The mounting tension on the Korean Peninsula poses the risk of another global supply chain interruption. Last week, General Motor’s CEO Cliff Akerson expressed concern regarding the growing lack of stability in the Peninsula and its influence on manufacturing there. Some have even opined that North Korea’s intention is not to inflict physical harm on its neighbor but rather to inflict financial injury upon it. Whatever North Korea’s goals may be, the situation brings into sharp focus the importance of managing and protecting supply chain integrity.

Building the right legal framework to support a supply chain is an essential element to ensuring its integrity in the face of global challenges. Taking an active interest in the terms and conditions of a supply agreement and winning points wherever possible in negotiations can make an enormous difference down the road when supply chain disruptions are threatened or occur. 

Here are some ways to build integrity into supply chains, particularly when they are international in nature. A complete article on the issue is available here: http://wnj.com/Publications/Rising-Tensions-in-North-Korea-and-Supply-Chain-In.

• Choosing the law that applies to the interpretation of a supply agreement and disputes arising with the supplier is critical. Whatever law is ultimately settled upon, it is most important to understand the law that applies – to contemplate how the applicable law will influence and impact the resolution of supplier disputes that may be reasonably anticipated and prepare for expected outcomes.
• Settling upon a mechanism in a supply agreement that produces enforceable results is also imperative. There is no bilateral treaty or multilateral international convention in force between the U.S. and any other country regarding reciprocal recognition and enforcement of judgments from our courts. International supply agreements often call for disputes to be arbitrated. The arbitral forum as well as language and location of any arbitration should be carefully considered with assistance of counsel.
• A buyer may prefer to see a force majeure term entirely omitted, or, if not omitted, at least buyer friendly in nature and narrowly tailored to circumstances that are addressed by its supply chain structure. Buyers prefer that supply agreements ensure that risk of loss remains with the supplier as long as possible and provides for the types of damage that will be reimbursed in event of breach. A buyer friendly termination term may also prove vital to moving on when there is a threat to supply.  

Pop Quiz: You become aware of a defect in a part that you manufacture and supply to OEMs for installation in thousands of new motor vehicles, requiring a major recall. What do you do?

Somewhat surprisingly, unless you manufacture replacement equipment or tires, federal regulations do not require you to do much. Because the OEMs will be responsible for conducting the recall itself, your primary obligation will be to submit the initial “Part 573 Report” to the NHTSA. In the report, you will identify the defective part, describe the nature of the defect, estimate the number of vehicles affected, provide a plan for repair or replacement and list the OEM or other suppliers to whom your part was sold. If the defect is not in your part but in a sub-component that is manufactured by another supplier, you will have to disclose the identity of that supplier.

To review all of this and other information you may be required to provide as part of your “Part 573 Report,” take a look at a blank report from the NHTSA’s website:  http://www-odi.nhtsa.dot.gov/recalls/forms/Safety_Defect_and_Noncompliance_Report_for_Equipment.pdf.

It is important to keep in mind, however, that the Part 573 Report may not be the extent of your responsibility in the event of a recall. While federal regulations may go easy on suppliers, you should expect that the supply contract with an OEM will pick up the slack.  This contract may outline the process for reporting any defects to the OEM or to your customer (if a higher tiered supplier), apportion liability for any such defects and an ensuing recall, and require you to provide assistance to the OEM in meeting its own NHTSA reporting obligations and in providing consumers with a remedy.

Though we are years away from “driving” one on the road, autonomous vehicles are becoming a driving force in industry and government. Google and other companies have logged hundreds of thousands of miles in their autonomous vehicles. California, Nevada and Florida have already passed laws to regulate testing and use of autonomous vehicles. Governor Snyder made a point of mentioning their importance in his State of the State speech.  And now the Michigan Senate is considering legislation. If you are in the auto industry, or in another industry that might use autonomous vehicles, such as mining or agriculture, this legislation will likely affect you.  

The Senate’s proposed legislation will amend the state’s Motor Vehicle Code to allow autonomous vehicles to drive on Michigan’s public roads for research and testing purposes. The legislation, Senate Bill 169, defines an “automated vehicle” as one outfitted with “automated technology” capable of replacing a human driver. These are vehicles that can operate completely independent of any human. Excluded from this legislation are vehicles with some autonomy features but are not fully autonomous, such as those with blind spot and parking assistance, cruise control or emergency breaking features. 

