor only if a dealer agrees to standard reimbursement for warranty parts.” Hearthway, joined by Judge Robert Simpson, reasoned that Option C is a creation of GM’s contract and is therefore not governed by the act. “The act does not protect protesting dealers’ access to Option C,” Hearthway said. “The question of whether GM may make this change to protesting dealers’ warranty labor rate reimbursement is a contractual question over which the board has no jurisdiction.” Hearthway then turned to the other issue of first impression—the statutory construction of Section 9(b.4)(1)(i) of the act, which states that car makers may not impose a surcharge on a dealer that has not sought retail rate reimbursement for parts and labor. The dealerships argued that the provision meant that a dealer could be subject to a surcharge only if it elected retail reimbursement for both parts and labor. GM, meanwhile, argued that manufacturers could impose a surcharge on dealerships that elected retail reimbursement for either parts or labor.

While acknowledging that the language of that section “is susceptible to more than one meaning,” Hearthway ultimately determined that the legislature’s “use of the phrase ‘parts and labor’ in Section 9(b.4)(2) supports GM’s position that a dealer must not be using any statutory retail warranty reimbursement to be protected from the possibility of a surcharge for increased reimbursement costs.” “The self-evident object of Section 9(b.4) is to permit manufacturers to recover increased costs from a dealer that invokes Section 9(a) to be reimbursed at a statutorily defined retail rate instead of at the rate the parties had agreed upon in their contract,” Hearthway said. “This court cannot identify any policy reason that would justify limiting the ability of manufacturers to recover under Section 9(b.4) only to instances where dealers elect to invoke retail rate reimbursement for both parts and labor.” Judge Joseph M. Cosgrove dissented, arguing that the majority’s ruling runs counter to the legislative purpose of the act, as laid out in 49 Pa. Code Section 19.1, which describes it as “‘an exercise of [the commonwealth's] police power’” that is designed to “‘prevent frauds, impositions and other abuses upon [the commonwealth's] citizens and to protect and preserve the investments and properties of the citizens of this commonwealth.’” “Against this backdrop, it is difficult to see how the legislature could have intended statutory language, which may be subject to two reasonable interpretations, to be viewed in a way which favors multibillion-dollar corporations based in other states (or countries) over the protective interests of local automobile dealers operating within the commonwealth,” Cosgrove said. In its one-page order granting allocatur, the Supreme Court agreed to address three questions on appeal: "1) Did the Commonwealth Court err in concluding that, as a matter of first impression, GM is permitted to eliminate statutory protections provided to dealers by unilaterally altering the dealers’ warranty labor reimbursement rate? (2) Did the Commonwealth Court err by failing to give proper deference to the board’s decision interpreting the act? (3) Did the Commonwealth Court err in concluding that, as a matter of first impression, GM is permitted to impose a surcharge on dealers seeking retail reimbursement for parts alone, although the plain language of the act provides that a manufacturer may only surcharge dealers seeking retail rate reimbursement for both parts and labor?" GM is represented by Mark Bradshaw of Stevens & Lee in Harrisburg. A spokesman for GM did not respond to a request for comment on the allocatur grant. Counsel for the dealerships, James D’Angelo of McNees Wallace & Nurick in Harrisburg, also did not respond to a request for comment.