Legislature(2017 - 2018)BELTZ 105 (TSBldg)
03/09/2017 01:30 PM LABOR & COMMERCE
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SB 56-PRODUCT WARRANTIES & REQUIRED UPDATES 2:38:00 PM CHAIR COSTELLO reconvened the meeting and announced the consideration of SB 56. 2:38:29 PM SENATOR CATHY GIESSEL, sponsor of SB 56, introduced the bill speaking to the following sponsor statement: Senate Bill 56 proposes fair treatment to Alaskan consumers and businesses. Heavy equipment is expensive and complicated. Most resource companies, contractors, and many other consumers are dependent on the availability of equipment to keep Alaskans employed and businesses running. Our state's remote locations and transportation challenges, coupled with high shipping costs, often can result in high costs to local dealers and distributors when delivering warranty and update services for a manufacturer's defective or deficient products. Many of these services are not reimbursed by the manufacturers who require this high cost work. This results in our local businesses, or their customers, absorbing expenses for shipping, transportation, and labor that should be paid by the company that manufactures the defective or deficient products, provides the warranty, and requires the updates. Senate Bill 56 protects buyers of heavy equipment. If, during the term of a warranty or, if earlier, within one year after the date equipment is delivered to a buyer, the manufacturer or dealer is unable to repair equipment after a reasonable number of attempts, the bill requires a refund or replacement of the equipment. Senate Bill 56 also would ensure that local dealers and distributors of heavy equipment, machinery, and tools used for construction, maintenance, resources development and similar activities are adequately compensated when providing required warranty service and manufacturer's required updates on the products they sell. Senate Bill 56 builds on existing state law pertaining to boats, and all-terrain vehicles (ATVs). The legislation provides clarity, and certainty, for the consumers that use and the manufacturers and dealers that provide the equipment that keeps Alaska's heavy equipment industries running. Senate Bill 56 would not apply to vehicles licensed for use on roads, boats, and ATVs; those items are covered under a separate and current statute. Senate Bill 56 protects consumers and balances the interests of local dealers to be adequately made whole for meeting their obligations to customers, while setting clear guidelines for manufacturers of heavy equipment products. SENATOR GIESSEL said her staff, Mr. Gialopsos, is available to take the committee through a sectional analysis if the chair wishes. 2:44:10 PM AKIS GIALOPSOS, Staff, Senator Cathy Giessel, provided a sectional analysis for SB 56 speaking to the following prepared document: Section 1: Enacts 45.45.772 - 45.45.788, which outline the obligations and duties of manufacturers, contractors, dealers, and distributors when providing "required services" which include warranty work, corrective work on defective products, and updates required by manufacturers. For simplification of this sectional, the word "dealer" is used instead of "dealer or distributor," the phrase that appears in the bill. Sec. 45.45.772 Requires a dealer to provide any manufacturer's warranty in effect at the time of sale to the purchaser. Outlines the obligations of each party when a contractor provides warranty service on behalf of the manufacturer. Sec. 45.45.773 Requires a dealer to explain the warranty coverage, including disclaimers, and limitations; prohibits a dealer from making a representation about a warranty that is not made in the warranty; and requires the dealer to provide manuals to the purchaser. Sec. 45.45.774 Requires the dealer to provide warranty service and to make all claims for warranty reimbursement in the manner established by the manufacturer. Sec. 45.45.775 Prohibits a manufacturer from restricting the nature or extent of labor or parts that are needed to perform the work in accordance with generally accepted standards. Sec. 45.45.776 Requires the manufacturer to follow the process outlined in this bill and standard industry claim procedures when paying a dealer for required services. Sec. 45.45.777 Establishes the minimum compensation for work performed by a dealer on behalf of a manufacturer. Specifies the minimum rate and time for labor costs. Also requires the manufacturer to pay for transportation and lodging costs if the dealer has to send an employee to the field to perform the work. Sec. 45.45.778 Requires a manufacturer to reimburse a dealer for parts used at the manufacturer's full suggested retail price. Sec. 45.45.779 If a part needed that is not in the dealer's inventory, requires the manufacturer to pay the cost to send the item, as soon as possible, to the purchaser's choice of either the dealer