What China's Lemon Law Will Mean For Manufacturers

Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY 10003 www.law360.com Phone: +1 646 783 7100 Fax: +1 646 783 7161 customerservice@law360.com What China's Lemon Law Will Mean For Manufacturers Law360, New York (October 15, 2013, 1:37 PM ET) -- During the last few years, familiar scenes have played out on the Internet of disgruntled customers taking sledgehammers to their prized automobiles, literally taking out their frustrations on what they consider to be lemons. With the introduction of China s new lemon law, however, these scenes may be relegated to the dustbins of Internet history as Chinese consumers now have an outlet in the civil court system. But how exactly will the Chinese lemon law, known as San Bao or the Three Guarantees, compare to the lemon laws of other countries? This article aims to compare China s new consumer protection statute with California s long-established Song-Beverly Consumer Warranty Act, and for comparison s sake, will also include a review of Germany s lemon law to offer a European perspective. While these three lemon laws differ, the similarities are surprising, and manufacturers and distributors should be prepared to apply some of the lessons learned defending cases in California and Germany to defending similar cases in China. Calif. s Song-Beverly Consumer Warranty Act The Gold Standard of Lemon Laws California s lemon law is codified in the Song-Beverly Consumer Warranty Act, Cal. Civil Code 1790 et seq., which was enacted in 1971. Prior to the introduction of California s lemon law, consumers had little to no recourse if their vehicle suffered from defects in materials or workmanship. While the law has been strengthened with various pro-consumer amendments over the years, the heart of the act has remained the same: If an automobile manufacturer or its representatives are unable to repair a buyer s vehicle after a reasonable number of attempts, the manufacturer shall either promptly repurchase or replace the new motor vehicle. The force and effect of the law is that manufacturers must honor their express warranties and repair vehicles under warranty, and if unable to repair a vehicle that suffers from a substantial defect, then they are obligated to repurchase or replace that vehicle. There is no requirement that California consumers notify the manufacturer of a warranty nonconformity before filing a civil lawsuit, and some California courts have interpreted the law to create an affirmative duty on the part of manufacturers to offer repurchase or replacement if warranted by the service history. Consumers are obligated only to provide the manufacturer or its representatives with a reasonable number of repair attempts. Page 1 of 5

A presumption of a reasonable number of repair attempts exists if during the first 18 months from delivery or 18,000 miles on the odometer, whichever occurs first: the same nonconformity results in a condition likely to cause death or serious injury that has been subject to repair two or more times, the same nonconformity has been subject to repair four or more times, or the vehicle is out of service by reason of repair a total of 30 or more days. Perhaps most importantly, California s lemon law provides that the buyer s attorneys' fees and costs shall be paid by the manufacturer or distributor if the buyer prevails at trial, creating a great incentive for plaintiff attorneys to file lawsuits. In lemon law suits filed in California, plaintiffs need not prove the cause of an alleged defect but instead need only establish that the vehicle was subject to repeat repairs for a problem that substantially impaired the vehicle s use, value or safety. If a plaintiff prevails at trial, the manufacturer must pay the plaintiff s attorneys' fees and costs and possibly even a civil penalty (punitive damages of up to two times actual damages). While the manufacturer is entitled to take an offset for the consumer s use of the vehicle before the problem first arose, the Song-Beverly Act remains a decidedly remedial statute liberally construed by courts for the consumers benefit, resulting in significant ongoing costs to manufacturers and distributors burdened by an onslaught of lemon law suits. While California s law purports to encourage resolution of lemon law claims short of litigation through the use of independent third-party dispute resolution processes, this simply is not the case. California s Civil Code Section 1794(e)(2) provides, If the manufacturer maintains a qualified third-party dispute resolution process... the manufacturer shall not be liable for any civil penalty pursuant to this subdivision. Unfortunately, this provision does not completely eliminate the threat of civil penalty damages as consumers can also seek civil penalties through Section 1794(c), which provides that civil penalties may be sought if a manufacturer willfully fails to comply with its obligations to repurchase or replace vehicles. "Willful" has been interpreted to mean knowing of your obligations but intentionally declining to follow them. So while the creation of third-party dispute resolution processes was intended to offer a means of resolving lemon law claims short of litigation, in practice, lemon law claims in California very frequently end up being resolved in California courtrooms. The pursuit of statutory attorneys' fees also contributes greatly to the plaintiff bar s strategy of foregoing dispute resolution processes and instead simply filing suit, creating a huge burden on the courts of California and a major expense to manufacturers and distributors who do business in California. The European Approach A Look at Germany s Lemon Law The German lemon law was completely revamped at the turn of the century and went into effect in 2002, in order to comply with the European Union s consumer protection directive. If a new vehicle purchased in Germany suffers from a defect, the buyer can demand that the defect be repaired, can have the purchase rescinded or seek monetary damages, the latter remedies, however, being in general conditioned upon the seller having failed to repair the defect. First, however, German law imposes a requirement that the consumer initially reports the defect. If a warranted defect is unable to be repaired, then a German consumer can seek to have the purchase rescinded, less an offset for use, or he or she can seek a reduction in Page 2 of 5

