I wish every state legislator received a training course in “Regulation Best Practices” that taught them how to balance the equities when contemplating their vote on a given piece of legislation. By that, I mean approaching regulation in the spirit of “If we demand too much, we will create mandatory compliance costs that will exceed the prevention of the harm we seek to avoid.” This must be weighed against regulating an industry too little, in which the potential harms to be avoided are great and the agency costs that would be required to avoid the bad outcome are minimal.
One of my favorite examples of sound regulation comes out of the State of California (and I don’t get to say that too often). In California’s Song-Beverly Consumer Act, which is often called the California (CA) Lemon Law Act, new motor vehicles sold to consumers contain implied warranties of merchantability and fitness that entitle them to free repair or refund on their vehicle purchase if the manufacturer refuses to fix it upon being given notice of the car’s defect.
The Lemon Law works as follows:
You buy the car. You subsequently discover that there is an issue–poor air conditioning, radio malfunction, poor-functioning belts or gaskets, you name it–and then you inform the manufacturer of the defect, they must repair it (presuming that this action occurs within California’s new car warranty period of the first 36 months or 36,000 miles. N.B.: Prior to the passage of the Lemon Law Act, the coverage period was one-year or 12,000 miles. That duration is no longer correct, though some unscrupulous dealers or manufacturers may try to argue otherwise).
If the manufacturer refuses to repair it, you are then entitled to a refund of your purchase. Your refund amount is the price that you paid for the car minus the value of the depreciation that occurs according to a set statutory formula. The California is that you take your total mileage, divide by 120,000 miles, and then deduct that percentage from the price of the vehicle.
Let’s say that you bought a car with 52 miles on the odometer. You drive it to the 2,052 mile mark when you discover that there is an issue with the head gasket / cylinder. The manufacturer refuses to repair your motor vehicle (in addition to refusal, any repairs lasting longer than 30 days or more than four attempted fixes also provide independent bases for a lemon law claim). At that point, you are entitled to a refund for the full purchase price minus the 2,000 miles driven divided by the statutory rate of 120,000. You would only have to deduct 1.67% from the price you paid to determine your refund amount. If you paid $40,000 for the car, you would have a California Lemon Law claim for $39,332.
Another advantage in California, which exists in all fifty (50) states, is that the lemon law provisions entitle you to a recoupment of attorney’s fees from the manufacturer if the claim is successful. Might as well pick up the phone and call Los Angeles’ best lemon law attorney, as the car manufacturer will pay the bill in the event you are successful (and if your claim is weak, the attorney will tell you so and won’t waste your time).
The only risk of a Lemon Law claim is that you do bring a lawsuit and lose. But that rarely happens because these types of claims are largely straightforward. The only way you lose a Lemon Law claim is if: (1) you are suing for a defect that arose after the warranty period; (2) you purchased a used vehicle “As is”, in which case, you were never subject to the Song-Beverly protections in the first place; or (3) the problem with your car doesn’t exist or exists due to your own fault (i.e. you drive a car into a tree, and file a Lemon Law claim for subsequent repairs.)
The reason why I like this type of regulation is that it does not prospectively limit the ability of a car manufacturer to hawk their wares. It is not an act that subjects car companies to redundant testing and the agency costs involved in preventing remote risks. But it is aimed at preventing bad behavior.
For most people, car purchases are one of the four biggest purchases they will make in life, alongside education, medical, and home purchases. When you are spending five-figures on a vehicle, it helps to have the assurance that the good you are purchasing actually works. Most likely, it is actually pro-business in that it incentivizes customers to buy new cars in the California marketplace because they know that they will be protected in the event of some failure occurring shortly after purchase. It even removes the consumer’s direct agency costs by forcing the manufacturer to pay the attorney fees in the event that a Lemon Law claim is legitimate.
The only vehicle purchasers that aren’t covered by California’s Lemon Law are those that purchase vehicles for commercial purposes (on the theory that commercial enterprises should be able to fend for themselves via contract), motorcycle purchasers (the California Assembly documents debating the Song-Beverly legislation indicate that they feared motorcycle purchasers would fabricate claims under the act if it included them), and sellers of “As is” motor vehicles (on the theory that the consumer is receiving a lower purchase by giving up lemon law claim protection).
This is close to ideal regulation. If there is a defect in a vehicle when a consumer is promised a vehicle without defect, a manufacturer should pay to make the consumer whole without the imposition of any hardship. It is clear cause-and-effect. The attorney-fee shifting provisions are important, as it prevents the consumer from having any agency costs and it informs the manufacturer that responsibility won’t be dodged due to the hassle of getting a lawyer involved. But it doesn’t impose unwarranted costs on the manufacturers like Dodd-Frank does on banks. It does not prospectively diminish a manufacturer’s ability to sell cars, but in the event something goes wrong, there is a clear accountability mechanism. It is a wise strategy for harnessing the power of capitalism to encourage growth but punish excess.
Notice: This article should be read for general information purposes only and should not be construed as legal advice of any kind.