Automobile Warranty Law: What You Must Know To Win!

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AUTOMOBILE WARRANTY LAW: WHAT YOU MUST KNOW TO WIN!

By Stephen L. Swann, Esq.
Attorney at Law
Arlington, VA
[email protected]
© 2002 Stephen L. Swann

This article is not intended as a substitute for legal advice from an experienced automobile warranty litigation attorney. Hopefully it provides an overview for the layperson wondering about warranty rights and weary from fighting with car dealers and manufacturers.

INTRODUCTION

In 1988 I left Federal government service to practice "lemon" law in Virginia. Although I had never filed a lawsuit against an auto manufacturer or dealer, I was well aware of the grief shared by many owners of new motor vehicles. Since 1985, I had taught several times a year a seminar in Washington and Virginia titled "Winning Strategies for Car-buyers," focused on scandalous sales practices, negotiation techniques, and value strategies. It was obvious that the motoring public distrusted car dealers and the manufacturers even more than lawyers! Now I can claim two records in Virginia: the most successful jury trials against auto manufacturers, and the state's largest lemon law judgment, against Lexus in July of 1997 for almost $84,000.

This experience has not come without sacrifice, including many eighty hour plus weeks along with minimal compensation in too many cases. Regardless of what one thinks of the legal profession, those few of us willing to represent plaintiffs of modest financial means against the largest, wealthiest corporations in the world in "small value" cases reflect the truest attributes of the profession.

WARRANTY LAW OVERVIEW

The World Wide Web has become saturated with articles and advice on consumer issues - this is a wonderful revelation because there is no true substitute for sound consumer education.

A. A Broken Promise

A warranty is essentially a promise - in the automobile world of "lemons," the promise is by a manufacturer that it will repair, replace or adjust defective components during a specified period. For many automobiles, this period begins when the vehicle is first placed "in-service" and continues for three years or 36,000 miles, whichever comes first. (This stated warranty is termed an "express" warranty.) Usually the consumer's purchase triggers this in-service date; however vehicles such as "demos" have earlier in-service dates and thus shortened warranty periods for their buyers. The terms and obligations of the factory's promises, or the warranty, arise from two sources: the published warranty manual provided by the manufacturer, and the law, state and Federal, applicable to motor vehicles. While the manufacturer in its written warranty statement intends generally to limit its exposure to liability for defective vehicles, our legal system provides duties and rights for our protection.
Types of Warranties

Some discussion of warranties arising by operation of law - the implied warranties - is in order. Under the Uniform Commercial Code, adopted in most jurisdictions, a motor vehicle must be "merchantable" and "fit" for reasonably intended purposes. The fitness of a new truck can be in issue if, for example, its capacity to tow a boat or motor home is impaired. "Merchantability" is much more complicated - to be merchantable, the vehicle generally must be: 1) in at least average condition for the price paid, 2) capable of passing in the retail auto trade without objection, 3) fit for safe, reliable transportation, and 4) properly labeled. Because a state's lemon law can be triggered by breach of "any" warranty, be it "express" or "implied," (e.g., Virginia), implied warranty violations may give rise to buy-back rights for consumers.

There are four warranty or "lemon" type laws covering new and almost-new (i.e., some used) car purchases and often leases. The oldest developed in the nineteenth and early twentieth centuries as the common law of contract and warranty. Most of this unwritten law was transformed into statutes in almost all states as Article Two of the Uniform Commercial Code, the second category.

In the mid-1970's, the United States Congress responded to the cries of the public by enacting the Magnuson-Moss Warranty Act (15 U.S.C. 2301 et seq.) However, none of these three sets of law provided the necessary leverage for resolving complaints for vehicles which just could not be fixed within a reasonable time. Any right to a full cash refund for a manufacturer's breach of warranty did not exist until the advent of automobile warranty enforcement law - the automobile "lemon" laws adopted now in every state.

