The FTC has Issued a Consent Order on Every Dealer

December 20, 2023

By Barrie Charapp Beaty
Mahdavi Bacon Halfhill & Young, PLLC

January 2024 update: This Rule was set to go into effect on July 30, 2024, but has since been stayed by the FTC pending resolution of the legal action filed by The National Auto Dealers Association and the Texas Auto Dealers Association in the United States Court of Appeals for the Fifth Circuit.  Resolution of the Court proceeding will determine if the Rule is revoked or modified by Court order or if the Court finds in favor of the FTC, the Rule will presumably go into effect some time in later 2024.   

On Tuesday, December 12, 2023, much to the disappointment of those in the automotive industry, the Federal Trade Commission (FTC) issued what it calls the Combating Auto Retail Scams Trade Regulation Rule, but most dealers know it to be the “Vehicle Shopping Rule”.   The Rule becomes effective July 30, 2024.  This Rule is the FTC’s attempt to regulate how you do business and sell motor vehicles on a micro-management level.

We have written extensively when this Rule was first proposed back in July 2022.  Along with the National Automobile Dealers Association, state associations submitted detailed and extensive comments to the FTC during the 60-day comment period following publication in the Federal Register.

Unfortunately, much of the proposed rule was kept intact and the FTC moved forward with this Rule to the detriment of not only dealers, but consumers.  We highlight many important issues with the Rule that will negatively affect how dealers sell cars.

Who is subject to it?  A motor vehicle dealer licensed as such, that owns its vehicle inventory, and is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both, is covered.

We have already implemented what is required by this Rule.  We understand that many dealers have been abiding by much of the Rule for many years because they have implemented best practices based on what the law already is or based on implications of previous consent orders by the FTC.  However, we caution you that many of the prohibitions and requirements of this Rule go well beyond anything previously imposed on a single dealer or group under a FTC cease and desist order.

For example, the Rule requires “express, informed consent” but states that “a signed or initialed document, by itself” does not constitute express informed consent. What does that even mean?  We explore that further in the disclosure portion of our article, but the Rule offers very little guidance.

Additionally, the FTC noted in its comments that if the deal is negotiated in one language, “and a different language in its contracts, and the consumer does not understand and assent to the charges,” the dealer is violating the Rule.

What does the Rule require for pricing of vehicles?  The Rule defines “offering price” for a vehicle as the “full cash price for which a Dealer will sell or finance the Vehicle to any consumer, provided that the Dealer may exclude only required Government Charges.” For those that charge a document or processing fee, the fee must be included in the offering price, if it’s not a “required” government charge.  It requires disclosure of the amount of the fee and that its voluntarily and not required by state law.  Rebates may be disclosed to consumers so long as the offering price “remains clear and conspicuous, and any additional information is truthful and non-misleading” and complies with the Rule.  For Add-ons pre-installed on vehicles by the dealer or at the request of a manufacturer, and the consumer will pay for the pre-installed add-on, the Rule requires that “the amount of the charge must be included in the vehicle’s offering price,” and the dealer must comply with the Rule regarding disclosure and express, informed consent of that charge.

What are the prohibited misrepresentations?  There are sixteen specific misrepresentations included in the Rule.  Many are repeats of previous FTC positions on the state of the law and are straightforward such as “Whether the terms are, or transaction is, financing, or leasing a Vehicle.”  Unfortunately, several specific prohibitions of the Rule are loosely written to enhance FTC discretion and cause dealer anxiety about what is covered.