that sold the product or the dealer closest to the purchaser. Sec. 45.45.780 Requires the manufacturer to pay or disapprove a claim within 30 days or it is considered approved and accrues a penalty of 1.5% per month. Sec. 45.45.781 Requires a manufacturer's claim disapproval to be in writing and issued within 30 days of receipt of the claim. "Lemon Law" Provisions: Sec. 45.45.782 Requires the manufacturer or dealer to repair a product defect that is covered under warranty when reported by the purchaser. Sec. 45.45.783 If a product cannot be repaired after a "reasonable number" of attempts during the term of the warranty or one year after purchase, whichever comes first, requires the manufacturer to either replace the product with a new comparable product or refund an amount equal to the full purchase price minus a "reasonable amount" for the period that the purchaser was able to use the product. The purchaser can choose whether to get a new product or refund. Outlines how to calculate the "reasonable amount" for a refund. Sec. 45.45.784 Establishes a process for the purchaser to make a claim under 45.45.783. The purchaser must make a written claim by certified mail to the manufacturer within 60 days of the end of the term of the warranty or one year after the purchase date, whichever comes first. Outlines what must be in that written claim. Allows the manufacturer to make a final attempt to fix the item within 30 days. Sec. 45.45.785 States that the manufacturer does not have to replace/refund if the claimed product defect is either not a defect or resulted from alteration, abuse or neglect by a person who is not an authorized dealer. Sec. 45.45.786 Creates a rebuttable presumption that if the product has been in the shop for repairs three separate times or for 30 days during the warranty period or first year of ownership, whichever is shorter, a "reasonable number of attempts" to fix the product has been made. Definitions for language enacted in this bill: Sec. 45.45.787 Defines what products are covered by this legislation. Sec. 45.45.788 Establishes what qualifies as a "warranty service." Section 2: Amends the definition of "merchandise" in AS 45.45.790 to include "covered products" - a term used in this bill. Section 3: Adds definitions to AS 45.45.790 for terms used in this legislation. Section 4: Adds violations to the provisions in Section 1 to the list of unfair methods of competition and unfair or deceptive acts or practices found in AS 45.50.471. Section : Applicability - specifies that this bill applies to agreements entered into on and after the effective date of this act. 2:54:01 PM SENATOR STEVENS asked if passing this bill might result in a manufacturer such as Caterpillar deciding it isn't worth doing business in Alaska. SENATOR GIESSEL clarified that the vendor travels to the locations, not the manufacturer. She posed the hypothetical scenario of a vendor in Anchorage who is required to either travel to the remote location to provide warranty service or ship the equipment back to Anchorage for repair. Right now, the vendor is required to do that to cover the warranty, but the manufacturer may decline to pay the vendor's full costs. The Alaska vendor assumes the extra costs. SB 56 seeks to remedy that; the manufacturer must agree to cover the full costs. SENATOR STEVENS voiced concern about potential harm if manufacturers decided not to do business in Alaska if they had to cover what could be enormous additional costs. SENATOR GIESSEL suggested that he ask the vendors who are online to offer their perspective, but she believes it is unlikely that the bill would cause a company like Caterpillar to stop doing business in Alaska. 2:57:48 PM SENATOR GARDNER said she too shares that concern. It may be an unintended consequence that Alaskans would have to buy equipment in Seattle and the warranty would only be valid in the state of Washington. She referred to Sec. 45.45.787 on page 7 that refers to the products that are covered under the bill. She asked, if this is a good idea, why not apply it to all products sold in Alaska? MR. GIALOPSOS explained that this legislation was introduced at the request of some of the affected stakeholders that specifically work with off the road system manufacturing and dealer issues. The language is based on the legislation that passed in 2009 when all-terrain vehicles, boats, snow machines and other off-road vehicles were brought under coverage for warranty service in remote regions. The legislative intent in 2009 was clear that there was a delineation between items registered for operation on a road and those that are specifically purposed for off-road use. SENATOR GARDNER continued to question limiting the coverage to items involved in resource development or construction. She pointed out that it could be similarly expensive to get warranty work done on a commercial refrigerator that was