United States: Top Legal Issues Facing Automotive Suppliers in 2014 - Commercial Litigation

Executive Summary

Recent developments in commercial contracting and commercial law will have important implications for the automotive industry in 2014. Original equipment manufacturers such as General Motors as well as suppliers continue to make changes to terms and conditions of sale that have important implications for all companies in the automotive supply chain. Companies at all levels of the supply chain must take care to evaluate their own terms and conditions and business practices to ensure that they are in compliance with their customers' requirements and account for new risks. In addition, as volumes continue to increase and production ramps up industry-wide, warranty issues will continue to be highly important. Increasing numbers of class actions for breach of warranty have been brought in recent years, and recent decisions highlight issues and strategies that suppliers may use to protect themselves against such claims.

1. GM NEW TERMS AND CONDITIONS

General Motors (GM) has issued new general terms and conditions (Terms) for direct material, customer care and aftersales, and tooling purchases effective for requests for quotation issued on or after July 15, 2013. Suppliers at all levels of the supply chain must be aware of how these changes will affect them. Even those suppliers at the Tier 2 and Tier 3 levels, who may not contract directly with GM, must take notice of the new terms and conditions, as suppliers from the upper tiers will flow these obligations down throughout the supply chain.

While some of the new provisions in GM's revised terms and conditions merely codify or clarify rights and remedies that already exist under the Uniform Commercial Code (UCC), many other provisions impose substantial new obligations on suppliers. Among other things, GM's new terms and conditions impose new obligations on suppliers to: 1) report deficiencies in GM's own specifications; 2) self-report any breaches of the contract, quality problems, or delays in delivery; 3) provide GM with greater access to suppliers' books and corporate information; 4) grant GM licenses for all background intellectual property rights relating to the goods or services in question, including those developed prior to the contract; and 5) name GM as an additional insured or beneficiary on all liability policies.

Suppliers at all levels of the supply chain must take care to evaluate their own terms and conditions and business practices to ensure that they are in compliance with their customers' requirements and to ensure that they have adequately accounted for new risks and obligations to which they may be subject.

2. WARRANTY ISSUES

As volumes increase and productions ramps up across the automotive industry, warranty issues are likely to be another critical issue. Increasing numbers of class actions for breach of warranty have been brought in recent years. See, e.g., Keegan v. American Honda Motor Co. Inc., et al., No. 2:2010-cv-09508 (C.D. Ca.) (class certified for breach of express warranty and consumer protection laws for alleged defect in rear suspension of Honda Civics). However, recent decisions have made clear that plaintiffs continue to face significant obstacles in obtaining class certification in automotive breach of warranty actions. In order to certify a class in federal courts, plaintiffs must show that there are questions of law or fact common to the class, and typically must also show that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods of fairly and efficiently adjudicating the controversy. The commonality, predominance, and superiority requirements have served as key hurdles for plaintiffs in recent putative breach of warranty class actions, allowing defendants to stave off certification of potentially large classes of warranty claimants. See, e.g., In re Ford Motor Co. E- 350 Van Prod. Liab. Litig. (No. II), No. 03-4558 (D. N.J.) (class certification denied for warranty claims based onalleged high center of gravity in vehicles); Daigle v. Ford Motor Company, Case. No. 09-cv-03214 (D. Minn.) (class certification denied on warranty claims for allegedly defective torque converters); Burton v. Chrysler Group LLC, Case No. 8:10-00209-MGL (D.S.C.) (class certification denied for warranty claims based on allegedly defective exhaust system); Martin v. Ford Motor Co., No. 10-2203 (E.D. Pa.) (class certification denied based on warranty claims based on alleged defect due to a poor design, causing premature metal fatigue).

Class certification for express warranty claims generally hinges on questions of when each class member purchased the vehicle, the mileage on the vehicle, service records, maintenance history, and whether the vehicle has performed satisfactorily. Implied warranty claims involve similar facts, in addition to questions of whether the vehicle is fulfilling its ordinary purpose. These individualized facts can stand in the way of meeting the commonality and predominance requirements necessary for certification of warranty claims. The substantive differences in states' interpretation and implementation of the UCC have also served as an obstacle to class certification. See, e.g., Burton v. Chrysler Group, LLC, Case No. 8:10- 00209-MGL (D.S.C.) (noting the "variances, nuances, and state-specific defenses (i.e., privity of contract, notice of breach, and waiver) and case-law interpretations which may come to be applicable in this case"). Courts also strongly consider the impact of voluntary recalls in denying class certification under the "superiority" requirement under Rule 23(b)(3). See, e.g., Daigle v. Ford Motor Company, Case. No. 09-cv- 03214 (D. Minn.) (Ford's voluntary recall provided most of the putative class the relief it sought in the case). Despite these hurdles, however, courts will nonetheless grant class certification in certain circumstances, including where all class members had the same design defect, the same warranty, and the same class of vehicles. See, e.g., Keegan v. American Honda Motor Co. Inc., et al., No. 2:2010-cv-09508 (C.D. Ca.).

If a manufacturer, distributor, or supplier is faced with a breach of warranty lawsuit or putative class action, key questions to consider include: 1) whether the claims fall within the statute of limitations; 2) the states covered by the putative class, and key differences between the states' adoption and interpretation of the UCC (including privity, reliance, and notice requirements); 3) whether the plaintiffs have adequately alleged a specific defect; and 4) whether the manufacturer, distributor, or supplier have taken steps which provide all or most of the relief sought by the putative class action, for example through a voluntary recall.

Automotive manufacturers and suppliers must also be cognizant of drafting their own warranty provisions in a manner that helps to ensure that the goods being sold meet performance requirements. The key to drafting warranty provisions is using language that establishes objective performance criteria for the goods being purchased. The criteria can only be developed after understanding the end-use performance expectations for the goods. Objective criteria (e.g., "10 cycles per minute"), as opposed to subjective criteria (e.g., "free from defects"), provide a bright-line test for the question of whether the goods conform to the contract. Clarity, specificity, and precision in this regard are critically important.

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