Opinion ID: 426343
Heading Depth: 3
Heading Rank: 4

Heading: The Reimbursement Scheme

Text: 57 Petitioners MVMA and APRA challenge the reimbursement scheme set forth in the regulations. As a condition of certification, a parts manufacturer must warrant to vehicle manufacturers that its part will not cause a vehicle to exceed emission standards. 40 C.F.R. Sec. 85.2117(a) (1982). Under this warranty, the parts manufacturer is liable for all costs incurred by vehicle manufacturers because of the failure of a certified part under section 207(b). The regulations require parts manufacturers to reimburse the vehicle manufacturers for these costs: 58 The aftermarket part manufacturer's minimum obligation under this warranty shall be to reimburse vehicle manufacturers for all reasonable expenses incurred as a result of honoring a valid emission performance warranty claim which arose because of the use of the certified aftermarket part. 59 Id. Sec. 85.2117(b) (1982). Although EPA acted within its statutory authority in requiring such reimbursement, we find the scheme set forth in the regulations to be unworkable in several respects. Because EPA failed to address adequately the legitimate concerns raised by both vehicle and parts manufacturers during the comment period, we hold that promulgation of the reimbursement scheme was arbitrary and capricious. 60 We agree with EPA that it acted within its statutory authority in developing a reimbursement scheme, even though the statute does not specifically authorize such a scheme. Section 301 of the Clean Air Act authorizes EPA to prescribe regulations that are necessary to carry out the purposes of the Act. 42 U.S.C. Sec. 7601(a)(1). The reimbursement scheme envisioned by EPA would effectuate the purposes of the performance warranty and certification provisions of the Clean Air Act. As we explain today in our opinion in Automotive Parts, section 207(b) flatly prohibits vehicle manufacturers from denying a performance warranty claim on the basis of the use of any certified part, even if the part is defective. At 159-162. Congress did not want consumers caught in the middle of disputes between parts and vehicle manufacturers over who is responsible for an emissions failure. If vehicle manufacturers could deny a warranty claim by asserting that an aftermarket part caused the car to fail a short test, consumers would have no incentive to buy parts from independent manufacturers. See SEN.REP. NO. 127, 95th Cong., 1st Sess. 82 (1977) (The threat of such conflict might otherwise induce owners to avoid nonoriginal parts in favor of original equipment parts.). The anticompetitive effects would be comparable to those Congress intended to eliminate through the certification program. 61 Contrary to MVMA's assertions, EPA has not imposed vicarious liability on vehicle manufacturers for the failure of parts made by another manufacturer. As we explain today in Automotive Parts, EPA's regulations simply require a vehicle manufacturer to honor a valid warranty claim and then obtain reimbursement from the manufacturer of the defective part that triggered the warranty. Our approval of the broad performance warranty established by EPA is conditioned on EPA's development of a workable reimbursement scheme. At 161 n. 80. 62 Although EPA may adopt a reimbursement scheme to serve the purposes of the Act, we cannot endorse its failure to develop the details of such a scheme. It is unreasonable for the agency to require reimbursement as a condition for certification without setting forth some mechanism for resolving the disputes which inevitably will arise as a result of that requirement. After developing a detailed regulatory scheme for the certification of parts, EPA put forth only a broad outline of a reimbursement scheme and told the members of the affected industries to figure out the rest for themselves. 63 Petitioners MVMA and APRA challenge various aspects of the regulations which relate to the reimbursement scheme. Both criticize the lack of a dispute resolution mechanism and the vagueness of the reimbursement liability terms contained in the regulations. MVMA further argues that EPA should require parts manufacturers to demonstrate their ability to reimburse vehicle manufacturers as a condition for certification, and contends that the labelling and identification requirements for certified parts are inadequate. We consider each of these arguments in turn. 64
65 One of the major complaints advanced by the vehicle manufacturers is the absence of any mechanism for resolving disputes between parts and vehicle manufacturers over the liability for and amount of reimbursement owed in a particular case. There is no forum for resolving such disputes and no remedy available to the vehicle manufacturers to enforce the obligations that the regulations impose upon manufacturers of certified parts. EPA contends that the parties can go into district court to resolve any reimbursement disputes and that no other forum is required. Moreover, the agency contends that the threat of decertification is a sufficient incentive for parts manufacturers to honor their reimbursement obligations. See 40 C.F.R. Sec. 85.2121(a)(1) (1982). 66 EPA's position is unconvincing. Resort to district court is costly and time-consuming; in many cases it will be cheaper for the vehicle manufacturer to bear the full cost of the performance warranty than to engage in litigation over reimbursement for a particular repair. EPA concedes that the cost of litigating in federal court may be prohibitive, but concludes that the industry can create alternative remedies as it sees fit. We disagree. If reimbursement is to be a mandatory element of the certification program, then EPA must provide some forum for resolution of reimbursement disputes. EPA suggested before this court that arbitration might be one alternative mechanism for determining and enforcing reimbursement obligations. Establishing an arbitration procedure or similar forum for resolving disputes might be a reasonable implementation of the certification program. But it is for the agency to devise the precise contours of a dispute resolution mechanism subject to judicial review. Without some such mechanism, the reimbursement scheme, along with those portions of the performance warranty regulations that require vehicle manufacturers to honor a warranty claim caused by the failure of a defective certified part, cannot be sustained. 67