Lemon Law Elements

Typically, the elements common to almost all of these state lemon laws, the fourth type of warranty, are:

- a warranty complaint for which a manufacturer is responsible. The starting point is reading the printed warranty in the manual or owners guide. For example, if the new car is damaged after being backed into a light pole on the dealer's lot, it would be unreasonable to hold the factory liable under express or implied warranty theories.

- an objective standard to determine whether a particular vehicle is a lemon. This standard usually is defined as a "significant" or a "substantial" impairment to an automobile's use, or market value, or safety. In Virginia, statutory terms "unfit," "unreliable," and "unsafe" further determine whether the alleged impairment is significant.

- the problems covered by a state's law may include not only vehicle "defects," but also "conditions" giving rise the complaint. For example, to counter a manufacturer's defense that because "all models are designed in a particular way there can be no defect," state laws often protects consumers from "conditions" not qualifying as defects also. Toyota, in defending a Lexus 300 coupe's "kerclunk" noise from its rear suspension in a recent Virginia trial, argued that sporty type cars have tighter suspensions and are expected to make more noise. The jury rejected this explanation in light of clear videotape evidence exhibiting a loud and disturbing metallic noise from the vehicle when crossing speed bumps, and a Lexus Technical Service Bulletin describing the exact problem and suggestions for a "fix."

- right to cash refund, or optional vehicle replacement, and other amounts for bank finance charges, registration and taxes, dealer-installed options, expensive extended warranties

- minimal financial loss for vehicle use or depreciation which is usually computed by multiplying a designated number of miles driven during a designated period times one-half the IRS business use rate (.155/mile). For example, in Virginia, the maximum credit due the factory is .155 per mile times the odometer mileage existing at the first report of a significant defect or condition. Other states cap the mileage or use at a percentage of the purchase price; in Maryland, for example, the mileage credit does not exceed fifteen percent of the purchase price.

- right to reimbursement of legal fees and costs incurred to force a manufacturer to accept the return of a defective vehicle. Again, using Virginia law as an example, the consumer may be entitled to an award for "reasonable fees and costs" if successful.

- the existence of a legal "presumption" to shift the burden of proof in civil litigation to the manufacturer after a prescribed number of repair opportunities or days in the shop. In Virginia, an automobile is presumed to be a lemon, and repair efforts reasonable, if during the eighteen month period following purchase it has been out of service three or more times for a non-safety problem, or one or more times for a safety related defect or condition, as long as the problem continues. For vehicles in the shop and subject to repair thirty days or longer even if the problem has been eventually fixed, this presumption also exists. While this presumption may be useful at trial to the consumer/plaintiff, it does not generally mandate multiple repair attempts when the facts suggest futility. In some circumstances a single cure opportunity (e.g., repainting the entire vehicle delivered with defective paint or primer yet leaving it is an inferior condition) might be deemed reasonable for lemon law purposes.

- a defined period during which any lawsuit must be filed, termed the "statute of limitations." Each state's law must be carefully examined, and the language may be confusing. For example, suit must be filed under Virginia's Warranty Enforcement Act within eighteen months of purchase, unless the consumer resorted to the manufacturer's dispute settlement program. Using the program gives the consumer an additional twelve months after the decision to file a lawsuit. An attorney should be consulted on the statute of limitation issues -- there are several traps here!

- consideration of arbitration as either required, or optional, before filing any lawsuit

- a jurisdictional statement, specifying which vehicles fall within the state's law. In Maryland, the "lemon" must be registered in the state, for example. Virginia, by way of contrast, has no similar restriction, and therefore protects owners of vehicles purchased in Virginia but registered elsewhere (say, in D.C. or West Virginia or Maryland) and automobiles purchased and registered outside the state, but owned by citizens of the Commonwealth. Arguably, any breach of warranty committed in Virginia triggers lemon law rights. A single, unsuccessful warranty repair at a Virginia dealership probably is sufficient to open the jurisdictional doors to a Commonwealth courthouse for the unlucky consumer.

 

[Thai]

Part II

D. Money Damages

Using the Virginia lemon law as an example, a $20,000 minivan purchased a year ago, with bank financing, would predictably give rise to a $25,000 demand for repurchase to be completed within four to six weeks, along with reimbursement of finance charges, loss-of-use for shop days without a loaner, allowance for all or part of insurance premiums paid, attorney fees and related expenses, and other amounts.

