September 23, 2010
Written By Attorneys: Michael R. Nelson, Robert S. Stickley, G. Franklin McKnight IV
and Mark H. Rosenberg
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
The use of aftermarket vehicle replacement parts is receiving increased media attention. In November 2009, a demonstration by collision repair instructor Toby Chess at the International Autobody Congress & Exposition ("NACE") compared OEM and aftermarket parts by using a reciprocating saw to cut through an aftermarket bumper reinforcement bar, while only scratching the OEM equivalent. The demonstration has drawn criticism, but several media outlets have picked up on the story, including TV news stations and Consumer Reports, which has included in its October 2010 issue a sidebar titled, "Are low-cost replacement bumpers safe?" The increased media attention to aftermarket parts will likely attract the interest of plaintiffs' counsel, and additional issues have emerged recently in connection with the use of aftermarket parts.
On September 15, 2010, Fox 5 Atlanta aired an investigative report about Ford Motor Company's recent study on aftermarket parts. The Ford study involved a computer simulated crash test of an OEM part and an aftermarket part. Ford concluded that aftermarket parts raised "red flags" and "may increase the risk of injury" in a crash. Ford expressed concerns about the quality and long term safety of the aftermarket parts claiming that, depending on how an aftermarket part was manufactured, it may affect the operation of airbag sensors. Experts have disputed Ford's claim that all aftermarket parts were unsafe, and point out that it is in Ford's interest to deter customers from using generic-brand parts. Fox's report claimed that Ford's research attracted the attention of the National Highway Traffic Safety Administration ("NHTSA"), which will be reviewing Ford's findings.
Consumer Reports magazine's October 2010 edition features an article about how to save on insurance. In one of its sections, the article discusses the preference by insurance companies' to utilize less expensive aftermarket parts in vehicle repairs. It cites the Ford tests and other demonstrations that highlight the safety and quality issues of aftermarket parts. Elaborating on crash protection, the article specifically questions the safety of low-cost bumpers. In closing, it recommended that insureds refuse aftermarket collision repair body parts and that they demand the "knock-off parts" be replaced with original equipment if their vehicles were already repaired.
In response to the Consumer Reports' article, the Auto Body Parts Association ("ABPA") issued a statement challenging its accuracy. The ABPA's statement pointed out that the tests and criticism cited by the article were from at least one organization (Ford) with a financial stake in expensive original equipment sales. The statement also accused Consumer Reports of not involving the aftermarket parts industry in its reporting.
Beyond raising awareness about aftermarket parts' performance and quality, the OEMs have also sought legal protection from the International Trade Commission, claiming that aftermarket parts infringe on OEM design patents. Ford settled such a case in 2009 by licensing its patents to an aftermarket part manufacturer. However, the license agreement expires in 2011, at which time it is expected that Ford will continue to pursue its patent infringement claims. In June 2009, Rep. Zoe Lofgren (D-CA) and Sen. Sheldon Whitehouse (D-RI) introduced the Access to Repair Parts Act, which states that "it shall not be an act of infringement of any design patent" to make, use, offer, or sell any aftermarket parts. The bill is currently in the committee stage.
Due to the increased attention to the safety of aftermarket parts, NSF International Automotive Business Solutions - a non-profit quality control organization that promulgates standards for consumer products - announced earlier this year that it has developed an automotive parts certification program. NSF claims that the program includes the inspection of manufacturing facilities, quality assurance guidelines, comparisons to factory parts, and traceability procedures to allow for fast and effective recalls. Many states have laws governing the specification of aftermarket crash parts by insurance companies in the repair of claimants' vehicles.
The National Conference of Insurance Legislators ("NCOIL") - an organization that helps legislators make informed decisions on insurance issues - is drafting a Proposed Model Act Regarding Motor Vehicle Crash Parts and Repair, which "requires disclosure and consent prior to crash part repair or replacement; establishes conditions whereby insurers may specify use of aftermarket crash parts; and mandates permanent, transparent identification of crash parts." The NCOIL is expected to discuss the Model Act at its annual meeting in November 2010.
The emergence of aftermarket part issues occurred in the late 1990s, when the automobile insurance industry faced numerous putative class action lawsuits challenging the specification of aftermarket parts in the repair of insured vehicles. Several of these cases ultimately proved unsuccessful due to the inability of plaintiffs to prove on a class-wide basis that the use of such parts constituted a breach of insurance contracts. Most notably, in 2008 the Illinois Supreme Court overturned a verdict of over $1.1 billion in a national class action (Avery v. State Farm Mut. Auto. Ins. Co.) challenging State Farm's practice of specifying aftermarket parts that were purportedly "categorically inferior" to original equipment manufacturer parts. In so doing, the Court emphasized that the central question of whether the use of such parts constitutes the breach of a contractual promise to utilize "like kind and quality" parts could not be resolved absent individualized inquiries as to whether non-OEM parts were actually used in the repair of each vehicle, and whether the use of such parts failed to restore the vehicle to its pre-loss condition.
While it was widely expected that other jurisdictions would reject similar proposed class actions based upon the reasoning set forth in Avery, this has not always proven to be the case. In Smith v. American Family Mutual Insurance Co., the Missouri Court of Appeals for the Western District in 2009 reversed a trial court's decision to grant judgment notwithstanding the verdict in an aftermarket parts class action that resulted in a jury verdict entered in 2007 of over $17 million against an insurer. This decision, in tandem with the Missouri Supreme Court's subsequent refusal to address insurer's appeal in September 2009, may revive the plaintiff bar's interest in pursuing aftermarket parts class actions and leaves open the possibility that the quality of aftermarket parts can be determined on a class-wide basis.
In an effort to avoid obstacles to class certification, some plaintiffs have focused upon allegations that insurers have conspired to provide purportedly inferior aftermarket parts to their policyholders, while charging premiums that are alleged to be excessive in light of the quality of such parts. Such actions may be encouraged by an August 6, 2010 decision by the United States Court of Appeals for the Ninth Circuit in Perez v. State Farm Auto. Ins. Co. in which the Court held that such antitrust allegations did not constitute an impermissible challenge to the insurance rates approved by the California Insurance Commissioner. The Court found that antitrust claims that produce overcharges did not fall under the Insurance Commissioner's exclusive rate-making authority and further noted that the Courts have primary, if not exclusive, jurisdiction over antitrust claims.
For more information, contact Mike Nelson at 212.233.6251.
