Volvo forced to terminate “subscription” program in California

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Nearly a year after California’s New Motor Vehicle Board (NMVB) considered the petition from the California New Car Dealers Association (CNCDA), which resulted in an investigation by the California DMV, Volvo has agreed to terminate it’s so-called “subscription” program in the golden state. The Volvo program—Care by Volvo (CbV)—was launched by Volvo in the United States in November, 2017 and marketed to consumers as an “all inclusive” two-year subscription service for Volvo vehicles that included maintenance, auto insurance, road hazard and tire and wheel protection for a flat “monthly fee.” The program was offered directly to consumers through Volvo’s website, promoting in particular the newly released model XC40, which was also being allocated to California franchise dealership from port stock only if they agreed to sign an amendment to their dealer agreement that made the dealers limited agents of Volvo who would consummate the CbV subscriptions.

In January, 2019 – after Volvo blatantly proclaimed to consumers during the November 2018 Los Angeles Auto Show “Don’t Buy Our Cars” and “Subscribe, Don’t Buy,” the CNCDA filed a petition with the NMVB contending that Volvo was undermining the “traditional role of Volvo dealer franchisees” and unlawfully violating several provisions of the California Vehicle Code (VC). In particular, the petition asserted that the CbV program constituted “illegal competition between manufacturer and dealer in violation of VC section 11713.3(o).” The petition further alleged, among other things, that the addendum Volvo unlawfully forced the dealers to sign constituted a “modification to Volvo’s franchise agreements, which requires notice under VC section 3060(b) and an opportunity for dealers to challenge the change with the board” (which was not done).

The petition was heard at a hearing of the NMVB on August 15, 2019, and the NMVB unanimously ordered that the California DMV investigate the alleged VC violations. In February, 2020, the Investigations Division of the DMV completed its investigation of the CbV program and released a scathing report finding that not only had Volvo committed several violations as asserted by the CNCDA, but also finding other violations discovered as a result of their investigation.

Specifically, the DMV found that when “Volvo offered the same line-make XC40 directly to consumers… through its website, which is accessible and exchanges information with consumers everywhere in California, then Volvo was competing in the same line-make of vehicle in each dealer's relevant market area (RMA).” Also, when “Volvo used dealer employees Volvo controlled to consummate CbV transactions, this constituted Volvo competing with the Dealers from inside each dealership, which is within the RMA.” [Report of Investigation, Department of Motor Vehicles Investigation Division, dated February 11, 2020, page 3 (emphasis added).] This was found to violate VC section 11713.3.

The DMV further found that, as the CNCDA had alleged, when “Volvo had the Dealers sign the Addendum, making the Dealers agents of Volvo, rather than independent of Volvo as in the franchise agreement, then Volvo modified the Dealers franchise agreement” but Volvo did not give proper notice to the NMVB or the dealers in violation of VC section 3060(b)(1). Notably, this was still considered a violation, notwithstanding the fact the dealers “voluntarily” signed the addendum. As discussed in the DMV’s report, the addendum used to “accomplish a franchise modification” was “substantially a waiver of Volvo’s obligation to give notice of the franchise modification to the NMVB and Dealers, and the opportunity to protest,” and thus constituted an unlawful “waiver of that obligation which is specifically prohibited under the Vehicle Code.” Specifically, the DMV cited to VC section 11713.3(g)(1), which provides that it is “unlawful and a violation of this code for a manufacturer…to obtain from a dealer or enforce against a dealer an agreement, provision, release, assignment, novation, waiver, or estoppel that does any of the following: (A) Modifies or disclaims a duty or obligation of a manufacturer….”

Of course, not all dealers agreed to sign the addendum and participate in the CbV program – but this meant they “would and did not receive the port stock XC40's reserved for CbV.” According to the DMV’s report, when “Volvo allocated XC40's from port stock to Dealers offering CbV then Volvo discriminated in favor of factory, in part, controlled dealerships and discriminated against any dealership that did not participate in CbV.” [Id.] This also was found to be a violation of VC section 11713.3.

During its investigation, according to the report, the DMV examined the subscription documents used for the CbV program. The DMV express concern that Volvo advertised a "subscription" but the contract consumers signed was labeled "California Motor Vehicle Lease Agreement, Care by Volvo." The DMV noted that the term "Subscription" may “mislead a consumer to believe they can opt out and cancel the subscription at any time whereas a "lease" is understood to be binding for an extended period of time, which is the duration of the lease.” [Id.] DMV stated: “Volvo baiting consumers with the word ‘subscription’ and then switching consumers to a ‘lease’ when executing the contract may be deemed ‘misleading.’” [Id.] As such, the terminology would potentially be a violation of Vehicle Code§ 11713(a) which “prohibits use of any untrue or misleading word or statement in an advertisement.” The DMV ultimately did not “reach a conclusion on this issue” in the report (apparently because it was not directed to investigate this issue). However, the DMV did find that the “costs for maintenance, excess wear protection, road hazard, tire and wheel protection,” were not separately itemized in the lease as required by law. The DMV found that this “violated Civil Code§ 2985.8(c)(2)(D) and (G).” [Id.]

In the end, the DMV found the violations constituted “cause for license discipline pursuant to Vehicle Code § 11705(a)(10).” [Id.] The report was submitted to the NMVB for “evaluation” and the DMV issued a “warning letter” to Volvo on April 28, 2020 providing Volvo a “formal warning from the DMV that future violations of law… may result in enforcement action.” On May 14, 2020, after it was confirmed that Volvo was “still fully operating” the CbV program in California, CNCDA lawyers issued a formal “cease and desist” demand to Volvo to “immediately cease marketing and offering CbV in California…” (The letter also offered CNCDA’s assistance in the roll out of the planned 2.0 version of CbV “to ensure that, if CbV 2.0 is implemented in California, it does not violate California law...”

Ultimately, CNCDA prevailed. At a hearing of the NMVB held earlier this month, counsel for Volvo informed the NMVB that they had stopped offering the “subscription” program in California and that Volvo intended to work closely with the DMV to ensure its new CbV 2.0 program does not also violate California law.