Auto sellers can't deduct the value of a trade in credit from the amount that courts may order to be paid to car buyers who sue under California's lemon law after buying defective vehicles, the state's Supreme Court has ruled.
Automakers had argued that refusing to allow them to make the deductions would essentially result in windfall payments to unlucky car buyers, greatly exceeding the value of the car or the amounts they may have paid fixing it.
On March 4, the California Supreme Court unanimously sided with plaintiff Lisa Niedermeier in the dispute with the automaker now known as Stellantis.
In that case, Niedermeier had sued Stellantis - then known as FCA US LLC - in Los Angeles County Superior Court, saying the company improperly rejected her multiple attempts to sell back a Jeep Wrangler she had purchased new in 2011.
According to court documents, Niedermeier paid $40,000 for the vehicle. But "almost immediately" the vehicle began experiencing chronic problems, including unspecified problems with the transmission, engine and exhaust, which allegedly "caused the vehicle to jerk, make rattling and grinding noises, and emit noxious gases," while also impairing "the vehicle's braking, acceleration, and turning."
According to court documents, Niedermeier took the vehicle in for repairs 16 times over four years, but technicians could not fix the problems.
In 2015, Niedermeier asked FCA to buy back the vehicle three times, without success. She ultimately traded it in for a new GMC Yukon, and received a $19,000 trade-in credit from the defective Wrangler.
A year later, Niedermeier sued, claiming FCA had violated California's lemon law, officially known as the Song-Beverly Consumer Warranty Act, in how they handled the sale, repair efforts and buyback requests for the Wrangler.
A jury sided with Niedermeier and ordered FCA to pay her $98,961, which included a civil penalty of $59,376 the jury said the company should pay for its "willful failure to repurchase the vehicle," according to court documents.
However, after the verdict, FCA asked the court to alter the verdict to reflect the $19,000 trade-in credit the company gave to Niedermeier toward the purchase of her new vehicle. The change to the verdict would be reflected before the civil penalty was calculated.
The effect of such a deduction would reduce the total award to $51,461.
After a Los Angeles County Superior Court judge denied that request, FCA appealed, and won on the question before the California Fifth District Appellate Court.
In arguments on appeal, FCA argued the judgment for Niedermeier was not in keeping with the intent and language of the law, which was created to restore vehicle buyers after purchasing defective vehicles.
In this case, FCA said the jury essentially allowed Niedermeier to collect both a full refund, and keep the trade-in credit, which they said amounted to a "windfall ... inconsistent with the concept of restitution."
They further argued that allowing car buyers to keep the trade-in credit on top of any amounts ordered by a jury would produce situations in which car buyers would simply choose to sue, rather than return their defective vehicle and request either a refund or a replacement vehicle, as allowed under the lemon law.
Niedermeier then appealed to the state Supreme Court, and they tossed out the appellate ruling.
In that decision, the Supreme Court justices said they believed allowing auto sellers to deduct a trade-in credit would essentially reward sellers who seek to make it as difficult as possible for car buyers to exercise their rights under the lemon law.
"Buyers have neither the obligation nor the ability to label their defective vehicles lemons," the Supreme Court wrote in its opinion. "Had FCA promptly refunded Niedermeier when its obligation to do so arose, the defective vehicle could have been reacquired and labeled a lemon by the manufacturer.
"Buyers like Niedermeier are only confronted with the possibility of selling or trading in their defective vehicles after manufacturers have failed to comply with their obligation to promptly replace or repurchase the vehicle. When this occurs, buyers may have no choice but to engage in self-help to relieve themselves of the burden of owning or possessing a lemon."
"... Allowing buyers to recover full restitution, as defined in the statute, incentivizes manufacturers to comply with their obligations under the Act."
The majority opinion was authored by Justice Kelli M. Evans.
In a special concurrence with that opinion, Justice Leondra M. Kruger said she generally agreed with the majority's conclusions. Justices Joshua P. Groban and Martin J. Jenkins joined in Kruger's special concurrence.
They cautioned that the decision should not be read to always entitle car buyers to the alleged "double recoveries" under the lemon law.
They warned, for instance, that allowing consumers to always recover trade-in credits or resale values could result in situations in which consumers willfully sell defective vehicles to other buyers, rather than returning them to dealers, as required by the lemon law. They could then sue auto makers and dealers, demanding full reimbursement, while pocketing the proceeds from the third-party sale
Kruger and his colleagues said they shared the concerns of automakers and the appellate court that this kind of decision could ultimately undermine the basis of the lemon law.
"An across-the-board rule giving lemon law plaintiffs a categorical entitlement to full reimbursement ... plus the proceeds of resale or trade-in would also raise significant questions of fairness," Kruger wrote in the special concurrence. "A rule permitting this sort of double recovery in every case would meant that plaintiffs who buy luxury vehicles could wind up turning a substantial profit if those vehicles later prove defective, while plaintiffs who buy economy cars probably could not - for reasons that have nothing to do with the extent of their actual losses or the extent of the manufacturer's wrongdoing."
In a statement released following the ruling, a spokesperson for FCA/Stellantis said: "FCA US LLC disagrees with (the) ruling. We remain committed to quickly and fairly resolving all customer warranty concerns."
FCA US LLC was represented in the case by attorneys Thomas H. Dupree Jr., Matt Gregory, Shaun Mathur, Clark Hill and David L. Brandon, of Gibson Dunn & Crutcher, of Washington, D.C., and Los Angeles.
Niedermeier was represented by attorneys Steve Mikhov, Roger Kirnos and Amy Morse, of the Knight Law Group, of Los Angeles; Sepehr Daghighian and Erik K. Schmitt, of Hackler Daghighian Martino & Novak, of Los Angeles; Cynthia E. Tobisman and Joseph V. Bui, of Los Angeles; Leslie A. Brueckner, of Bailey Glasser, of Los Angeles; and legal advocacy non-profit organization Public Justice, of Oakland and Washington, D.C.