As auto manufacturers continue to get hammered in court, they work harder and harder to avoid liability. Let me list a few pitfalls or issues whereby a manufacturer might escape the dreaded buy-back of a lemon.

Dangers and Pitfalls

First, there is the "notice" issue. In Virginia, and in most other states, the manufacturer is entitled to actual notice and one opportunity to attempt to fix or "cure" the reported defect or condition. Although this is certainly fair, few consumers realize that notice to the franchise dealer - the factory's designated warranty agent for repairs - may not suffice as "actual" notice. My office routinely advises callers to immediately write a letter to the factory, using the address in the warranty manual. Also, the statutory requirement for notice may not include a telephone call to the manufacturer's 1-800 customer assistance office. Again, if in doubt, write the letter. In Virginia, notice should have been given during the first eighteen months.

Another question often raised is whether used cars are covered by lemon law. Some states clearly say "yes." For statutes not specially addressing this question, lawyers often successfully argue that the law covers "consumers" who are "purchasers" or their transferees within a specified time from the vehicle's in-service date. Three circuit courts in Virginia, for example, have ruled that the purchasers of used vehicles reported as lemons during their first eighteen months qualified for repurchases from the factory. Simply stated, the warranty follows the lemon vehicle regardless of the number of times it is resold.

Leases can be another problem area. The first step is to check the particular state's law. Some states include "lease purchase" vehicles, and vehicles purchased and transferred to third persons with warranty rights. Virginia law covers leased vehicles.

Categories of money damages sometimes are not clearly addressed in state law. One example has to do with loss-of-use while the vehicle is in the shop for warranty repairs, and a similar loaner or rental vehicle is not made available. I routinely figure $30-50 per day if the client does not get a loaner or rental car. Where a rental is hired, its actual cost should be reimbursed. Liability and comprehensive insurance may also be reimbursable in lemon buy-backs. While the argument for liability coverage as an item of damages is less compelling, I believe the manufacturer should at least refund the comprehensive - fire and theft - portion of insurance coverage. Some manufacturers will agree to pay one-half of insurance premiums in a settlement. Reimbursement of special taxes such as personal property taxes, if applicable, may give rise to disagreements. Again, some factories will offer to reimburse the client for up to one-half of the amounts paid for annual personal property taxes, which can be as much as four or five percent of the assessed value.

Legal Alternatives to State Lemon Law

Sometimes a consumer's complaints will not trigger the lemon law entitlement to a full refund (or replacement), and other dollar amounts, regardless of creative lawyering. If, for example, he or she has failed to comply with whatever notice requirement exists under state law, the manufacturer will not ordinarily repurchase the vehicle. The consumer's fall back position may be recourse to two other warranty statutes, the Federal Magnuson-Moss Warranty Act and the state's Uniform Commercial Code.

Under "Mag-Moss," breach of a written factory warranty or an implied warranty arising by operation of law gives rise to money damages and reimbursement of litigation expenses. For breach of warranty, the amount of the loss is usually computed by subtracting the actual value on the date of purchase of the defective vehicle from the price paid. Payment or award of this diminished value is available in lieu of a full repurchase. I often explain the difference this way: under lemon law, the keys and title are handed over in exchange for a check reflecting the original purchase price, finance charges, legal fees, and other amounts. However, under Mag-Moss, the consumer receives a check reflecting how much was overpaid for the defective product, and then may either repair it or liquidate it. (Obviously handing the keys over to the manufacture, which is better able to liquidate a tainted lemon, is preferable.)

