Over the last several years, automobile manufacturers have gone to great lengths to curb consumer exports of their vehicles to foreign countries. Manufacturers face millions of dollars in losses annually on the sale of high-end luxury vehicles to places like China and the Middle East, where the sales of luxury vehicles can fetch two to three times the U.S. sticker price.

At a loss for how to prevent these exports on their own, manufacturers are forcing dealerships to act as unofficial enforcers, imposing stiff penalties against any dealership that unwittingly allows one of their vehicles to be exported overseas.

In their effort to force dealerships to police the export of luxury vehicles, manufacturers now insert strict liability provisions in their franchise agreements, imposing financial penalties, chargebacks, reductions in vehicle allocations, and in some cases termination of a franchise, when a dealership sells a vehicle that ends up overseas in its first nine to twelve months in service.

In response, dealerships are forced to go to great lengths to investigate potential purchasers. For example, before selling a high-end luxury vehicle, a dealership seeking to avoid penalties may be required ask the buyer uncomfortable financial questions to determine whether they can afford a luxury vehicle. Some dealerships are now even going so far as to require purchasers to sign an “Agreement Not to Export” wherein the buyer agrees that they will not allow the vehicle to be exported in the first two years of service, or face severe liability to the dealership.

For dealerships, unknowingly selling a vehicle to an exporter can be disastrous. Some estimate that manufacturers have charged dealers selling vehicles to exporters, even inadvertently, tens of millions of dollars in penalties and chargebacks. Four of the largest manufacturers of high-end luxury vehicles, BMW, Land Rover, Mercedes-Benz and Porsche, reportedly penalized their U.S. dealers with chargebacks totaling $30.4 million from 2008 through 2013.

Fortunately, a new California law aims to protect dealerships from oppressive penalties related to exports. Recognizing that a California dealership should not be held responsible for the unknowing sale of a vehicle to an exporter, the legislature recently passed Assembly Bill AB-1178, which recognizes that, “at least one manufacturer is disregarding [California] franchise law by imposing a strict liability export and sale-for-resale policy against dealers. These actions impose severe sanctions on dealers regardless of the fact that dealers are collecting sales tax and registering these vehicles in California and have no reasonable knowledge of the future fate of those vehicles.” Assembly Bill AB-1178 now prohibits these practices.

AB-1178, which went into effect in 2016, prohibits a manufacturer from taking any adverse action against a dealer unless the dealer knew, or reasonably should have known, of the customer’s intent to export the vehicle. What’s more, the new law creates a rebuttable presumption that a dealer did not have reason to know of the customer’s intent to export the vehicle if the dealer causes the vehicle to be registered in California, or any other state, and collects any applicable sales or use tax due to that state.  Most importantly, the law requires that the burden of proof for any violation of a manufacturers export prohibition policy be on the manufacturer, and not on the dealership.

In passing AB-1178 into law, the California legislature has taken an important step to protect its dealerships from a manufacturer’s overreaching export prohibition policies. If your dealership has been penalized by your manufacturer for the unknowing sale of a vehicle to an exporter, you should immediately contact an attorney to determine whether, and how, AB-1178 may protect your dealership.