Under Senate Bill 169, manufacturers of automated technology may drive an automated vehicle on Michigan’s public roads solely for research and testing purposes. A human driver must be in the vehicle at all times to monitor its performance and to intervene, if necessary. The bill also requires that the automated vehicle be outfitted with technology that (1) allows a human occupant to easily disengage the automated technology, (2) clearly indicates to a human occupant when the vehicle is driving in “automated mode,” and (3) alerts a human occupant when an automated technology failure requires the intervention of a human driver.  

 If passed, this legislation could put Michigan at the forefront of automated vehicle development.  While this is certainly a move in the right direction, there are some concerns with the proposal that should be addressed before it reaches Governor Snyder’s desk. 

• The bill allows an “upfitter” — a person who installs automated technology into an existing vehicle to convert it to an automated vehicle — to transport or test the automated vehicle on public roads as long as the upfitter is “recognized” by the Secretary of State.  However, the bill fails to define “recognized” or outline the requirements an upfitter would have to meet before becoming “recognized.” Even though the current law uses the term “recognized,” with respect to subcomponent system producers, use of the term could have new and different implications for “upfitters” who do not fit the category of subcomponent system producers. 
• The bill defines “operator” as the person who “causes the automated vehicle’s automated technology to engage” whether or not physically present in the vehicle. Under this definition, an operator who pushes a button from miles away could arguably be considered an “operator” and, thus, subject to liability under the bill. This could affect automated vehicle testing in many ways, including liability and liability coverage.  California’s law limits “operator” to either the person in the driver’s seat or the person who engages the automated technology if there is no one in the driver’s seat.   
• The bill does not address other uses for autonomous vehicles. There is already talk about using such autonomous vehicles for mining and other industrial uses. Such use is likely to come about before we see autonomous vehicles on the road. 

 If you are an auto supplier involved in the autonomous vehicle field or interested in becoming involved in the field, or if you are in an industry that may use such vehicles, now is a good time to get involved and address these issues with the Michigan legislature before the bill becomes law.

The Warner Norcross & Judd Automotive Industry Group includes attorneys with extensive experience dealing with the automotive supply industry. Warner also has a highly experienced legislative/lobbying group that serves our clients’ interests when legislation is proposed. Let us know if we can help you.

Under the Michigan Sales Representative Act, you are required to pay your sales representative his commission “when due.”  The due date of a commission is determined by the contract, so it is important that the date specified in a sales commission contract is clear about any prerequisites to payment.  For example, a contract might state that payment is due after the sales person has returned any unsold products; and, if for any reason, the sales representative relationship ends, the sales representative may still be entitled to commissions due under the sales commission contract (which must be paid within 45 days after the relationship ends).

Failing to pay a sales representative commissions that are due may lead to litigation and possible penalties under the Act.  The penalty for failing to pay commissions that are due can be significant – commission plus any losses the sales representative incurred from the failure to receive commissions when they were due.  There may be additional penalties if the failure to pay is found to be “intentional.” 

Even though the sales commission contract cannot limit the penalties for failure to pay sales commissions, a well-drafted contract that specifically defines when commission is due may reduce the risk of penalties.  It is always best to be proactive and careful to ensure that your contract is properly drafted to minimize that risk.

Under the Michigan Sales Representative Act, a “sales representative” is any person employed to sells goods who “is paid, in whole or in part, by commission.”  Therefore, if any part of your employee’s compensation is earned on a commission basis, no matter how small that part may be, he or she is considered a sales representative.

Your sales representative may be protected by various wage laws.  If your sales representative spends more than fifty percent of his or her  job time working for you, you are required by the Fair Labor Standards Act to pay the minimum wage.  Currently, the minimum wage in Michigan is $7.40 per hour.  If your sales representative’s commission payments do not meet the minimum wage, you are required to pay the difference.

If your sales representative is not considered your employee, the minimum wage laws do not apply.  However, the line between an employee and an outside sales representative is a blurry one.  It is wise to discuss your employment structure with an attorney to clarify the nature of your employment relationships.  A carefully drafted contract may help to establish your sales representative as a non-employee, but in some cases proactive compliance with wage laws may be the only safe approach. 