Magnuson-Moss brings to the bargaining table (or courtroom) two additional considerations: actual legal fees paid (or to be paid), and certain consequential damages. Let's address legal expenses first. Under this Federal warranty law, the consumer is entitled to "lodestar" legal fees, which are computed by the court (and not a jury) by multiplying the attorney's hourly rate times the number of hours expended in the representation. From this figure, a judge may make adjustments under state law. This objective standard is generally more favorable to the winning consumer than a subjective criteria established in many state laws... "reasonable fees and costs." In my somewhat extensive (and occasionally painful) experience, judges using the subjective standard often start "low" and work upward, while judges using the lodestar rule start at the actual hourly rate and fee, and make adjustments. (If you suspect that Federal pre-emption of state law should apply, I agree.)

There is an arbitration issue here. If the manufacturer subscribes to an arbitration program that complies with the Federal Trade Commissions arbitration regulations, then arbitration should be undertaken before filing a lawsuit for breach of warranty under Magnuson-Moss. Therefore, even if state law does not mandate arbitration, Federal law may. (Note that there is currently at least one Federal court decision contrary to such a view.) Whether Ford or Chrysler's arbitration programs, or the Better Business Bureau's AUTOLINE program complies, is subject to debate and beyond the scope of this "non-technical" discussion. My advice? Always ask for arbitration, even though many consider it a waste of time and money. Arbitration is free, and an attorney is not required ordinarily.

In contract law, damages sometimes are characterized as "incidental" to the breach, and a "consequence" of the breach. Most lemon laws provide reimbursement of the incidental losses, such as mileage expenses and substitute transportation. Consequential damages are even further removed from the breach. Perhaps one example would exist where the unsafe lemon is "parked" and a second automobile is purchased. The sales taxes might be appropriately termed as consequential damages. The Mag-Moss rule is this: unless these consequential damages are conspicuously disclaimed in the written warranty, the consumer is entitled to be reimbursed. Ordinarily a judge makes this determination - in my experience, he or she will actually thumb through the warranty book to try to find disclaiming language, with results being unpredictable!

I am convinced that the term "trial and error" has it roots in American jurisprudence - a trial can be like opening night of a theatrical performance. Few of the many "errors" that can possibly be committed by judge, jury, client, witness or counsel will give rise to an opportunity for a second bite at this judicial apple. For this, and other reasons, I routinely allege in a complaint's single count breaches of express and implied warranties by the particular manufacturer under state lemon and Uniform Commercial Code law, and under the Federal Magnuson-Moss Warranty Act. Other attorneys may do it differently. In some states, there may be reasons to also allege violations of consumer protection acts, common law fraud and contract, and other grounds for relief.

 

[Thai]

Part III

STRATEGIES TO WIN

Warranty litigation is undertaken for one purpose - to win. This includes resolutions by fair and reasonable settlements. Here are a few thoughts on "winning."

A. Letter Notification to the Manufacturer

I routinely advise prospective clients to send a certified letter to the manufacturer if there is a notice issue. It generally will have four paragraphs, in addition to clearly identifying the buyer and the vehicle's VIN (Vehicle Identification Number). These paragraphs notify the factory that 1) the vehicle has specific warranty problems that have not been properly repaired; 2) the writer seeks full and complete repairs under the factory warranty, or a refund of the purchase price and other amounts; 3) arbitration is requested; and 4) a response in writing will be expected within eight or ten days. There is usually no need to send copies of documents, such as repair orders, etc. If the manufacturer cares, it will invite submission of this information. In my experience, most manufacturers, surprisingly, never write back! Those that do often make the consumer even madder in their insensitive form letters.

Arbitration

Arbitration was addressed above. The trend at one time seemed to favor arbitration as a substitute for the judicial process. That may have changed - it is difficult to know because most consumers choose not to retain counsel to assist in preparing to arbitrate lemon complaints. Where a consumer has received an offer as a result of arbitration, and is being urged to hurry up and accept, he or she might want to consult an experienced warranty attorney to discuss the ramifications of acceptance (i.e., waiver of rights).

Automotive Consultants

My office often advises prospective clients to seek opinions from independent automotive consultants. Since I will not go to trial without an expert witness, I routinely bring the expert onboard four to six months before trial. I recognize that attorneys like doctors have differing views on how to treat the problem. However, I want someone other than my client available to educate jurors on the vehicle's particular problems, reliability and safety considerations, methods of repair, shoddy workmanship, loss of market value, etc. For this reason, I strongly favor use of teachers from public high school's automotive centers. They are routinely affordable, objective, and caring.