68 Under the regulations, parts manufacturers are obligated to provide reimbursement for all reasonable expenses incurred as a result of honoring a valid performance warranty claim which arose because of the use of a certified part. 40 C.F.R. Sec. 85.2117(b) (1982). The terms reasonable expenses and valid emission performance warranty claim are nowhere defined in the regulations, but are likely to become terms of art under the reimbursement scheme. MVMA and APRA contend that these terms are too vague to provide meaningful guidance to those engaged in a reimbursement dispute. We agree that EPA has failed to respond adequately to their concerns. EPA should apply its expertise in this area and flesh out these terms in the regulations to give guidance to parts and vehicle manufacturers. Alternatively, these terms could be clarified through the adversarial process in the forum selected by EPA to resolve disputes. Whatever method is chosen, EPA must make a reasonable effort to minimize the ambiguities that could lead to costly, protracted disputes over the amount of money owed in particular cases. 69
70 MVMA argues that EPA should require parts manufacturers to demonstrate their financial stability before being allowed to certify their parts. Without reasonable assurances that parts manufacturers are financially able to meet potential reimbursement obligations, MVMA believes vehicle manufacturers will incur expenses because of the failure of a certified part and never obtain reimbursement. Specifically, MVMA recommends that parts manufacturers be required to post bonds or otherwise demonstrate their ability to pay as a condition of certification. 71 In rejecting this suggestion in the final regulations, EPA countered that the financial instability of certified parts manufacturers is purely speculative. 45 Fed.Reg. 78,457 (1980). The agency indicated its willingness to alter the regulations if specific evidence is presented indicating the occurrence or potential occurrence of significant problems in this area. Id. at 78,458. We find this to be an adequate explanation of EPA's action and a reasoned application of the statute. 72 A central purpose of the certification regulations is to make certification as quick and inexpensive as possible so that small parts manufacturers will be able to overcome the competitive disadvantage of the performance warranty program. See 45 Fed.Reg. 78,449 (1980) (EPA has purposefully structured the program so that any party who manufactures sound parts and uses reasonable quality control should be able to certify with minimal expense or difficulty.). Posting a bond could have anticompetitive effects on small businesses in the aftermarket parts industry even though their parts may be qualitatively superior--from an emissions standpoint--to parts manufactured by companies that can afford to post bond. Given the pro-competitive purposes of the certification provision and the lack of any evidence suggesting widespread bankruptcies by small parts manufacturers, EPA's decision not to require parts manufacturers to demonstrate their financial stability is consistent with the statute. 73
74 MVMA claims that the regulations provide inadequate procedures for identifying the manufacturers of defective certified parts. EPA faced a difficult balancing task when it set forth labelling requirements for certified parts. On the one hand, if labelling requirements are too intricate and costly, small parts manufacturers may not be able to afford to certify. On the other hand, unless the manufacturer of a given part can be identified from the label, vehicle manufacturers may be unable to determine which company manufactured a defective part and thus may never recover their reimbursable expenses. 75 Although EPA properly was concerned about the labelling costs for small parts manufacturers, MVMA claims that the agency refused to adopt inexpensive procedures that would facilitate identification of a parts manufacturer. First, MVMA challenges EPA's failure to require that an identification symbol be permanent. EPA concedes that the symbols should be permanent, but contends that any vehicle manufacturer that believes a label is not sufficiently durable may object to the certification of that part. Such a procedure would require vehicle manufacturers to review every notice of intent to certify a part that is filed with EPA. If EPA is setting forth detailed labelling requirements as a condition of certification, it makes no sense to leave out the one requirement that would make the labelling effective: a guarantee that the label will be durable. The agency should not place the burden on vehicle manufacturers to check every notice of intent to certify a part when the agency itself concedes that the labels should be permanent. Because EPA concedes that a symbol should be durable, its failure to impose such a requirement cannot pass muster. 76 MVMA's second claim is that the agency failed to require that the same or similar symbols be used by only one manufacturer to ensure identification of the appropriate parts manufacturer. EPA concedes that such a requirement makes sense in light of the purposes of the labelling requirement, but claims that the issue was not raised during the rulemaking proceeding and is therefore not properly before this court. We agree. Section 307(d)(7)(B) of the Act precludes this court from considering objections to rules or procedures if they were not raised in a timely manner before the agency. 42 U.S.C. Sec. 7607(d)(7)(B). Because MVMA concedes that it did not challenge EPA's failure to prevent the use of similar identification symbols during the comment period, we lack jurisdiction to consider its claim.