Article

As You Recall

Factory defects devalue inventories and raise the ire of plaintiffs’ attorneys. Compliance expert breaks down the high cost of recalls and your responsibilities under the Motor Vehicle Safety Act.

May 2017, Auto Dealer Today - Cover Story

by James S. Ganther, Esq. - Also by this author

The last few years have not been good when it comes to vehicle safety recalls. General Motors underwent Congressional scrutiny of certain of its ignition switches that led to fatal accidents. Many OEMs used airbag inflators from Takata that spewed lethal shrapnel like a Claymore mine. Toyota had to deal with cars that exhibited runaway acceleration. All of a sudden, the once-obscure topic of automotive safety became headline news, and it stayed there.

All of this led to a very real concern for dealers: What to do with cars subject to open recall notices? To sell or not to sell? If cars aren’t sold, who bears the cost of idled inventory and repairs? If cars with open recalls are sold, is the dealer liable if things go wrong and people get hurt?

Federal law is clear on this issue, except where it’s not.

What is a safety recall? Like beauty, it is all in the eye of the beholder, and how one beholds it depends on one’s interest.

Deadly Blades

True story: My wife, Melissa, drives a 2013 Chevy Equinox. Like most cars these days, the Equinox includes a windshield wiper switch mounted on the righthand side of the steering column. If you raise the arm three clicks to the highest position, the wipers run continuously, and furiously (the “monsoon” position). If you raise the arm two clicks, the wipers run continuously, but slowly (the “Raindrops Keep Fallin’ on My Head” position). And if you raise the arm just one click, you activate the wipers’ intermittent operation. By twisting a collar switch at the end of the arm, you control the frequency of the wipe.

Last August, the good folks at Ferman Chevrolet in Tampa called to inform Melissa that her Equinox was subject to a safety recall. The life-threatening defect? The intermittent wiper switch at the end of the assembly. Not the monsoon function or the “Raindrops” function, mind you, but the ability to wipe away precipitation at a more refined rate.

And so Melissa dropped off her 2013 Equinox and drove away in a brand-new 2016 Equinox as a loaner, which she liked just fine. We kept making car payments, but we weren’t putting any miles on Melissa’s car, and she got to drive a new copy.

About two months later, she returned that 2016 Equinox and was put into another new 2016 Equinox (she was told not to let the odometer go over 3,000 miles). This happened one more time, with an even newer 2017 Equinox. Then that car was sideswiped by an Uber driver. Ferman repaired the vehicle at their body shop (paid for by Uber’s insurance).

Finally, about a week before I wrote this article, Melissa got her original car back. We had actually forgotten what color it was. Oh, and I bought one of the 2016 Equinoxes that Melissa had been driving while her car was idled waiting for replacement parts. I bought it as the result of our extensive test drive — we liked the vehicle — and because it was deeply discounted as a result of being put into the rental fleet.

The point of that overlong story is to illustrate how expensive a recall can be. Think how much it cost to provide Melissa with new cars for over seven months. Add the diminution in value of all those new cars when it was time to pull them from the rental fleet and sell them at a loss. And don’t forget the cost of actually replacing the defective part. Then multiply our story by the thousands of Equinoxes affected. Math isn’t my strong suit, but it comes out to a very, very big number.

Then recall that the great bulk of those costs arose because the recall was safety-related rather than just cosmetic. I never thought of the intermittent wiper function as safety-related. Unlike airbags and seat belts, it is still an optional feature in many cases. So why would GM absorb so high a cost to ground the fleet?

Only because the downside could be so much more expensive. The famous starter switch, airbag and accelerator recalls I mentioned at the top of this article not only killed people — a very real tragedy — they took awareness of recalls to historic heights. And as Jesus said, “Wherever there is a carcass, there the vultures will gather” (Matthew 24:28). He was, of course, referring to plaintiffs’ lawyers.

We Sue Car Dealers

Source: National Highway Traffic Safety Administration
Source: National Highway Traffic Safety Administration

In the course of researching this article, I came across a website for a law firm that boasted WE SUE CAR DEALERS in all caps. One of the issues for which they promised to sue the pants off your local dealer was selling a car with an open safety recall. The firm flatly declared that dealers must perform safety recalls on used cars before reselling them (not necessarily true), and “Failing to do so constitutes auto fraud” (also not necessarily true).

But what was really chilling was what the law firm promised to do once you brought a potential case to their attention: “When we receive a call from someone who was sold a car with an open recall, our consumer auto fraud attorneys dig in and look at all the documents that they can get their hands on. We want to see the sales contract, your warranty, and financing information and, well, basically every document you received from the dealership. Oftentimes, we find larger auto fraud violations that aren’t even related to the recall.” Yikes!

With the vultures circling, OEMs are prudent to give the benefit of the doubt to defects that in less litigious times would not have been considered safety-related. So what’s a dealer to do? Let’s look at the possible variations on this theme:

1. Franchised new-car dealers with open-recall vehicles in inventory: This is the easy one, with clear federal guidance. Pursuant to the Motor Vehicle Safety Act, dealers may not sell vehicles subject to “stop sales” orders from the vehicle manufacturers or the National Highway Traffic Safety Administration, unless and until the defect is corrected. Dealers may still advertise and display those vehicles, but they can’t sell them or lease them. This makes it hard to earn a living.

To address the economic impact of stop sales orders, the MVSA requires the manufacturers to either repurchase vehicles subject to recall or provide affected dealers with an immediate remedy. In our case, GM had to reimburse Ferman Chevy for the cost of putting Melissa into a loaner until her Equinox was finally repaired.

Furthermore, manufacturers must compensate dealers with an additional 1% of the price they paid for the affected vehicles per month.

2. Used-car dealers with open-recall vehicles in inventory: Despite what one plaintiffs’ firm suggested, the MVSA does not prohibit selling used cars subject to open safety recalls, and doing so is not fraud per se. But just because the act doesn’t prohibit it doesn’t mean it’s a good idea. In fact, given the current climate, I would never advise a dealer to do so. Best practices would include:

  • Fix the recall before offering the vehicle for sale.
  • If the defect seems truly minor, disclose the defect in writing and have the customer acknowledge the defect in writing.
  • Talk to your lawyer before you declare any safety defect “minor.”
  • Run a VIN-specific check of open recalls as close in time to the sale as possible (perhaps as part of the delivery process). This can be done for free at SaferCars.gov. Print two copies of the report and have the customer sign one. Put this copy in the deal jacket and send the customer home with the other copy.

That last step might be the most important, for it is entirely possible a used-car dealer, or even a franchised dealer selling off-make vehicles, may not know about a specific recall. To a plaintiffs’ lawyer, it does not matter. The standard for liability is “knew or should have known” about a potentially dangerous condition the dealer placed into the stream of commerce. Since 2014, SaferCars.gov has made the “should have known” standard easy to prove.

So if you’re worried about your potential liability for selling a used car or truck with an open safety recall, you should be. Make it your policy to check the recall status of every used unit you sell, document the process, and never deliver a car with an open recall.

James S. Ganther Esq. is the co-founder and CEO of Mosaic Compliance Services. He is a dealer compliance expert and a prolific writer and speaker. Email him at [email protected].

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