Trial Track

I prepare every case as though I will eventually spend between two and five days with seven Virginia jurors and a circuit court judge. Trial testimony can be monotonous, and afternoons long. I use photographs and videotaped demonstrations when the case calls for them. In a recent Lexus trial, it was obvious that the jury appreciated the opportunity to view two videotaped road tests showing the vehicle crossing speed bumps and the clear, metallic "kerclunk" from its rear suspension.

In a water leakage case, I would have the owners use blue paper towels to absorb water from the passenger compartment, and then photograph or videotape the results. Several years ago, for a Jeep Wrangler that often had several inches of standing water on its floorboards, I had the client remove the carpeting and store it in an air-tight plastic garbage bag... to be opened at trial for the jury to see and "smell!" (This case settled just before trial.) We all like "show and tell."

Technical Service Bulletins (TSB's)

For many mechanical and electronic problems, frequently there are Technical Service Bulletins published by the manufacturer to assist service department technicians charged with fixing the car. These are available from cooperating dealerships, on the Web, and from the Transportation Department's National Highway Traffic Safety Administration in Washington, D.C.

Alternatives to Cash Refunds

In my experience, most consumers burned by one specific brand vehicle do not want another one from the same manufacturer. However, most lemon laws give the consumer the option for a replacement rather than a cash refund. Generally, these swaps are done "MSRP to MSRP" with a deduction for odometer mileage at anywhere from $.17 to $.30 per mile. (The MSRP is the manufacturer's suggested retail price posted on the Federally - required window sticker and on the invoice statement delivered to the dealership.) Although a swap almost always requires payment of more money for a newer model year vehicle, it is especially valuable when a legal defect in the case may jeopardize the lemon law claim, such as lack of proper notification.

Sometimes manufacturers refusing to recognize lemon law rights, and unwilling to settle with a swap, will offer a "trade assist" cash credit of $2500 - 3000, or a no-cost extended warranty to the unhappy customer. An extended warranty may be worth $500 - 900 and provide some added protection. However, the trade assist financial credit for a replacement vehicle leaves the customer at the mercy of any greedy dealership desiring to profit from the consumer's misfortune. However, each of these alternatives may be preferable to litigation.

AVAILABLE RESOURCES

I am frequently reminded by new clients how difficult it is to locate a consumer attorney. Most of us car lawyers are "solo" or small firm practitioners with large overhead expenses and tight budgets. A consumer law practice must be geared for the public good; it will not provide the same financial rewards available in other speciality areas. Only after six years of practice could I afford a one-line Yellow Pages ad for "lemon law."

Most of my clients have never retained an attorney until their current disaster arose. Therefore, I am expected (and am glad) to provide more "hand-holding" than many other lawyers would want to undertake. New clients should remember that while these are small dollar value cases, often manufacturers rely on "scorched earth" defense tactics to discourage going all the way to trial. Remember an important point: defense lawyers make a lot of money winning and losing cases... and General Motors doesn't really care!

 

[Thai]

Part IV

I want to briefly address two topics: HOW TO FIND A CONSUMER LAWYER and HOW LAWYERS CHARGE.

Finding an Attorney

Let me first list resources for locating an experienced attorney for warranty litigation:

- referral from a respected attorney, business acquaintance, or friend

- the Center for Auto Safety, in Washington, DC (1-202-328-7700)

- the National Consumer Law Center, Boston, MA (1-617-523-8010)

- County and city bar associations

- County or city consumer affairs offices

- the Better Business Bureau

- state attorney general's office

Now, once you find a lawyer that has hopefully at least "heard" of the lemon law, ask these question:

- have you tried "to verdict" an automobile warranty case in state or Federal court?

- are you willing to take a case all the way to trial if required?

- do you have available one or more reliable and conscientious auto experts?

- will you consider various legal fee alternatives, and will you provide for review a copy of a proposed fee agreement?

