McGrath Lexus Chicago Blog

Jan. 30–Toyota this week issued a “stop sales order” to address a safety-related defect associated with a significant percentage of its new-vehicle fleet. Click here for the company’s Jan. 26 message to its dealers. No Lexus Division vehicles are effected.

Dealers of all makes have voiced concern about the action. Important, the suspension of sales is confined to certain new Toyota models; used Toyotas are not involved. Also, no Lexus Division or Scion vehicles are affected by the stop sale.

Toyota dealers should carefully review the link above. Following is some information on the relevant provisions of the federal Motor Vehicle Safety Act (the “Safety Act”) and National Highway Traffic Safety Administration regulations that govern safety-related vehicle defect recalls.

1. The federal Safety Act prohibits the sale and delivery of new vehicles subject to orders such as the one Toyota issued yesterday unless and until the defect is corrected. 49 USC 30120(i)(1). (It is our understanding that Toyota does not yet have a remedy for the defect that can be applied to the new vehicles in dealer inventory.) This prohibition does not prohibit dealers from offering such vehicles for sale, as long as the dealer does not sell or lease the vehicles. 49 USC 30120(i)(2); 49 CFR Part 573.11(b).

2. While there is no recall remedy yet available for in-use (used) vehicles, the resale of such vehicles is not prohibited by the federal Safety Act. 49 USC 30112(b). However, other laws, including state product liability laws, may impose liability in this situation if (1) a dealer chooses to sell a used vehicle containing the safety-related defect, especially in the face of Toyota’s instructions that new vehicles should not be sold, and (2) that used vehicle is in an accident involving the defect.

3. The federal Safety Act contains provisions to ensure dealers receive compensation when a “stop sales order” is issued. These include:

· an obligation either to repurchase vehicles subject to defect recalls or to provide a remedy for dealers to implement immediately. Regardless, manufacturers must also compensate dealers with an additional 1% of the price they paid for such vehicles, per month, prorated from the receipt of the “stop sales” notice until the vehicle is repurchased or the remedy is implemented. 49 USC 30116(a) and (b); and

· compensation for parts and labor associated with the remedy. 49 USC 30116(b) and 30120(f).

4. In contrast to a safety recall to address a non-compliance with the federal motor vehicle safety standards, the federal Safety Act does not directly prohibit a manufacturer from selling to a dealer a vehicle that contains a known safety-related defect. However, as noted in point 3. above, the federal Safety Act would immediately require the manufacturer either to repurchase such a vehicle once it was sold to the dealer or to provide an immediate remedy to the dealer free of charge. And, as also noted above, it is our understanding that Toyota does not have a remedy for the defect that can be applied to the new vehicles in dealer inventory or which are in transit to dealerships.