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A Better Partnership


Jan 2015
January 14, 2015

2014 was the Year of the Automotive Recall
How Can Suppliers Protect Themselves Amid Wave of Recalls?

Despite the fact that vehicles are safer and more reliable than ever, over 60 million were recalled as part of more than 500 separate and distinct recalls in 2014. Three times as many vehicles were recalled as were sold in 2014.

And what do these recalls cover? Virtually everything: ignition switches, transmission cables, electrical systems, seat belts, air bags, headlights, gaskets, power steering, wiring, faulty systems, even floor mats that can slide out of position. The list goes on and on.

As vehicles become more complex and new models are introduced in compressed time frames, defects happen. Everyone in the auto industry understands this, and knows that recalls do occur from time to time. But recalls have now taken on an added dimension—one that poses great risk to unwary auto suppliers. The focus is now on whether OEMs, and their suppliers, engaged in wrongdoing, cover-ups or intentionally ignored safety issues.

GM and Takata have had to face the damaging contention that they knew about safety-related product defects for many years and did nothing until very recently. GM’s independent internal investigation revealed, among other damaging missteps, that the ignition switch issue was passed around from committee to committee for years, without anyone taking ownership of – and resolving – the issue. Likewise, public reports indicate that Takata tested its air bags many years ago, but the results of those tests were destroyed and Takata took no action to remedy the issue until last year. To paraphrase the timeless Watergate questions, these auto companies have been forced to answer what they knew about their faulty products and when they knew it?

By not acting promptly, both GM and Takata are dealing with civil and criminal investigations by NHTSA, the Department of Justice and Congress, not to mention a plethora of civil class action lawsuits. Moreover, the companies are facing an avalanche of bad publicity and lost customer goodwill.

In what may be best described as over-correcting, other OEMs have been issuing recalls on an almost daily basis to avoid the GM/Takata problem. This has resulted in a record number of recalls in 2014, with 2015 promising to be the year the recalls are carried out. What should suppliers do? How can they protect themselves from the collateral damage of an OEM recall and how should they manage their own responsibilities?

The lesson that this recall mess teaches auto suppliers is clear: after receiving notice of a potential problem, be sure to fully and promptly investigate the issue with the assistance of in-house or outside counsel. Once a potential claim is raised, corporate management should conduct a robust internal investigation to determine what (if any) problem occurred, how wide ranging the problem is, and what should be done to correct it and ensure it doesn’t happen again. Suppliers need to:
  • Recognize that the game has changed: OEM warranty terms are often onerous, unclear and have an increasing tendency to shift liability to suppliers. Thus, your liability to your OEM customer on a recall may have been sealed years before when you entered into a potentially one-sided contract. At the outset of a program, before the contract is finalized, suppliers need to keep one key fact in mind: the devil is in the contractual details. Terms and conditions are the focal point of a contract, but they are not the only point. Smart suppliers will make sure their obligations are clearly specified and that their warranty responsibilities cover only things they actually control.
  • Work with legal counsel on contracting issues: Recall concerns will likely go much more smoothly and efficiently if you’re joined at the hip with your in-house or outside counsel and if these attorneys have been involved since the inception of the contract. Counsel may drive you crazy with what seem like niggling details while you’re writing a contract, but these “details” may save your company’s bacon when it comes to potential recall or repair costs, fines or incalculable damage to your company’s reputation.
  • React quickly when a problem develops: As fast as possible, you need to determine with the manufacturer exactly what the problem is, what your company’s role in it may be, your liability and exposure, and whether there may be similar problems with your product in other customers’ hands.
  • Assign a team and legal advisor to conduct the investigation: Once a problem is discovered or a recall contemplated, select someone with stature in the company who is knowledgeable and respected and will establish the most appropriate and efficient plan of action. Include your counsel so that the investigation will be protected from disclosure by the attorney-client privilege. This will allow for an unvarnished investigation of what really happened.
  • Start the investigation with a root cause analysis: This may require outside experts as well as internal engineers. Outsiders provide objectivity as well as a new set of eyes and sometimes a new level of expertise. To get at the answer, the investigation must include not only the product itself but the system within which it operates. Preserve every piece of evidence you uncover during the investigation—you’ll need it. It will be challenged by your customer, the government and attorneys for third parties in potential future litigation.
  • Set clear guidelines for how the investigation is messaged: A clear message, both internally and externally, to your customers, your suppliers, the government or others is critical. All messages must be accurate and consistent. And be careful what you write in e-mails.
  • Preserve relevant documents: Immediately preserve all documents and data that may relate to the problem being investigated. Even if a supplier has done nothing wrong in the underlying matter, inadvertent document destruction will create separate, significant legal exposure.
  • Finish the investigation as QUICKLY as possible: Avoid the temptation of a perpetual investigation mentality. There will always be new facts, but you need to follow your plan and reach a finish line. Get on with it. Get it done and carefully document your findings.
In a recall situation, do not shift blame onto another person if the problem is yours to accept but be sure you know if it’s really your problem, or how much of it is your problem, before you accept responsibility for fixing it. Suppliers can lose millions of dollars on product recalls, enough to put many companies out of business. Don’t let it happen to you.

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