Extracted from Law360
When faced with a safety-related recall, automotive manufacturers necessarily scramble to get potentially defective vehicles repaired before drivers are exposed to the alleged danger. While the defects at the heart of some recalls have little impact on driver safety, others have been linked to serious accidents or even fatalities. Protecting the safety of the manufacturers’ customers is priority one.
However, in addition to serious consumer safety issues, recalls present challenges to the manufacturer in the form of massive financial burdens, brand management concerns and legal risks. While company executives worry about preserving the company’s reputation and profits, lawyers in the company’s legal department are consumed with a foreboding question: Will this become a class action? Given these multiple and sometimes divergent interests, it can be difficult for the factions that comprise an auto manufacturer to establish a unified goal and attendant strategy.
Goal 1: Simply Getting the Recall Implemented
Because recalls often span multiple vehicle models and years, effectively managing a recall can be a Herculean task. In 2014 alone, the auto industry recalled a record-breaking 64 million vehicles. In 2015, with the massive recall of Takata airbags, the total number of recalled vehicles may meet, if not exceed, the 2014 record. We know that the scope of recalls is often huge, but how many of those cars actually get repaired? According to the NHTSA, about 30 percent of vehicles affected by a recall remain unrepaired 18 months after a recall.[1] Carfax, which tracks used-car vehicle histories, calculates that more than 3.5 million cars now on the road have uncompleted recall work.[2] This tremendous number of affected but unrepaired vehicles is caused by a variety of issues, including limited supply of replacement parts, “recall fatigue” and poor communication of recall notices.
A mass vehicle recall creates an instant demand for replacement parts that sometimes simply cannot be met, at least not right away. This is precisely what happened following GM’s recall of almost 2 million defective ignition switches last year. GM faced what it called “extreme supply constraint,” such that its dealers could not stock the part in inventory and were told to place an order only if contacted by a vehicle owner. Replacement parts were not available to anyone, including dealers, for at least a month.
The urgent need for replacement parts is intensified by the fact that, unlike other categories of consumer goods, when a vehicle is recalled its owner likely has little choice but to continue using it. While maneuvering these challenges, auto manufacturers must also keep in mind that affected consumers will not patiently wait for a solution and will likely have even less patience for a rushed solution that ends up being ineffective.
Some auto manufacturers have countered this speed-of-repair issue by paying for or directly providing rental cars. For example, to deal with the delays GM encountered servicing the millions of cars subject to its ignition switch defect recall, it offered to pay for rental cars for its affected customers for the period leading up to the repair, as well as during the repair, or in the alternative, a $500 voucher to be used toward the purchase or lease of a new GM vehicle. Some companies simply reimburse customers for the cost of rental, while others take a more hands-on approach, directly supplying affected customers with their replacement vehicles.[3]
Another challenge in implementing a recall is recall fatigue. The ever-increasing number of recalls consumers learn of on a regular basis can cause even the clearest and most comprehensive recall notice to go unread or disregarded. In fact, 30 percent of drivers notified in a recall never respond.[4] While recall fatigue certainly accounts for at least some of the low consumer response rate, it also may be attributable to notices that fail to effectively communicate the problem and the remedial options available to consumers. Auto manufacturers have been accused of downplaying the potential harm in order to manage the pace and expense of remedial efforts.
A low response rate to recall notices and low participation in company-sponsored remediation offers may be seen by the manufacturers’ proverbial bean counters as a good thing, particularly when the company does not view the recall issue as one that creates a significant safety risk. Indeed, it may seem like an economically advisable option not to improve communications with consumers about the availability of remedial measures. A manufacturer may determine that its compliance with recall mandates is enough and that the fewer consumers who actually show up for a repair, the more money the company has saved. In other words, the goals of those within an auto manufacturer whose primary directive is profit may conflict with the goals of those whose primary concern is consumer safety or product quality.
Goal 2: Turning a Public Relations Negative into a Positive
Even when an auto manufacturer has gone to great lengths to provide quality service to its customers in the form of rental cars, vouchers and speedy replacement parts, often these measures will have less of a positive impact than the auto manufacturer hoped. Dissemination of insufficient or negatively biased information about the recall may overwhelm the company’s positive efforts. With the proliferation of social media and all of the interactions that occur over the Internet, the moment a customer is dissatisfied with the remedial process, everybody finds out about it. Vicious news stories bashing well-intentioned auto manufacturers may go viral overnight before the company has any opportunity to correct the story or add objective perspective on unfortunate realities. These media misfortunes may negatively impact an auto brand on a colossal scale.