shipped to Cold Bay, for example. MR. GIALOPSOS said the individuals who will testify can talk about the relationship between a dealer of industrial commercial pieces of equipment versus a home appliance from a big box store that provides a direct, through-the-manufacturer warranty. Those purchases are different for several reasons, one of which is the exclusivity clause for some franchise holders and dealers. He said it was the sponsor's intent to narrowly tailor the legislation to cover the products it does. SENATOR GARDNER asked if the provisions in subsections (b), (c), (d), and (e) that start on page 3, line 1, are the same in other parts of the country or unique to Alaska. MR. GIALOPSOS deferred the question to the Department of Law. CHAIR COSTELLO indicated the question would be held until later. SENATOR GARDNER reviewed the provision in subsection (e) on page 3, lines 17-20, that requires the manufacturer to reimburse a dealer or distributor for transportation and lodging costs to travel to a location to perform required service. She said a lot of her questions are about whether this is done in other states or is unique to Alaska. 3:03:49 PM SENATOR GIESSEL responded that it is impossible to compare the challenges associated with doing business in a remote area of Indiana, for example, versus the challenges of doing business in remote areas of Alaska that can only be reached by air. "It is in fact true that Alaska is different." SENATOR GARDNER referred to Sec. 45.45.785 on page 6 that talks about exceptions. She asked if a manufacturer would to need send somebody to Cold Bay, for example, to show that an alleged defect either is not a defect or is the result of an alteration by somebody who is not the dealer or distributor. MR. GIALOPSOS deferred the question to the people online waiting to testify. They can recount specific case studies, he said. 3:05:27 PM At ease 3:06:22 PM CHAIR COSTELLO reconvened the meeting and asked Mr. Sniffen to respond to Senator Gardner's questions. 3:06:43 PM ED SNIFFEN, Deputy Attorney General, Civil Division, Regulatory Affairs & Public Advocacy (RAPA), Department of Law, Anchorage, Alaska, said he is not aware of what other states do with lemon laws for large construction equipment. He agreed with Mr. Gialopsos that some of the dealers who are online to testify may have a more comprehensive understanding of how other states handle this. 3:07:26 PM SENATOR HUGHES referred to the list of products that are covered starting on page 7, line 7. She asked if the Department of Transportation and Public Facilities (DOTPF) will benefit from the bill, resulting in a cost savings to the state. SENATOR GIESSEL offered to follow up after doing research about whether DOTPF purchases equipment through a local vendor or goes directly to the manufacturer. SENATOR HUGHES said if the department does deal with local vendors, the list should be reviewed to ensure it is complete. CHAIR COSTELLO asked Mr. Sniffen why contract law fails to address the concerns that prompted the sponsor to introduce the bill. MR. SNIFFEN said most of these franchise relationships start with contract negotiations and over time it becomes something like an adhesion contract where the dealer doesn't have a lot of bargaining power. That's why states like Alaska have auto franchise laws. SENATOR STEVENS asked if a manufacturer could declare that a warranty is not covered in distant or remote locations. MR. SNIFFEN said that would be difficult to do for a manufacturer that sells equipment into a state knowing that it is likely it will be transported to a remote area. Warranties generally follow the equipment and unless there is a clearly stated exception, the manufacturer would probably be required to provide that service. SENATOR STEVENS observed that it is simple economics; if it costs too much to do business you find a way not to do it. He said he agrees with Senator Gardner's comment about unintended consequences but Mr. Sniffen doesn't seem to agree. MR. SNIFFEN clarified that he is saying the manufacturer might adjust the warranty after getting stuck with a large bill. He added, "It's hard to say what the consequences of this legislation might be." 3:12:50 PM SENATOR HUGHES asked the estimated annual dollar amount that dealers are paying for unreimbursed warranty work. SENATOR GIESSEL suggested the franchise dealers answer the question. She added that she has anecdotal evidence that they do not pass those unreimbursed costs on to the consumer. "They absorb that cost as Alaskan businesses themselves, and therein lies the problem." 