Lemon law litigation is on the rise, and state laws are more and more geared towards protecting the consumer, not the manufacturer.
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Every state has its version of a “lemon law” designed to protect buyers of consumer goods, whether used for personal or household use, against “nonconformities” (i.e., product defects, the proverbial lemons of lemon law). That said, exactly which products may qualify as a “lemon” varies by state. For example, some lemon laws apply to any motor vehicles (new, used, leased), while other states exclude used or leased vehicles. Some states’ lemon laws exclude motorcycles and motorhomes, appliances, and consumer electronics, yet other states like California extend their lemon laws to nearly all consumer products.
When a consumer notices a defect in a consumer product, they must first notify the manufacturer or an authorized dealer and provide at least one repair attempt (most states require between two to four). Then, if the product has not been satisfactorily repaired—or, in some cases, even if it has been repaired—if it has been out of service more than a minimum number of days (usually 30 days or higher), the product is considered a “lemon,” and the consumer can demand a full repurchase and/or file suit.
California’s Song-Beverly Act
California’s lemon law—which applies to almost any product—is the Song-Beverly Warranty Act, undoubtedly the country’s most consumer-friendly lemon law. For this reason, the number of lemon law claims filed against manufacturers in California has skyrocketed in the last few years from 17,000 to over 22,000, and is now on pace for over 30,000 in 2024.
In California, once a product qualifies as a “lemon,” the consumer may recover not only the full purchase price but also attorneys’ fees and the costs/expenses of litigation, plus (in some cases) civil penalties. While the California requirements of what can qualify as a lemon (low number of repair attempts; few days out of services; etc.) are very consumer-friendly, most states allow for similar remedies, such that manufacturers must take special care.
Early Evaluation of Repurchase Demands
Once a consumer has demanded that a manufacturer repurchase the product, the ramifications can increase exponentially. It is therefore important for manufacturers—either via in-house counsel or through retaining outside counsel—to obtain documentation and evaluate, early, such demands.
For example, imagine this scenario: Your company manufactured a $40,000 vehicle that was sold in California. The consumer brings it to the dealership for repairs, which involves multiple attempts to repair the vehicle and results in it being out of service for over 30 days. The consumer then demands a repurchase. The manufacturer either refuses to repurchase or may simply not have enough information to do so. The consumer files suit, and while the lawsuit is ongoing, trades it in for $19,000 and purchases a different vehicle. The litigation results in a verdict that includes not only the repurchase price of $40,000 but also $60,000 in civil penalties (in this case, 1.5x the value of the vehicle), plus attorneys’ fees and litigation costs/expenses, which alone could be more than the value of the vehicle. And since the vehicle was already traded in, the manufacturer does not even receive back the vehicle as salvage or to offset the award by the $19,000 trade-in value.
Is this a windfall for the consumer? Yes, it is. Is it fair to the manufacturer? No, it is not. But this is exactly what happened when the California Supreme Court recently held that a vehicle manufacturer was not entitled to receive any offset for the trade-in value (or, obviously, the vehicle itself). One can only imagine the results if such decisions extend to other states, which could adopt a similar approach. What if ever-more-creative plaintiff’s attorneys all start to tell their clients—once they have demanded a repurchase and filed a lawsuit—to immediately trade in or sell their vehicle? Instead of a $40,000 vehicle, you have potentially manufactured a $600,000 recreational vehicle, which results in a $1.5 million verdict ($600k plus $900k in civil penalties), in addition to attorneys’ fees and litigation costs. And you don’t even get to resell the very expensive product or at least offset the value the consumer received by selling it during litigation. Thus the importance of evaluating early if a product should be repurchased, rather than waiting until litigation is initiated.
Controlling Costs through Arbitration
Lemon law litigation can be an expensive and lengthy process. One way to control costs is to divert such claims to arbitration. In fact, many states require arbitration before the consumer can file suit, which is beneficial to manufacturers. By arbitrating, manufacturers can often shift into a more straightforward, limited process that generates less defense costs and can potentially decrease later demands for fees.
That said, California’s Song-Beverly Act has no such requirement, which means manufacturers have to seek to enforce arbitration, usually in court after the consumer has filed suit. But recently, California courts have made it even more difficult for manufacturers to force arbitration because they are not typically signatories to the sale contract between the consumer and retailer/dealer, even though manufacturers may provide the warranty that contains the arbitration provision. In fact, this exact issue is currently pending before the California Supreme Court, which may hold that manufacturers cannot enforce even their own warranty’s arbitration provisions.
Repurchase and Litigate: What Manufacturers Can Do
To sum up, lemon law litigation—in California and elsewhere—is on the rise, and state laws are more and more geared towards protecting the consumer, not the manufacturer. Even before litigation, if a consumer demands a repurchase, manufacturers must evaluate fully—and early—to determine whether to repurchase or to litigate the claim (not every claim rises to the level of repurchase, and some indeed must be litigated). Even after a suit is filed, manufacturers can look to shift to arbitration instead when possible. And when arbitration is not possible, the focus still should remain on litigating swiftly so that there is less chance for the consumer to sell or trade in the product. Otherwise, manufacturers may face verdicts and penalties, well in excess of the product’s original value.
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