Typically in the face of these scathing reports, manufacturers issue their own statements to attempt to balance the scales and to otherwise convey their regret and continued commitment to their customers’ safety. While these public statements certainly help manufacturers repair their injured reputations, as in so many arenas, actions may speak louder than words. Taking the remedial steps discussed above, and doing so as publicly as possible, may reinforce affected as well as future customers’ impressions that the company truly cares about their well-being.
If structured correctly, robust remedial measures may even provide new business opportunities. For example, the use of a voucher to be applied to a new vehicle instead of or in addition to providing rentals may actually generate more future sales. While this approach may not be enough to satisfy some disgruntled customers, it may provide a silver lining to the recall cloud by turning an otherwise unfortunate event into an opportunity, while at the same time looking out for the customer’s best interest. Such efforts to project a positive image of the company and improve its long-term reputation may run counter to the shorter-term financial interest in minimizing the number of vehicles the company ultimately has to pay to repair, but may ultimately be the appropriate long-term goal for the company.
Goal 3: Avoiding or Minimizing Legal Risk
The auto manufacturer’s analysis of its recall goals would not be complete without a thorough consideration of how its recall strategy may impact its legal strategy. While keeping consumers happy with excellent customer care and robust recall offerings will not prevent a recall from blossoming into a class action, would-be class members who feel that a car manufacturer cares about their well-being and has already made them “whole” may be less likely to participate in a class action. Further, making would-be class members whole prior to the initiation of a class action and providing substitute vehicles prior to the occurrence of serious, or even fatal, accidents may reduce the amount of damages that could be awarded in individual personal injury or consumer class actions based on negligence or loss of use theories. In these ways, a thoughtful approach to optics and public relations may have a synergistic relationship with legal strategy.
However, it is important to remember that remedial measures will have little effect on class action claims based on a diminution of value theory. In this popular style of “no injury” class action, the plaintiffs argue that their vehicles are either worth less than they paid for them because of the undisclosed defect that led to the recall, or that their cars have decreased in value as a result of the recall. In either version of this claim, the fact that the manufacturer has offered to repair the vehicle does not detract from, or lesson the likelihood of, a claim that the car is worth less by virtue of the fact that there existed an undisclosed safety-related problem.
Another legal risk that must be considered is that, regardless of how an auto manufacturer decides to manage its recall notice and implementation, its choices may be subject to legal review. For example, in one of the numerous ongoing class actions against GM related to the ignition switch recall, plaintiffs have alleged that GM’s failure to mention its free rental offering in its recall notice or on its website constitutes a violation of California’s “Secret Warranty” law. See Kelley et al. v. General Motors, No. 8:14-cv-00465 (C.D. Cal. 2014). Plaintiffs have also sought a preliminary injunction requiring GM to provide nationwide notice of the free rental vehicle policy.[5]
From even this brief analysis, it is easy to see that the decisions auto manufacturers face in the midst of a recall are anything but simple. The management of an auto manufacturer has numerous, and often competing, interests to weigh. But in recalls, as in life, sometimes the wisest approach comes not from knowing the right answers, but rather from asking the right questions. By taking the time to balance the various competing interests at the outset of a recall, an auto manufacturer can work toward a unified goal and accompanying strategy that will allow it to thrive despite the unfortunate occurrence of a recall.
[1] United States Government Accountability Office, Report to Congressional Requesters, GAO-11-603, NHTSA Has Options to Improve the Safety Defect Recall Process (June 2011).
[2] CarFax Press Release, March 20, 2014. http://news.carfax.com/index.php?s=25079&item=136466&printable
[3] In response to the ignition switch recall in 2014, GM put together a fleet of rental cars to use as loaners for those affected by recalls. The fleet included non-GM cars where GM’s supply was inadequate. GM even agreed to compensate the consumer for the difference in insurance in the event that the consumer was underinsured for their substitute vehicle. See http://www.edmunds.com/car-news/rental-companies-to-help-gm-with-loaner-vehicles-in-ignition-switch-recall.html
[4] https://www.washingtonpost.com/news/the-switch/wp/2015/05/20/one-in-seven-u-s-cars-just-got-recalled-heres-what-to-do-if-one-of-them-is-yours/
[5] This case was transferred to the MDL in the Eastern District of New York, No. 1:14-md-02543, and remains pending.