In recent years, the term “unreasonable” has dominated the landscape of the warranty reimbursement space. Many dealers’ warranty parts and labor rate submissions have been adjusted or even denied based on claims by the original equipment manufacturers (OEMs) that the rates were “unreasonable” compared to the practices of other dealers in the market. Because warranty reimbursement code is governed by state franchise laws, there is variation to the language in these laws, some of which provide the OEMs with the ability to compare the rates to other dealers in the market and adjust if they deem the rates to be “unreasonable.” The intent of this clause was to prevent a dealer from temporarily inflating the rate for a short period of time to submit for a higher warranty parts or labor rate application.
However, many OEMs have interpreted these provisions in ways that may effectively reduce and even cap rates in a given market. Additionally, OEMs have adjusted the rates in states such as Texas, which has no “reasonableness” component, and Massachusetts, where the statute provides the rate “shall be deemed reasonable.”
Labor rate surveys can help evaluate the range of rates in markets where state laws contain reasonableness provisions. A survey completed for an Oregon Honda dealer showed that the three highest dealers in the market all had the same rate of $179.63, with the next-closest dealer only a few dollars lower. This has been a common theme with American Honda Motors (AHM) of late. Any Honda submission that exceeds the highest in the market will be reduced to equal to the highest in the market. As a result, they have effectively capped the highest rate in the market (or state) because any dealer that submits for a higher rate will be deemed “unreasonable” and reduced to the previously highest rate.
Similar adjustment methodologies have been observed among other OEMs, including:
State statutes that include reasonableness provisions generally do not define “reasonable” as a rate that is only slightly above the highest or average rate in the market. Additionally, instead of comparing the submitted retail rate to other retail rate submissions, these OEMs compare submitted retail rates to approved warranty rates, many of which have previously been adjusted downward. For example, the Oregon Honda dealer listed above submitted for a labor rate of $188.97 in its previous submission and was adjusted to $179.63 because AHM claimed the rate was “unreasonable.” As a result, when these other two Honda dealers submitted, they were compared to $179.63 and not the submitted rate of $188.97. A very similar situation occurred in Massachusetts with labor rate submissions of multiple Honda dealers.
In one warranty parts submission involving a Toyota dealer in Alabama, TMS calculated average parts markups using data from other dealers’ factory financial statements. These average rates include maintenance, accessories, tires and other parts that would be excluded from a warranty parts submission and, as a result, produce significantly lower average customer-paid markup rates.
Dealers have options for responding to adjustments by pushing back. This can typically be done by writing a rebuttal letter to the OEM defending its rate and explaining the dealer’s interpretation of the applicable law. However, some OEMs, such as AHM, NNA, TMS and BMWNA, do not acquiesce too easily, so it will require the dealer to engage an attorney who specializes in this space. This process rarely culminates in litigation but instead includes a rebuttal letter on the attorney’s letterhead and subsequent negotiation with the OEM’s counsel. This can be an effective method to help the dealer get closer to the submitted rate. Additionally, dealers may wish to advocate for statutory language prohibiting reasonableness adjustments to submitted rates through state associations and automotive law firms. States such as California, Virginia, Florida and, most recently, New Jersey have adopted language addressing reasonableness adjustments to submitted rates.
Navigating warranty reimbursement submissions and OEM adjustments can be complex, particularly in states with reasonableness provisions. Withum works with dealers to evaluate warranty parts and labor rate submissions, analyze reimbursement methodologies and support responses to OEM adjustments. Our team helps dealers understand their options and identify strategies that align with the applicable statutory framework.
For more information on this topic, please contact a member of our team.
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