California court finds manufacturer steps into retailers shoes when it offers express warranty for certified pre-owned vehicles

2019 cases affecting auto dealers: Part 4

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Justin Kiluk v. Mercedes-Benz USA, LLC (Cal. Ct. App., Dec. 12, 2019, No. G056344)

Plaintiffs alleging that pre-owned vehicles are “lemons” have long vexed new car dealers as the law does not explicitly require manufacturers to indemnify the dealer in these cases. However, a recent Courts of Appeal case may provide relief in some situations, as the Court found that manufacturers step into the shoes of retailers when they offer an express warranty for a used vehicle. Because manufacturers offer such warranties for certified pre-owned vehicles, this case may expand the number of cases in which manufacturers indemnify dealers.

Mr. Kiluk purchased a used certified pre-owned Mercedes-Benz vehicle with a portion of the new vehicle warranty remaining. The vehicle also accompanied an additional used vehicle warranty issued by the manufacturer that would last for one year from the end of the remaining new car warranty. After the expiration of the new vehicle warranty and during the period of the certified pre-owned warranty, the vehicle manifested an incurable defect. Despite multiple repair attempts, the vehicle’s problem was never fixed. Mercedes-Benz refused to repurchase the vehicle. Kiluk sued Mercedes-Benz under the Song-Beverly Consumer Warranty Act (“Song-Beverly Act”) for breach of express warranty and the implied warranty of merchantability. The jury found in favor of Kiluk on both of his claims. Mercedes-Benz appealed and argued that the Song-Beverly Act does not apply to an express warranty issued by a manufacturer on a used vehicle.

The Court of Appeal found that the jury’s verdict was sound and affirmed the judgment, holding that though the Song-Beverly Act generally binds only distributors and retail sellers in the sale of used goods, Mercedes-Benz stepped into that role by issuing an express warranty on the sale of a used vehicle. The Song-Beverly Act provides enhanced remedies to consumers who buy new consumer goods accompanied by a manufacturer’s express warranty and an implied warranty of merchantability. The same protections generally apply to the sale of used goods accompanied by an express warranty, except that only the distributor or retail seller is bound.

The Court explained that Song-Beverly, pursuant to Civil Code § 1793.2, requires that where a manufacturer sells “consumer goods” accompanied by an express warranty, it must maintain local repair facilities “to carry out the terms of those warranties.” Where the manufacturer cannot service or repair a new motor vehicle to conform to the express warranties after a reasonable number of attempts, the manufacturer shall either replace the vehicle, or reimburse the buyer in an amount equal to the purchase price paid by the buyer, less that amount for the buyer’s use of the vehicle prior to discovery of the defect.

The Court noted that the “Song-Beverly Act provides similar remedies in the context of used goods, except that the manufacturer is generally off the hook.” Under Civil Code § 1795.5, the distributor or retailer seller making express warranties with respect to used consumer goods have an obligation to maintain sufficient service and repair facilities to carry out the terms of the express warranties, not the original manufacturer, distributor or retail seller making express warranties with such goods when new.

The parties disputed whether the subject vehicle was a new motor vehicle or a used good under Song-Beverly Act. Mercedes-Benz argued Civil Code § 1795.5 does not apply because that section specifically exempts manufacturers, instead imposing obligations only on the retailer or distributor. The Court held that the manufacturer and the distributor/retailer are distinct entities within section 1795.5 but “where the manufacturer sells directly to the public, however, it takes on the role of a retailer.” In conclusion, because Mercedes-Benz partnered with a dealership to sell used vehicles directly to the public by offering an express warranty as part of the sales package, Mercedes-Benz stepped into the role of a retailer and was subject to the obligations of a retailer under Civil Code § 1795.5.

Car manufacturers step into the role of “retailer” for purposes of Song-Beverly when they involve themselves into the sale of used vehicles by issuing express warranties on the sale of used vehicles. The manufacturer can be treated as a retailer and have duties under Song-Beverly when incurable defects occur during the express warranty period, or the consumer may seek recourse under Song-Beverly for replacement of the vehicle or restitution. Car dealers with certified pre-owned programs should take note that this court decision expands liability to manufacturers under the Song-Beverly Act when an incurable defect occurs during the remainder of an express warranty that was issued by the manufacturer on the sale of a used vehicle.

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