A federal judge has curbed automaker Volkswagen's attempt to strike down an Illinois state law that VW asserts violates its constitutional rights by forcing it to pay millions of dollars more for customer warranty repairs completed at locally-owned VW dealerships in Illinois, as "handout" to politically-connected cronies of the Democrats who control Springfield.
The judge said VW is free to raise prices, if it wishes, to make up the difference.
U.S. District Judge John Tharp Jr.
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The law generally governs the ways in which car dealerships can operate, but also governs the relationship between Illinois car dealerships and the manufacturers who supply them with new vehicles to sell.
In 2022, Illinois state lawmakers, with the support of Gov. JB Pritzker and labor unions, changed provisions in the MVFA law addressing how much manufacturers must pay to their affiliated auto dealers in the state when completing repairs on new vehicles still covered by manufacturer warranties.
Specifically, the change in the law would apply a "multiplier," which would require manufacturers to reimburse their dealers for warranty repairs at "no less than the amount the retail customer pays for the same services with regard to rate and time."
The provision also generally applies a multiplier of 1.5 times what the manufacturer would regularly pay.
The law does not apply to electric car makers, including Tesla and Rivian, which market their vehicles directly to customers, rather than through independent dealerships.
VW challenged the so-called Multiplier Act in federal court. The automaker asserted the changes to the law amounted to unconstitutional taking of property, by forcing the automaker to pay more than it already was under existing contractual relationships.
VW claimed the law violated its rights to equal protection by giving unfair competitive advantages to electric carmakers, favored by the state's Democratic majority.
They also alleged the law amounted to unconstitutional restrictions on insterstate commerce, and violated the Illinois constitution in the way it was drafted and approved, among other challenges.
VW noted the law does not include a statement of purpose required by the state constitution, and appears to be the result of a desire by Pritzker and others to use the law improperly to boost pay for auto repair technicians.
VW has claimed the law has cost it more than $10 million in warranty repair costs since it was enacted.
The state asked the court to dismiss the lawsuit, claiming the law passes constitutional review and VW has no case.
Tharp sided with the state.
In his ruling, Tharp said he believed the law passed the so-called "rational basis" test. Under such judicial scrutiny, states and other governments need pass only a low constitutional bar of demonstrating lawmakers had some "rational basis" and interest in enacting the law to achieve certain policy goals.
The judge said the state asserted the law was needed to ensure "fair and adequate compensation for Illinois dealers" and for dearlers' auto repair technicians
VW asserted none of its dealers had ever filed a complaint about warranty repair reimbursement levels. VW said it amounted to "a handout to a politically powerful group at the sole expense of other private parties."
Tharp said it is not up to the courts to determine "the actual reason behind the legislation." Nor does it matter constitutionally if the legislation addresses an actual problem.
He said it is enough if state officials can demonstrate lawmakers perceived a problem, and acted in a reasonable way to address that perception.
"To be sure, the defendant's (state's) logic is reasonable; the Multiplier Act may not be the optimal or most direct way of increasing technician pay," Tharp wrote. "But at the same time, Volkswagen goes too far in characterizing Illinois' means of achieving that goal as irrational. It does not fly in the face of reason to conclude that increasing the amounts dealers receive for performing warranty work may result in the employees who perform that work receiving higher pay."
Tharp also tossed VW's arguments that the Multiplier Act violates its equal protection rights by excluding Tesla and Rivian.
While Rivian and Tesla sell cars, just as VW, they do not use dealer networks, so a law that governs relationships between car makers and their dealers cannot apply to automakers who don't sell their vehicles through a network of dealerships. Therefore, the state did not violate the Constitution by applying the law only to so-called legacy car makers, like VW, who use dealer networks.
"As far as the Court can surmise, if the newer EV (electic vehicle) entrants elected to use independent dealer networks, then they would be subject to the same treatment about which Volkswagen complains," Tharp wrote.
And the judge rejected VW's claims accusing the state of unconstitutional takings and of interfering with interstate commerce by denying VW and other car makers the right to seek to recover those costs in other ways.
Tharp agreed with lawyers for the state that the law does not block VW from increasing its prices to recoup those costs and to level the playing field for its dealerships in Illinois, versus those out of state.
The judge dismissed VW's lawsuit without prejudice, meaning VW could attempt to amend its complaint and try again to address the shortcomings in its arguments perceived by Judge Tharp.
In response to questions from The Record, VW did not indicate if it would appeal the ruling.
The company, however, released a statement, saying: "The Illinois warranty law's multiplier unfairly and arbitrarily increased automakers' warranty labor costs by 50%. While we are disappointed that we did not prevail on every claim, we appreciate Judge Tharp's ruling that we can recover all the unfair and arbitrary costs imposed by the law."
VW was represented in the action by attorneys Owen H. Smith, Matthew A. Bills, Edward F. Malone and Jack O. Snyder Jr., of the firm of Barack Ferrazzano Kirschbaum & Nagelberg, of Chicago; and Carolyn Shapiro, of Schnapper-Casteras, of Chicago.