Lemon lawsuits and joint defense agreements

An ounce of prevention is worth a pound of cure

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The last ten years have seen a steep upward trend in the number of lemon lawsuits filed in California. In Los Angeles County alone, the number of lemon lawsuits doubled between 2015 and 2019 and are currently estimated to compromise 10% of the Los Angeles County Superior Court’s civil litigation docket. These numbers are particularly troubling when you consider that over the same period, the reliability of new cars increased substantially. According to Consumer Reports, between 2013 and 2018 new cars saw a 2% decrease in both major and minor engine problems and similar decreases for problems with transmissions, fuel systems, climate systems, suspension and brakes. One notable exception to this downward trend in reported problems with new car systems is in-car electronics, for which problem issues have remained largely flat. When taking into consideration the rapid deployment of new technology for in-car electronics over the same time period, even the outlier flat trend line for problems with in-car electronics issues is demonstrative of an across the board increase in car manufacturing standards and reliability.

Conventional wisdom and common sense attribute the increase in lemon lawsuits in the face of the increasing reliability of new cars over the same period to the attorney fee shifting provisions of the lemon law statutes. Both the federal and California lemon law statues provide for a prevailing consumer to recover its attorney’s fees as part of its damages. The fee shifting incentivizes plaintiff’s attorneys to bring cases they might not otherwise bring and to run up significant attorney’s fees before participating in earnest settlement negotiations. In this context, it can be a great relief when a manufacturer agrees to defend and indemnify a car dealership named as a defendant in a lemon lawsuit. However, even when a dealership’s tender of defense and indemnity of a lemon lawsuit is accepted by a manufacturer, the dealership remains exposed to potential liability, requiring careful negotiation of the joint defense agreement under which the manufacturer undertakes defense and indemnity of the dealership and independent monitoring of the lawsuit as it winds its way through litigation so as not to be caught by surprise if a manufacturer withdraws its defense of the dealership with trial rapidly approaching.

In broad brushstrokes, if a lemon lawsuit asserts that a vehicle purchased by a customer suffers from a defect that impairs its use, safety or value, the customer is entitled to having the vehicle either replaced or bought back. Typically, the manufacturer is the “target” defendant; however, the retail seller of the alleged “lemon” is often named in its capacity as a downstream distributor of the allegedly defective product.

Lemon laws are codified federally under the Magnuson-Moss Warranty Act and in California state law under the Song-Beverly Consumer Warranty Act. Both acts codify dealership liability as a downstream distributor of the allegedly defective vehicle notwithstanding whether the dealership is alleged to have committed any independent wrongdoing with regard to the subject vehicle and/or transaction. Under the federal Magnuson-Moss Warranty Act, warrantors of consumer goods must expressly disclose whether the warranty is “full” or “limited,” identify the contact information of the warrantor(s), who the warranty extends to, what products are covered, a statement of what the warrantor will do in the event of a defect or other failure to conform to the warranty, what the consumer must do and expenses the consumer will bear to obtain performance of the warranty, exceptions and exclusions to the warranty, availability of any informal dispute settlement procedure, general description of legal remedies available to the consumer, the time within which the warrantor will perform its obligations under the warranty, and the properties, products or parts that are not covered by the warranty. The Act also requires that the warranty be contained in a single, clear and easily readable document and must be worded in a way that would not mislead a reasonable, average consumer as to the nature and scope of the warranty. The Magnuson-Moss Act applies only to vehicles still covered by an original or extended manufacturer’s warranty and regardless of whether the current owner is the original retail purchaser of the vehicle. The Song-Beverly Act applies to all retail goods sold to consumers in California and provides all consumer goods are subject to an implied warranty of merchantability as well as implied warranty of fitness (i.e. that the goods are suitable for a particular purpose and they perform as promised by the retailer or manufacturer) and applies to all retail vehicle sales, including used cars.

A point of understandable frustration for dealerships is that often a plaintiff’s lemon law complaint is wholly lacking in allegations of independent wrongdoing by the dealership. Thankfully, in these instances a manufacturer will typically defend and indemnify the dealership in the lawsuit. The manufacturer’s contractual obligation to defend and indemnify a dealership is most commonly contained in the dealership’s “dealer agreement” with the manufacturer. However, it is the “joint defense agreement” that is negotiated between the dealership and the manufacturer after the manufacturer agrees to accept the dealership’s defense and indemnity that serves as the contract between the manufacturer and the dealer setting forth the specific terms under which the manufacturer agrees to defend and indemnify the dealership in a particular lemon lawsuit.