- do you charge a consultation fee for a first meeting, and if yes, how much?

If most of the answers are "yes," you may be on the right track.

For individuals residing in less metropolitan areas, it may be necessary to retain a local attorney inexperienced in warranty litigation. It might be wise for him or her to contact an attorney to discuss the case, and perhaps to even "associate" in on the representation.

Structuring Payment of Legal Fees and Expenses

Attorneys, like all other business professionals, can not work for free. My dentist for crowns charges $300 - 400 per hour, but I recognize that for important matters, we sometimes just have to "bite the bullet" (no puns please).

Lawyers charge clients usually in one (or more) of three ways: flat fee, hourly fee, or contingency fee. Where the task is well-identified and the effort known, a flat fee can work. Drafting a will is a good example. However, I can not imagine spending between twenty and 500 hours (including appeal work) in litigation with an auto manufacturer on a pre-determined "flat" fee!

Hourly fees are the norm for many lawyers. Usually an advance payment is required to cover initial expenses and several hours of lawyer time. A predictable range is probably $1500 - 10,000. If a warranty matter can be resolved quickly with a letter and a few hours of follow-up work, no doubt the lowest legal fee will be incurred.

I tried and won a difficult VW lemon law case several years ago, and was forced to undertake an appeal... and spent around five hundred hours total for a few thousand dollars. The client was of average means, and the trial judge refused to award legal fees. After the loan was repaid to the lender to secure the title, there were only a few hundred dollars left to pay for expert charges, court costs, and transcripts. As my wife frequently has reminded me over the last ten years, these are valuable "learning" experiences.

My rule of thumb for circuit court litigation (with a jury) is this: to complete a warranty complaint ending in a two day trial, I would expect to spend between 100 and 175 hours, over the course of 12 - 10 months. If the defendant (or client) appeals, hundreds of additional hours may be incurred. Warranty litigation is hard work!

In the United States, unlike Great Britain, some plaintiffs find an almost - "free" lawyer willing to defer payment for legal services until, and if, there is a recovery. This is called a "contingency" fee arrangement, and the fee can be based on percentages applied against a recovery (e.g., 30% or 40%), or time spent multiplied by the attorney's hourly rate, or a combination of both. Because the lawyer undertakes the risk of working for free, his or her fee will predictably (and reasonably) be larger. If required by your employer, what salary would you expect to collect two years from now if any salary payment was contingent on forces and hoped-for success beyond your control? Like I said... in America, sometimes we get "free" lawyers.

Car manufacturers love "percentage" - based contingency fee arrangements and may delay any settlement offers until days before trial. Their reasoning is sound: why pay early if the charge is the same! This is the philosophy of the insurance defense bar also, as I have learned. Regardless of the fee arrangement between attorney and client, I believe it is imperative that the manufacturer understand that, as a Texas client once said, "Cheap was yesterday!" The manufacturer understanding that it is ultimately at risk for a $25-35,000 legal fee under state lemon law or Magnuson-Moss if it loses should consider a reasonable settlement offer well before trial.

CONCLUSION

Many manufacturers work extremely hard to correct warranty problems, and to make the customer happy. Moreover, these same manufacturers often recognize their accountability under state and Federal laws, and try to resolve complaints at the outset. In my experience, Chrysler and Volvo are good examples. At the other end of the spectrum are Toyota, VW, Honda, and General Motors. Ford, Subaru, Mitsubishi, Hyundai, Saturn, Land Rover, etc., are somewhere in the middle.

Warranty laws fall within the guise of "consumer protection." I like to think of it as consumer "justice" - we all are consumers, and we all deserve the protections of the law. Our "lemon" laws - state and Federal - when they "work" work quite well... it is up to us consumers and their attorneys to insure that they work at all.

Stephen Swann, Esq.
Arlington, VA
PS - Your comments (agreement, disagreement, and otherwise) are welcomed.
sls

 

[JungleJim]

Thanks Thai. That was a very informative article. Hopefully few of us will ever need to use any of the info, but it's good to pass along to family and friends.