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What’s Hot on the Hotline? A Rewind to Recalls

Hao Nguyen /
man inspecting standing and inspecting the undercarriage of car in a service dock

What is an average day in the automotive industry if there isn’t a recall issued by the manufacturer to deal with? It used to be the case that vehicles had a manageable number of moving parts. Now, as vehicles become more complex, manufacturers are quicker to issue recalls on more parts now than ever before. However, all recalls are not created equal and are treated quite differently depending on whether or not the recall affects a new or used vehicle and the type of recall that is issued. We have been receiving a significant spike in calls recently regarding recalls and thought it would be appropriate to bring this topic back to your attention.

Recalls Come in Different Flavors

Manufacturers are very quick to issue recalls due to the highly litigious, and highly regulated, nature of the auto industry. After NHTSA levied a record fine against Fiat Chrysler in 2015 for recall violations, other manufacturers saw it as a message (i.e. we will make you pay and you will pay dearly) and don’t want to be on the pointy-end of a federal investigation for not providing timely recall notices.

Manufacturers and NHTSA can issue recalls, and they are issued due to one of two reasons: 1) the vehicle does not comply with the Federal Motor Vehicle Safety Standards (FMVSS) or 2) the vehicle has a defect relating to motor vehicle safety. A recall arising for the former reason is quite rare as automakers ensure that vehicles meet FMVSS before they leave the factory and are placed on trucks bound for dealerships across the country. Thus, the majority of recalls relate to problems with a vehicle or a vehicle’s equipment that creates a safety risk. From steering column issues to tailpipes protruding a little too far from the rear bumper that can cause risk a burn risk, these notices will go out to the dealer and registered owner in the same fashion. However, many of these recalls generally do not affect the vehicle’s ability to drive. Per the National Automobile Dealers Association, the affected vehicles in a vast majority of NHTSA engaged recalls are acceptable to drive while awaiting repairs. So now the question is “What do with my vehicles with outstanding recalls?” The answer is, you guessed it, “it depends.” What you should do depends on if the vehicle is new or used, and, in the latter case, the severity of the recall.

New Vehicles

Each recall is categorized into “actionable” or “unactionable.” “Actionable” means that there is a fix available and “unactionable” means that the remedy is unavailable due to a back-ordered part or that a fix has not yet been developed. The Motor Vehicle Safety Act prohibits dealers from selling new vehicles that are subject to open recalls issued either by NHTSA or the manufacturer. [See 49 USC § 30120(i)(1)]. Accordingly, unactionable recalls affecting new vehicles are where problems arise. So, not only are you prevented from selling the vehicle, but California law also suggests that you can’t even advertise the vehicle for sale (because it is considered unavailable). [Vehicle Code § 11713(b)(1)(A)]. All the while, these new vehicles sit on your lot costing you money in terms of floorplans, insurance, depreciation, and the like. The good news is that federal laws provide dealers some protection here. If a remedy is not immediately available, the manufacturer must pay the dealer monthly payments of at least one percent of the price the dealer paid for the vehicle, prorated from the day the recall notice was received (usually through a “stop sale”), until the vehicle is either repurchased (with transportation costs borne by the manufacturer) or a remedy is implemented (with the manufacturer reimbursing for the costs of parts and labor). [See 49 USC § 30166(a)].

The guidance as it pertains to new vehicles is fairly straightforward: if your new vehicle has an outstanding safety recall, complete the recall campaign before advertising it for sale (actionable) or ground it if there is no immediate remedy at the moment (unactionable). If the vehicle is grounded, be sure you are in close contact with your manufacturer to discuss your options. Time is money, as they say, and the costs add up the longer these vehicles remain unsold.

Used Vehicles

There are no state or federal laws that directly prevent dealers from selling used vehicles that have open recalls. However, the lack of authority in this area does not necessarily give you a green light to sell these recalled used vehicles with impunity. Rather, I would argue that dealers should proceed with even more caution. 

When considering whether or not to take a vehicle in on trade (or prior to selling a used vehicle), it is imperative that you check to see if there is an open recall on that vehicle. You can use government websites to do this by entering the vehicle’s VIN here: https://vinrcl.safercar.gov/vin/ and https://www.nhtsa.gov/recalls. If there is an actionable recall on the used vehicle, then it should be relatively easy to get it fixed at any dealership belonging to the vehicle’s line-make, and the recall campaign should be performed prior to offering the vehicle for sale. Thanks to Assembly Bill 179 (Reyes, 2019), dealers can now be reimbursed by the manufacturer for repair services covered under warranty at retail rates, among other things. So, as you can imagine, dealers are champing at the bit to do more warranty covered repair services (special thanks to the California New Car Dealers Association for this one!).

If there is an unactionable recall on the used vehicle, you will have to do further digging to see, among other things, if the manufacturer issued a stop-sale notice on the vehicle. Even when there are no federal or state laws that explicitly prohibit the sale of these used vehicles, your franchise agreement or other contracts with the automaker may require you to treat them differently. Is the vehicle still worth taking in on trade if the manufacturer issued a stop-sale notice?

So, you found that there is no stop-sale notice on the vehicle. What do you do if there is no potential fix on the horizon? This is where a little bit of common sense comes in, and where good communication with your manufacturer rep and your service department come in handy.  In California, dealers are also prohibited from selling new or used vehicles that are not in compliance with all of the equipment requirements of Division 12 (commencing with section 24000). [Vehicle Code § 24007]. If the unactionable recall pertains to an issue your service department confirms is a relative “non-safety” issue (such as a labeling concern), then it may ok to retail the used vehicle as long as the open recall is disclosed properly. However, you should think twice if it is a significant safety issue, especially if it can result in injury to the vehicle’s occupants. Remember your obligations under California laws regarding the sale of safe vehicles when determining whether or not it would still be a good decision to sell the vehicle. Prior to selling any vehicles with open recalls, we recommend collaborating with competent counsel to create policies and procedures on disclosing the recall and determining whether the vehicle is able to be retailed.  

Can I Just Have the Customer Sign an Acknowledgment?

Having the customer sign something acknowledging that the used vehicle has an open safety recall without a potential fix can potentially protect you from claims of misrepresentation or unfair or deceptive acts and practices. However, what an acknowledgment likely cannot do is disclaim away allegations of product liability. This means that if the customer gets into a motor vehicle accident because of an issue directly (or even indirectly) related to the recall, the dealer can still be held liable even though the customer knew that the recall existed when the customer purchased the vehicle. Additionally, this acknowledgment would not protect the dealer from any potential third-party claims if there were third parties involved in the motor vehicle accident.  Again, this is why we recommend collaborating with competent counsel to develop policies should you decide to sell used vehicles with open recalls.

What About Lease Buyouts?

When the vehicle is retailed to the prior lessee, the vehicle is considered used and should be treated like a used motor vehicle transaction. As such, if the dealer finds that the motor vehicle has a recall during the lease buyout process, the dealer should take the same precautions as noted above for used vehicle transactions.

Questions?

If you have any questions regarding recalls, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or hotline@autoadvisory.com.

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