While joint defense agreements are standard in many respects, there are often provisions in a manufacturer’s proposed joint defense agreement that the dealership can reasonably push back on. One such issue of particular concern to dealerships are the terms under which the manufacturer can withdraw its defense. One of the more common situations giving rise to a manufacturer’s withdrawal of defense of a dealership occurs when during the course of discovery the manufacturer learns of a conflict of interest between the manufacturer and the dealership. An example of a typical conflict of interest issue is when the manufacturer learns that the dealership improperly performed a repair on the customer’s car or the dealership is at fault for a customer’s car being out of service for more than thirty days. This can become a nightmare scenario dealership if the manufacturer learns of its grounds for withdrawing defense on the eve of trial, which can put the dealership in the very uncomfortable and expensive position of having to prepare for trial in a short amount of time. A manufacturer’s untimely withdrawal of its defense can put the dealership at a severe disadvantage in preparing for trial that can be leveraged by both plaintiffs and manufacturers, not only at trial but also during the inevitable settlement negotiations that take place on the courthouse steps where these cases often resolve.

There are steps a proactive dealership can do to prevent itself against such a scenario. First, a dealership can request that a manufacturer propose the joint defense agreement include time limitations on when the manufacturer can withdraw its defense. A provision in the joint defense agreement that requires if the manufacturer withdraws its defense less than ninety days before trial the manufacturer agrees to cooperate with the dealership in seeking a trial continuance. While a manufacturer is not required to agree to such a condition, typically manufacturers are agreeable to such a reasonable request. In the event a manufacturer is unwilling to agree to reasonable limitations on the timing of a potential withdrawal of defense, if the dealership elects to proceed with the tender in any event, the dealership is on notice that its defense may be withdrawn on the eve of trial and should take necessary steps to be sufficiently prepared to try the case. In either event, it is also extremely important for the dealership to keep up to date on what is happening in the litigation, including having the dealer’s personal counsel review all of the dealership’s discovery responses, participate in the preparation of dealership’s witnesses for deposition, and closely monitor expert discovery, dispositive motions and settlement negotiations.

Another potentially problematic provision in a manufacturer’s proposed defense agreement is where the agreement allows for the manufacturer’s reservation of its right withdraw its defense if the dealer has an obligation to defend or indemnify a third party. This reservation of rights can be problematic for dealerships where dealers have contractual obligations to defend lenders and bond companies. In these situations, the dealer can typically carve out lenders and bond companies from the manufacturer’s reservation of rights, so long as the agreement expressly provides that the manufacturer is not responsible for defending or indemnifying any third party the dealership is obligated to defend or indemnify.

Finally, joint defense agreements virtually always provide that fees and costs incurred by a dealer prior to the manufacturer’s acceptance of defense and indemnity. As joint defense agreements can sometimes take several weeks to negotiate, being proactive and moving swiftly to respond to a complaint can help save substantially on litigation costs. California Rules of Court require a defendant to respond to a plaintiff’s complaint within 30 days after service and provides that parties may agree to one 15 day extension of this responsive pleading deadline without leave of court. While in practice plaintiffs’ attorneys will agree to an extension of time to respond to a complaint beyond 15 days, they are under no obligation to agree to any extension to respond, As preparing, filing and serving a responsive pleading and negotiating a joint defense agreement can easily cost thousands of dollars in attorney’s fees and filing fees, a prompt and proactive tendering of a dealer’s defense and indemnity can result in substantial savings in attorney’s fees.

Finally, it is important to remember that defense and indemnity obligations are separate and distinct, and that indemnity obligations do not technically accrue until after a finding of liability. As such, even where a manufacturer denies a dealer’s tender of defense and indemnity, if the dealership is found liable in a lemon lawsuit and the liability is solely based on the dealership’s role as a downstream distributor, the dealership can seek post-judgment indemnity from the manufacturer.

Unfortunately, given the incentives fee shifting provisions in California’s consumer protection statutes provide plaintiffs’ attorneys to bring and over litigate consumer lawsuits it is unlikely that California dealers will see a reduction in lemon lawsuits without legislative action. Unless and until the laws change to even the playing field, dealers will be well-served to move quickly to tender lemon law claims to their manufacturers, carefully negotiate their joint defense agreements, and closely monitor ongoing litigation after the manufacturer takes over the dealer’s defense.