Federal Court Dismisses OEM Challenge To Illinois Warranty Labor Time Guide Amendment

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Last week, the Illinois federal court in Volkswagen Group of America v. Illinois Secretary of State, 2024 WL 2020036 (N.D. Ill. May 6, 2024) granted a motion to dismiss a challenge brought by Volkswagen ...
United States Corporate/Commercial Law
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Last week, the Illinois federal court in Volkswagen Group of America v. Illinois Secretary of State, 2024 WL 2020036 (N.D. Ill. May 6, 2024) granted a motion to dismiss a challenge brought by Volkswagen ("VW") against a 2022 amendment to the warranty reimbursement provision of Illinois' Motor Vehicle Franchise Act, 815 Ill. Comp. Stat. 710/6(b). The amendment significantly increased the amount of labor time for which OEMs must compensate dealers to perform warranty repairs. The court found that VW failed to state a claim for violation of the Due Process or Equal Protection Clauses of the U.S. Constitution, and that because Illinois law permits manufacturers to recoup costs by raising wholesale prices and communicate their reason for doing so to consumers, VW did not have standing to assert claims for violation of the First Amendment, the Commerce Clause, or the Takings Clause.

2022 amendment increases OEM warranty labor costs by 50%

Prior to the 2022 amendment, manufacturers typically reimbursed Illinois dealers for warranty labor at the average hourly labor rate the dealer charges retail customers multiplied by the flat rate time allotted for a repair in the manufacturer's published labor time guide. OEM time allowances are typically established based on studies conducted to determine the actual time required for a trained technician to complete each step of a repair, plus a markup for administrative tasks. Illinois law required only that such time allowances be "reasonable and adequate" and that the manufacturer provide a fair process for dealers to object to and seek modification of the allotted time.

In January 2022, Illinois amended Section 6(b) to require manufacturers "to pay each dealer no less than the amount the retail customer pays for the same services with regard to rate and time." (Emphasis added.) Section 6(b) now further provides that "[i]n the event that a time guide has not been agreed to [by the manufacturer and dealer] for warranty repairs, or said time guide does not define time for an applicable warranty repair, the manufacturer's time guide shall be used, multiplied by 1.5." This provision is referred to as the "Multiplier Act." The 2022 amendment also prohibits manufacturers from imposing "any form of cost recovery fees or surcharges against a franchised auto dealership for payments made in accordance with this [statute]" (the "Recoupment Bar")..

VW's constitutional challenge to 2022 amendment

VW filed suit against the Illinois Secretary of State and other state actors, challenging the constitutionality of the Multiplier Act and Recoupment Bar. VW alleged the Multiplier Act requires manufacturers to pay 50% more time for warranty repairs, regardless of whether a technician actually works that time, and that the amendment cost VW an additional $10 million in warranty labor reimbursement in 2022 alone. VW further alleged the Multiplier Act is "redistributive legislation" not rationally related to any legitimate government interest, as it does not require dealers to increase technician pay (the underlying objective cited by proponents), and does not address technicians employed by electric vehicle (EV) manufacturers that sell directly to consumers. VW also argued that because the Recoupment Bar could be interpreted to prevent OEMs from recouping increased costs from the Multiplier Act in Illinois, it violates the Takings and Commerce Clauses of the U.S. Constitution; alternatively, to the extent the Recoupment Bar is more narrowly interpreted to prohibit a manufacturer from telling consumers that a price increase is a result of increased warranty repair costs, VW argued the 2022 amendment infringes its First Amendment rights.

Court rejects VW's due process and equal protection challenges to the Multiplier Act

The defendants moved to dismiss VW's claims, arguing that the Multiplier Act easily passes muster under the lenient "rational basis" review standard for constitutional challenges to economic legislation, and that the Recoupment Bar does not prohibit manufacturers from implementing wholesale vehicle price increases to recover warranty costs in the state. The federal court largely agreed; with respect to VW's substantive due process claim, the court noted that VW faces "an extraordinary and perhaps insuperable burden" due to the strong presumption of validity applied to purely economic regulation, and found the Multiplier Act was rationally related to the State's legitimate interest in ensuring fair and adequate compensation for dealers and technicians in light of the "perceived disparities in bargaining power" between manufacturers and dealers. The court also dismissed VW's equal protection claim, finding that the legislature in addressing this perceived disparity could rationally conclude that the Multiplier Act should not "apply to manufacturers that do not have dealer networks because the reimbursement problem does not exist as to them."

Court finds OEM cost recovery permitted under 2022 amendment

With regard to VW's Takings Clause, Commerce Clause, and First Amendment claims, the court determined that VW lacked standing to assert them—though its reasoning will ultimately benefit manufacturers' cost recovery efforts in Illinois. The court explained that the parties had put forth three potential interpretations of the Recoupment Bar's plain language: first (and broadest), that manufacturers may not recover costs imposed by Illinois' warranty reimbursement statute by adjusting vehicle prices or imposing extra fees in Illinois; second (and slightly narrower), that manufacturers can increase prices but cannot tell consumers that such price increases are for the purpose of recovering their warranty costs under the statute; and third (and narrowest), that the Recoupment Bar merely prevents OEMs from imposing extra fees or surcharges only against those Illinois dealers to whom they are paying a 1.5x labor time multiplier under the Multiplier Act (and not against dealers with whom they have entered into separate time guide agreements). The court adopted the third interpretation, relying on representations made by defendants themselves and concluding that "the Recoupment Bar does not prohibit . . . manufacturers from raising prices in Illinois to recover the costs of their vehicles or identifying or classifying any price increases as recoveries for costs associated with complying with the Multiplier Act's warranty reimbursement rules."

Accordingly, the court held that VW lacked standing to bring a First Amendment challenge because its intended conduct—communicating to customers that its vehicle price increase was the result of the Multiplier Act—was not prohibited. The court also concluded that VW lacked standing to bring its Takings and Commerce Clause claims because the Multiplier Act permits VW to increase prices to recoup its costs and thus does not affect an uncompensated taking or burden or discriminate against interstate commerce by forcing VW to raise its prices outside of Illinois or making it more difficult for dealers in neighboring states to compete with Illinois dealers. The Court dismissed VW's complaint "without prejudice" and gave VW until May 27 to file an amended complaint should it choose to do so.

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