the price of the vehicle. The burden of proof remains on the buyer to prove a vehicle has a defect in materials or workmanship, but if a malfunction occurs within the first six months after purchase, there is a rebuttable presumption in the buyer s favor that the malfunction existed at the time of the purchase. Importantly, Germany s lemon law recognizes a statute of limitations of two years, which runs based on the date the vehicle was delivered. This is a big distinction between the German and Californian approach as California s statute of limitations for lemon lawsuits is four years and is generally regarded to begin to run only after the buyer determines previous repair attempts were unsuccessful. As a practical matter, this means that more lemon lawsuits are filed in California than in Germany simply because California consumers have a far greater time period in which to bring suit. Another big distinction between California s approach and Germany s approach is based on the differing civil systems. Like all other civil suits in Germany, the loser of the lawsuit has to pay the other side s fees and costs, Section 91 ZPO German Code of Civil Procedure (ZPO). The claimant always has to pay court fees in advance, and if he wins his lawsuit, his court fees and attorneys' fees will be reimbursed by the other side. If the defendant prevails, however, the losing plaintiff must pay the defendant s fees and costs, it being understood that reimbursement of costs is limited to the statutory fees accrued pursuant to the German Law on Attorneys Fees (RVG), which are related to the amount at dispute and are typically lower than fees based on time involved. Whereas California creates no downside to filing a lemon lawsuit and losing, the German system naturally makes consumers more cautious before filing a lemon lawsuit, which means that more lemon law claims are resolved before a lawsuit is ever filed. China s San Bao or Three Guarantees China s San Bao or Three Guarantees went into effect on Oct. 1, 2013. Prior to the implementation of these measures, consumers had little to no recourse if a new vehicle had a defect in materials or workmanship. If a manufacturer determined a new car was not defective, and the car was not covered by any warranty, it was up to the consumer to pay for the repair. With the implementation of San Bao, Chinese consumers now have three options when dealing with problems in new automobiles: replacement (Bao Huan), repurchase (Bao Tui) or repair (Bao Xiu). San Bao now permits consumers to demand that a vehicle be repaired, replaced or accepted for refund when there is a severe and dangerous malfunction during a warranty period fixed in the regulation. This warranty period is set at two years or 50,000 kilometers and covers the vehicle bumper to bumper and three years or 60,000 kilometers for main components and systems such as the engine, transmission, steering, braking, suspension and electronic systems. In essence, San Bao forces manufacturers (defined as Chinese automotive manufacturers and importers of foreign cars into China) to stand behind and warrant the quality of automobiles sold in China. The replacement option under San Bao provides that if the same problem occurs more than five times, or if a new vehicle is out of service a cumulative total of 35 days or more Page 3 of 5

due to a product quality issue during the first two years or 50,000 kilometers, then the consumer is entitled to a new motor vehicle. The repurchase or return option provides that if certain component parts are not successfully repaired after two attempts (engine, transmission, steering, braking, suspension, axle, etc.), or if a safety issue has not been successfully repaired after two attempts, consumers can return the car. The repair option provides that if a repair exceeds five days, the manufacturer must provide a loaner or rental vehicle and that repairs of defects in materials or workmanship during the San Bao period must be covered by warranty at no charge to the consumer. Liability under San Bao extends to the manufacturers and sellers of the vehicle alike, meaning consumers need not establish privity of contract to seek out a remedy. While in practice, it will be the seller that bears the liability in these cases, sellers may be able to recover costs through dealer agreements with foreign manufacturers or importers of foreign cars. Consumers make claims under San Bao through written letters requesting repurchase or replacement, and a response is required in 10 days. Practically speaking, and especially for manufacturers with a high volume of sales in China, responding to demands during this limited time frame will be difficult. As knowledge of the law spreads, companies selling cars in China need to be prepared to timely respond to these demands. To prove one s claim under San Bao, the vehicle must be proven defective by an official quality inspection carried out by an independent third party. It is not clear at this point which side will bear the burden of the cost of that inspection, but in China, once a lawsuit has been filed, the losing side is responsible for the winning side s litigation costs (but not attorneys' fees). Conclusion The initial difficulties for manufacturers adapting to the San Bao will include finding sufficient resources to respond to demands under the law and in implementing the necessary technical support to timely and adequately repair vehicles sold in China to comply with San Bao. The organizational structures automobile manufacturers have in place for responding to lemon law claims in Europe and California should be recreated in order to respond to similar claims in China. Defenses available to manufacturers, such as noting that certain problems were caused by misuse, abuse, modification, alteration, accident damage, failure to properly maintain a vehicle or that the problem was caused by some other unwarranted condition remain available in all jurisdictions, so lessons learned in one jurisdiction can be easily applied to other jurisdictions. While China s lemon law is new and untested, it represents a game change in the automotive industry. Whether it mimics California s lemon law and results in the opening of a floodgate of litigation in China or follows the European model that promotes resolution of lemon law claims short of litigation, the requirements imposed by San Bao will greatly tax automobile manufacturers and will require significant resources and attention. --By Joseph A. Kaufman and Kelly Liu. Carroll Burdick & McDonough LLP Joseph Kaufman is a partner in the firm's Los Angeles office. Kelly Liu is an associate in the firm's Beijing office. The opinions expressed are those of the author(s) and do not necessarily reflect the views Page 4 of 5

of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. All Content 2003-2013, Portfolio Media, Inc. Page 5 of 5