Over the years I have noticed more and more dealerships offering in-house warranties on used vehicles, backed by the dealership. It is a wonderful selling point and can set the dealership apart from competitors. But frequently dealerships want to make warranty coverage contingent on all non-warranty repairs that are completed at the dealership.
Sounds great right? Capture all of the customer’s non-warranty repair money and cover a few warranty items over the life of the vehicle. Unfortunately, it’s too good to be true. Ask BMW- MINI Cooper. In March, MINI settled with the FTC for allegedly representing to customers that its new car warranty would be invalidated unless all repairs and maintenance were completed at MINI dealerships using only MINI parts. Both requiring non-warranty repairs to be completed at a MINI dealerships and requiring MINI parts were alleged violations of the Magnuson-Moss Warranty Act.
Federal law prohibits “tying” agreements in warranties. A warranty cannot be contingent on non-warranty work being completed at a specific location or using a specific product1. However, limitations on the quality of parts used for non-warranty repairs may be set. For example, the warranty could require, at a minimum, that synthetic blend oil be used for all oil changes, but it could not require a specific brand synthetic blend to be used.
If a dealership’s goal in providing a warranty is to have more face-time with the customer, the dealership may want to consider providing a free2 or pre-paid service package with the sale. For example, if the vehicle is sold with four free oil changes at your store, chances are the consumer will bring it back to you instead of paying out of pocket for the same service. This provides more customer interaction and provides the service department the opportunity to up-sell other non-prepaid and non-warranty items. Additionally, if a free service package comes with the vehicle, your dealership is able to control the quality of the parts used and of the services rendered.
Aside from the tying issue, I have noticed that some dealerships charge customers for in-house warranties. It makes sense; the charge would help offset any future repair costs and would be a nice short-term profit. However, Federal warranty law distinguishes between warranties and service contracts based on payment. A warranty is included in the sale price of the product, whereas a service contract is an additional (optional) charge. Your dealership may opt to offer an in-house service contract which allows the dealership to charge a fee. Even though service contracts are not specifically governed by Magnuson-Moss, federal and state consumer protection laws will still dictate what limitations may be included in the service contract. Before you offer your own service contract, check state laws to ensure the service contract complies with your state requirements.
The nuances associated with in-house warranties and service contracts require attention to the details of federal and state law. With the FTC’s recent action against BMW-MINI, warranty laws are back on regulators’ radar. In order to protect your business from unnecessary liability, your in-house warranty, service contract, or maintenance package should be reviewed by legal counsel competent in auto warranty law.