Seyfarth's Future of Automotive Series
The California Department of Motor Vehicles (“DMV”) recently disclosed the results of its investigation of the “Care by Volvo” car subscription service (“CbV”) that was challenged as unlawful competition by the California New Car Dealers Association (“CNCDA”). As detailed in its Report and Supplemental Report, the DMV found that CbV is effectively a leasing program, and as such, Volvo is competing against its franchised dealers in violation of California law.
Subscription services like CbV have become increasingly prevalent. Several manufacturers and dealers now offer these services in an effort to meet the changing demands of consumers and an evolving industry. This activity has attracted the attention of state legislatures, with Indiana imposing a moratorium on such services (which expired earlier this month) and other states considering legislation that would require subscription services to be “offered through, or in partnership with” dealers. The CNCDA’s challenge to CbV, and the DMV’s decision, confirms that these services (and other OEM programs fueled by new technologies or innovation) will be scrutinized by dealers and regulators going forward.
Background on CbV. Launched in the United States by Volvo in 2017, CbV is marketed as a “car subscription” service. Customers who subscribe make a monthly payment that entitles them to the use of a Volvo vehicle of their choice for 24 months. The monthly payment is “all-inclusive” and covers the use of the vehicle, insurance coverage, routine maintenance, and excess wear protection. Unlike some of the subscription services offered by other OEMs, where subscribers can change vehicles regularly, CbV subscribers are limited to one vehicle. After 12 months, or halfway through the subscription period, CbV subscribers can upgrade to the latest model of their current vehicle or switch to a different model, but doing so requires them to sign a new 24-month contract.
Volvo offers CbV subscriptions directly to customers online. On the CbV website, the subscriber selects the vehicle model, color, and trim level, and Volvo confirms the subscriber’s insurance and credit eligibility. A Volvo Concierge member then contacts the subscriber to coordinate the date and time for vehicle delivery at the subscriber’s preferred Volvo dealership. The vehicle is wholesaled and delivered to the dealer, with the same “8% behind the line margin” being paid to the dealer as for other vehicles. The dealer assists the subscriber in completing the paperwork and executing delivery of the vehicle. In order to participate in CbV, dealers are required to sign a dealer lease agreement addendum that makes the dealers limited agents of Volvo.
Challenge by California Dealer Association. In 2019, the CNCDA filed a petition with the California New Motor Vehicle Board (“NMVB”) alleging that CbV violates various provisions of the California Vehicle Code. Specifically, the CNCDA claimed that (1) CbV creates competition between the manufacturer and its franchised dealers; (2) the addendum required to be signed by participating dealers modified their franchises without the required notice and opportunity to protest; (3) CbV gives preferential treatment in allocating vehicles and referring sales to participating dealerships that are controlled in part by Volvo; and (4) CbV constitutes illegal price packing. After Volvo responded to the petition, the NMVB directed the DMV to conduct an investigation into CbV.
DMV’s Key Findings and Conclusions. The DMV’s investigation included interviews of Volvo dealers and Volvo representatives, and a review of certain documentation, including Volvo’s website, CbV transactions, contracts, dealer files, and Volvo’s memo announcing CbV to its dealers. As set forth in its Report, the DMV made the following findings:
- Although marketed as a subscription service, CbV “is substantially a 2-year lease.” The DMV especially noted that the contract consumers sign is labeled “California Motor Vehicle Lease Agreement, Care by Volvo.”
- Volvo maintained a “port stock” of its “hot new model XC40” that was reserved for priority allocation to CbV subscribers.
- Volvo required CbV-participating dealers to execute an “Addendum to Dealer Lease Agreement” that made the dealers limited agents of Volvo and that allowed Volvo to control how the dealers offered CbV and to use dealer employees to consummate CbV transactions. According to the DMV, “[t]his made signatories factory controlled Dealers; not because Volvo owned them but because Volvo, in part, controlled them.”
- Unless they signed the addendum, dealers would not be allocated the port stock vehicles, including the XC40 models.
- “‘Millennials’ are understood to demand ‘subscriptions’ in higher proportion than other consumers and tend to be located in certain specific geographic areas.” Consequently, dealers “with an area of responsibility that includes a higher number of millennials would, and did, receive a higher allocation of port stock XC40s.”
- “All Dealers [who were interviewed] stated they would earn more on a traditional lease or sale, approximately $2,000 to $4,000 more, than a CbV transaction. Some Dealers interviewed also stated they could not offer a standard lease package equivalent to a CbV lease, for the same price.”
- “The manufacturer subscription lease competes against the traditional leases dealers sold because it is less expensive and precludes dealers from add-ons to the transactions.”