Additionally, Michigan law generally prohibits a company from taking deductions from a sales representative’s commission.  You may want to speak with your attorney about including language in a sales commission contract that will address how the sales representative is to repay the company for any costs that need to be reimbursed. 

Failure to comply with Michigan and federal wage laws may expose you to litigation and severe penalties.  You should be careful and proactive about your employment and compensation structure to ensure that you are in compliance with these laws.

Did you know that your employees can be considered sales representatives, just like outside sales representatives? If you pay your employee in whole or in part by commission, he or she is likely considered a “sales representative” under Michigan law. When this is the case, it is advisable for you and your employee to have a sales commission contract that lays out the specifics of how and when the employee is paid and addresses other important issues.

There are no specific requirements under Michigan law for the form or content of a sales commission contract. A contract may be oral, written, no more than a couple of sentences, or exceptionally detailed. But just because any of these types of contracts may be legally valid, it does not mean that it is prudent. Here are a few things that you should keep in mind when working with a sales representative:

•  Write it down - It’s easy for everyone to agree on the terms of a contract … until they don’t. If a sales commission contract is not put in writing, you may find it difficult to establish what your sales representative’s commission should be if there is ever a dispute about it. So put it on paper and get it signed.
•  Make it specific - Generally speaking, a sales commission contract should cover any issues about which you might later disagree, such as the commission amount and how the commission is to be calculated (i.e., on a per sale or per customer basis). Additionally, a contract should indicate whether there are any prerequisites to payment of commissions, such as repayment of any advanced costs or return of unsold products.
• Renew it - Certain contracts have an expiration date, and if a contract says it will end in a year, it ends in a year. Courts generally won’t extend the term of a sales commission contract beyond a contract’s stated termination date. This is true even if the company and its sales representative continue to act as if the contract is valid. So if you want to continue with the contract beyond the expiration date, renew it in writing and get it signed.

If a sales commission contract is not carefully drafted, a dispute over its terms may result in significant costs and penalties. Under the Michigan Sales Representative Act, you may be liable for penalties of up to $100,000, in addition to the costs of litigation. It is best to anticipate the potential disputes and have a properly drafted sales commission contract to make sure that you are covered when your sales representative or employee no longer has your best interests in mind.

This past summer, Congress passed the Moving Ahead for Progress in the 21^st Century Act, instructing the National Highway Traffic Safety Administration  (NHTSA) to ensure that individualized vehicle recall information is made publicly available on the Internet in a database searchable by vehicle identification number (VIN). 

NHTSA suggests a “one stop shop”– a centralized database on its website, www.safercar.gov, which will collect and distribute recall data from all major OEMs.  The website currently allows for general searches based on vehicle make and model, but that search functionality will be upgraded to allow a vehicle owner to search for recall information using just his or her VIN.  The search results will be customized; providing the owner with vehicle-specific recall information, including whether the vehicle is subject to a recall, whether it remains “un-remedied,” whether it has already been repaired and when, etc. 

 Of course, this database can only be created and maintained with the assistance of OEMs.  NHTSA’s proposal would impose the following obligations on these manufacturers:

• Initially, OEMs will be required to submit to NHTSA the VINs and recall completion data for vehicles covered by a recall instituted within the preceding 24 months. 
•  When OEMs submit their Defect or Non-Compliance Reports to NHTSA, they must also transmit a table with VINs and recall completion data for each vehicle in an electronic format dictated by NHTSA. 
•  OEMs must continue to submit this electronic table to NHTSA at least once daily for 10 years.   

Federal Regulations already require OEMs to identify by VIN the vehicles involved in a safety recall and to provide recall completion data for each vehicle in their quarterly reports to NHTSA.  So, the burden of the proposed rule is not necessarily supplying the required information, but rather the requirement that OEMs update recall completion data every single day for 10 years.  Further, many major OEMs, including Chrysler, Ford, General Motors, Honda and Toyota, already have a VIN-based search tool available on their websites.  Requiring these manufacturers to develop a duplicate database specifically for NHTSA may unnecessarily expend resources while doing little to advance consumer safety.  During the comment period for the proposed rule, Ford suggested that NHTSA could accomplish its objectives simply by providing a link to Ford’s VIN-search web page.