3:13:36 PM At ease 3:13:55 PM CHAIR COSTELLO reconvened the meeting and asked Mr. Sniffen if lemon laws are in current statute. MR. SNIFFEN replied Alaska has two lemon laws. The 2009 ATV lemon law that was predicated on the existing automobile lemon law. Alaska also has a distributorship law in Title 45 that protects distributors of all products from certain practices of manufacturers. CHAIR COSTELLO observed that the committee heard similar legislation last week; the legislature is being asked to set the guidelines in certain areas because it doesn't appear that the contracts are addressing the issues. MR. SNIFFEN said this bill does not have the retroactive provision that SB 47 has. It would only apply to new contracts. 3:16:23 PM CHAIR COSTELLO opened public testimony on SB 56. 3:16:37 PM CHRIS GERONDALE, Construction Machinery Industrial, LLC, Anchorage, Alaska, testified in support of SB 56. He stated that his family has been in the construction and heavy equipment industry in Alaska since the 1930s. He works in the family business and also does contract work for other heavy equipment contractors and several mines in Southeast Alaska. He said that he can see this issue from both sides. He discussed heavy equipment warranties and product updates and noted that in both instances the manufacturer is not required to cover all labor or freight associated with these repairs. SB 56 would require manufacturers to cover a higher percentage of those costs. This will be particularly helpful for small contractors, farmers, loggers, and placer miners. MR. GERONDALE explained the process when there is a failure and the equipment is under warranty. First, the end user has to pay the airfare, travel labor, and travel costs to get the problem diagnosed. Once diagnosed, the part is ordered on a stock order, which can take four weeks or 15-20 percent of the construction season in Alaska. To speed the process the end user often elects to pay for expedited freight. Once the part arrives, the end user will again have to pay the costs to have the mechanic come back out and fix the piece of equipment. He estimated that on a $4,000-$5,000 warranty work order, the manufacturer may only cover $500. Product updates are similarly problematic. The costs can easily be $3,000-$4,000 on a repair that only takes two hours, which is what the manufacturer will cover plus maybe $450 in travel costs. The balance is put on the vendor or the end user. MR. GERONDALE said the only opposition to SB 56 that he has heard comes from the manufacturers. They argue that the additional cost will increase the price of equipment, but the reality is that the end user already assumes the burden of the additional costs. SB 56 puts some of the burden back on the manufacturer that built a piece of equipment that needs to be repaired. Responding to the concern expressed that manufacturers may stop doing business in Alaska, he pointed out that boat and ATV manufacturers did not pull out after the ATV lemon law was enacted in 2009. 3:22:13 PM SENATOR GARDNER asked where product updates are covered in the bill. MR. GERONDALE deferred the question to Steve Seward. 3:22:44 PM At ease 3:22:48 PM CHAIR COSTELLO reconvened the meeting. 3:23:10 PM STEVE SEWARD, Attorney for Construction Machinery Industrial, LLC, Seattle, Washington, directed attention to page 8, line 12. It is part of the definition of required services. 3:23:52 PM JIM HALLORAN, Caterpillar Inc., Peoria, Illinois, said he wanted to make three points. First, N.C. Machinery and Caterpillar have had an agreement in place since 1926 and there has not been an issue. Second, because Caterpillar's agreements are global, he disputes the statement that Alaska is unique. Third, he maintained that Caterpillar's contracts are working and have allowed the company to service its Alaska customers for over 90 years. SENATOR STEVENS asked how much of the burden would go back on the manufacturers if the bill were to pass. MR. HALLORAN explained that Caterpillar pays for parts. They do not pay for time and travel, but they will discount the price of the machine to cover things like that. The dealer appreciates that unique twist because they can use the money as they see fit if warranty service isn't required. For example, it could be used to provide an incentive for the customer to purchase the machine. 3:27:01 PM NICK YAKSICH, Senior Vice President, Association of Equipment Manufacturers (AEM), stated that AEM represents over 950 companies that manufacture off-road highway equipment. He made four points and reinforced Mr. Halloran's comments. First, they work with and support the dealer and manufacturer as a partnership to ensure customer satisfaction. Second, he has yet to hear any specific problems that have arisen with dealers in Alaska. In any event, they would prefer to work directly with the dealer to resolve an issue. Third, this bill infringes on the private contractual relationship between the manufacturer and the dealer. Fourth, they would prefer to work directly with the dealer and outside the legislative process to find a solution to ultimately serve the customer. 3:28:43 PM CHAIR COSTELLO held SB 56 in committee with public testimony open.