Based on these findings, the DMV concluded that CbV violated the Vehicle Code in the first three of the four ways alleged in the CNDCA’s petition. These conclusions are paraphrased below:
- Violation #1 – Competition with Dealers: “When Volvo offered the same line-make XC40 directly to consumers for ‘subscription’ lease, then Volvo began competing with the Dealers. When Volvo offered the XC40 subscription through its website, which is accessible and exchanges information with consumers everywhere in California, then Volvo was competing in the same line-make of vehicle in each dealer’s relevant market area (RMA). When Volvo used dealer employees Volvo controlled to consummate CbV transactions, this constituted Volvo competing with the Dealers from inside each dealership, which is within the RMA.”
- Violation #2 – Franchise Modification without Notice/Protest: “When Volvo had the Dealers sign the Addendum, making the Dealers agents of Volvo, rather than independent of Volvo as in the franchise agreement, then Volvo modified the Dealers franchise agreement. A franchise agreement modification required notice to the NMVB and each dealer to give them an opportunity to protest. Volvo did not give notice to the NMVB or the Dealers.”
- Violation #3 – Discriminatory Allocation of XC40’s: “When Volvo allocated XC40’s from port stock to Dealers offering CbV then Volvo discriminated in favor of factory, in part, controlled dealerships and discriminated against any dealership that did not participate in CbV. When Volvo allocated from port stock XC40’s to Dealers in geographic areas with higher numbers of millennials then Volvo did not make XC40’s available pursuant to a reasonable allocation formula that is applied uniformly to all Dealers.”
As to the fourth alleged violation, the DMV determined that illegal price packing did not occur because “[a]ll of the goods and services included in a CbV [subscription] are identified upon initial contact with inquiring consumers,” and “[t]he price or payment for the subscription is not inflated, or the maturity of a sale or lease extended, to disguise actual charges for goods or services added by the dealer to the contract.” The DMV noted, however, the existence of other violations beyond what was alleged by the CNCDA petition. For example, costs for maintenance, excess wear protection, road hazard, and tire and wheel protection, are required to be, but are not, separately itemized in the CbV subscription contracts. Further, the addendum constituted, in the DMV’s opinion, an attempt by Volvo to obtain a waiver of the notice and protest provisions for franchise modifications. The DMV also expressed its “concern” that describing CbV as a “subscription” might “mislead a consumer to believe they can opt out and cancel the subscription at any time whereas a ‘lease’ is understood to be binding for an extended period of time, which is the duration of the lease”––as the DMV went on to state, “Volvo baiting consumers with the word ‘subscription’ and then switching consumers to a ‘lease’ when executing the contract may be deemed ‘misleading.’”
On April 28, 2020, the DMV issued a formal warning letter to Volvo based on these violations. The letter, a copy of which is attached to the DMV’s Supplemental Report, notes that further violations may result in administrative, criminal, or civil enforcement actions, but that at this time the DMV is not taking such action.
Takeaways. The CbV decision offers several insights for OEMs operating their own subscription services. First, potential competition will be top of mind for dealers. Because of its structure, CbV was deemed to be more like a traditional lease and thus direct competition for dealers. The manner in which the service is marketed may also matter. The DMV found that “[w]hen Volvo offered the XC40 subscription through its website . . . Volvo was competing in the same line-make of vehicle in each dealer’s [RMA].” It is unclear whether the DMV meant that online marketing, alone, is sufficient to constitute competition with dealers, or if the finding is intertwined with the DMV’s determination that CbV is a lease. OEMs implementing programs seen as potential competition should anticipate greater scrutiny.
Second, consumer benefit is not enough. That a program may be innovative, procompetitive, or otherwise better for consumers does not necessarily mean it will pass muster. As the CbV decision demonstrates, state dealer laws prioritize dealers’ interests at the expense of competition and consumers.
Third, it is notable that the CNCDA led the charge against CbV. Dealer associations may attempt to take on a larger role moving forward given the recent decision by the U.S. Court of Appeals for the Third Circuit, in New Jersey Coalition of Automotive Retailers, Inc. v. Mazda Motor of America, Inc., which held that the plaintiff dealer association had standing to challenge a Mazda facility incentive program. The Third Circuit decision is discussed further here. At the same time, it remains to be seen whether individual dealers, armed with the DMV decision that CbV violates the California Vehicle Code, will now seek redress.
Fourth, details and structure matter. Regardless of how a subscription service is marketed or described, regulators will look beyond the label and evaluate the actual structure of the program. For CbV, the DMV ultimately concluded it was a lease. Other OEMs with a vehicle subscription program need to review and assess their programs.