 The comment period for NHTSA’s proposed rule closed on November 9, 2012, and the agency is currently analyzing comments it received.  To review those comments and the text of the proposed rule, see http://www.regulations.gov/#!docketDetail;D=NHTSA-2012-0068;dct=FR%252BPR%252BN%252BO%252BSR

Companies frequently overlook the importance of periodically updating their terms and conditions. They take a look at them only when they have an immediate reason to, such as when a dispute arises. Often when such a dispute arises, companies learn that their terms and conditions haven’t been updated in many years. In the interim, both the law and the company’s business model may have changed.

 For example, imagine a situation where you decide – or are forced to decide by your customer – to switch parts suppliers. You make the switch and suddenly you are faced with the potential need for a court order requiring the soon-to-be-former supplier to immediately turn over possession of tooling needed by the new supplier to continue production of the parts. Your claim to the tooling (and your petition for a court order) is based upon your terms and conditions of purchase, which are incorporated into your contract with the supplier for the supply of those parts. You discover that your terms haven’t been updated in many years. Do your terms address such a situation? Do they provide you with adequate protection in such a situation? Would you rather answer these questions now or when you’re faced with a situation where your former supplier has possession of your necessary tooling?

Periodically and proactively reviewing and, if necessary, updating your terms and conditions is a wise practice. Once a dispute arises, it could be too late. Also, taking the time, in the wake of a dispute or a potential dispute, to identify and remedy any deficiencies in your terms and conditions mayhelp you to more efficiently resolve or avoid similar issues in the future.

While most of the automotive- related media attention in the recent “fiscal cliff” debate focused on individual income tax issues and their potential impact on vehicle sales, the recently enacted legislation (the American Taxpayer Relief Act), contains many provisions that will impact businesses, including those in the auto industry. 

 These provisions include the following:

• The Act extends the Code Sec. 179 business expensing through 2013.  The Code Sec. 179 dollar limit for years 2012 and 2013 is $500,000 with a $2 million investment limit.  This extension postpones significant reductions to the dollar limit and investment limit that would have applied to these tax years.
• The Act extends 50% bonus depreciation through 2013.  Certain transportation and longer period production property will be eligible for 50% bonus depreciation through 2014.
• The Act extends the Code Sec. 41 research tax credit through 2013.  The credit would have expired after 2011 without this extension under the Act.
• The Act extends the Work Opportunity Tax Credit through 2013.  This credit generally rewards employers who hire employees from certain targeted groups, including disabled veterans, Long-Term Family Assistance recipients and others.
• Other business tax extenders that expired after 2011 have been extended through 2013 under the Act, including the following:
• New Markets Tax Credit
• Employer wage credit for activated military reservists
• 100 percent exclusion for gain on sale of “qualified small business stock”
• Reduced recognition period for S Corporation built-in gains tax
• Tax incentives for empowerment zones

The Environmental Protection Agency (EPA), working hand in hand with National Highway Traffic Safety Administration (NHTSA), developed a program aimed at reducing greenhouse gas emissions and improving fuel economy for 2017-2025 model year passenger vehicles.  This program arose out of an agreement between the Obama Administration, auto companies and the state of California on setting vehicle greenhouse gas limits.  According to the EPA, “(o)ver the lifetime of the model year 2017-2025 standards, this program is projected to save approximately 4 billion barrels of oil and 2 billion metric tons of (greenhouse gas) emissions, with net benefits up to $451 billion.”  http://www.epa.gov/oms/climate/regs-light-duty.htm.  The final rulemaking on this program was issued on August 28, 2012. 

Legal challenges to this program were to be filed by December 14, 2012.  Not surprisingly, a few petroleum, manufacturing and other groups filed lawsuits over this new program.  In keeping with the industry agreement with the Obama Administration, the auto companies did not file legal challenges to the new standards.  Several states, including New York and California, filed motions to intervene on the EPA’s behalf in some of this litigation.  It is not clear at this time what aspects of the rule will be challenged, as the Federal Court of Appeals recently declined to reconsider an earlier ruling upholding EPA’s determination that greenhouse gas emissions from motor vehicles endanger human health and/or the environment.