  • Add-Ons Misrepresentations Prohibited. The prohibition in misrepresentation of any “costs, limitation, benefit, or any other Material aspect of an Add-on Product or Service.”  We will not get into the FTC’s view on Add-ons in this part of the article, but rather what does this mean?  How extensive must disclosures be to meet the test of the FTC as to what is not a misrepresentation?  By definition, a processing or doc fee is an Add-on, so remember you need to disclose what it is for, the amount of it, and that it’s not required, if your state does not mandate it by statute.  Many states provide for permissible doc fees, but that is still voluntary, and the consumer needs to know just that.
  • Misrepresentations as to Transaction is Final or Binding on All Parties, Down payments and Trades. The Rule prohibits misrepresentations when the transaction is final or binding on all parties and from “[k]eeping cash down payments or trade-in vehicles, charging fees, or initiating legal process or any action if a transaction is not finalized or if the consumer does not wish to engage in a transaction.”  As you are aware from previous articles, the FTC conflates yo-yo sales (illegal) and spot deliveries (legal).  Although the FTC did not outlaw spot delivery in this Rule, it is under pressure from consumer advocacy groups to do so.  These provisions prevent dealers misrepresenting that the deal is final, if it is not because it is conditional on financing approval, as well as keeping down payments or trades should the sale need to be backed out.  Many of you practice lawful spot deliveries, wherein the conditional delivery language is clear and conspicuous that the deal is not final until the financing assignee approves the deal.  Just a reminder that stating otherwise is a misrepresentation under this Rule.  Alternatively, there is no guidance on what happens if there is a transaction in which the customer makes a down payment on a special order vehicle and then refuses to take delivery of it.  It would appear that it is not a misrepresentation if the dealer keeps the down payment as liquidated damages for the customer’s breach of his or her obligations if it is adequately provided and disclosed in the contract for the special order, and the amount is reasonable.
  • Relocation of Vehicles. Under the Rule, misrepresentations on “[w]hether, or under what circumstances, a vehicle may be moved, including across state lines or out of the country” is prohibited.  As many of you know, there are prohibitions on the removal of a vehicle from the country imposed by manufacturers or distributors of new motor vehicles.  They strictly prohibit export of new motor vehicles for resale or personal use.  They do not want vehicles built for or distributed to one country being shipped to another country and interfering with the rights of the distributor in the other country.  The prohibitions on sales outside the United States in the dealer sales and service agreement of a U.S. dealer are often thorough, and when it occurs, manufacturers often seek to penalize dealers.  According to the FTC comments on the Rule, the Rule “does not prohibit dealers from accurately and non-deceptively communicating whether, or under what circumstances, a vehicle may be moved – it instead prohibits representations that mislead consumers about this information."

A prohibition of misrepresenting any of the “required disclosures” of this Rule brings us to the expanded requirements that will dramatically change dealer practices.

What are the required disclosures?  The Rule lists a number of mandatory disclosures.  Many will change legitimate dealer practices.

  • Pricing Disclosure Requirements. Some dealers choose to discuss vehicle prices and terms with consumers in person. If a dealer advertises that it may have a specific vehicle in stock, the Rule specifies that it must list the offering price.  More seriously, in “any communication with a consumer that includes a reference, expressly or by implication, regarding a specific Vehicle”, dealer personnel must affirmatively disclose in their first response about the availability of a specific vehicle the offering price for the vehicle.  Phone calls by consumers asking whether the dealer may have a specific type of vehicle in inventory are common, but dealer personnel can no longer use those calls to confirm availability of the vehicle and solicit an appointment to discuss price and terms face to face.  They must disclose the offering price for the vehicle in the first response to the call.  Additionally, if the communication is in writing to the dealer, the offering price must be disclosed in writing.
  • Add-On Disclosures. The offering price also raises issues, particularly regarding so-called “add-ons”. The FTC does not even try to hide its bias against equipment or services not originally included with a vehicle by the OEM.  According to the Rule, “Add-on” or “Add-on Product(s) or Service(s)” means any “product(s) or service(s) not provided to the consumer or installed on the Vehicle by the Vehicle manufacturer and for which the Dealer, directly or indirectly, charges a consumer in connection with a Vehicle sale, lease, or financing transaction.”

The Rule requires dealers “when making any representation, expressly or by implication, directly or indirectly, about an Add-on Product or Service, the Dealer must disclose that the Add-on is not required and the consumer can purchase or lease the Vehicle without the Add-on, if true.  If the representation is in writing, the disclosure must be in writing.”   We discussed pre-installed Add-ons in the pricing provision of this article. 

  • Add-On Must be Beneficial. The Rule specifically prohibits the charging of any Add-on Product or Service if the consumer would not benefit from such Add-on Product or Service.  The Rule lists two of those that dealers may not offer, which is not exclusive:

(1) nitrogen-filled tire related-products or services that contain no more nitrogen than naturally exists in the air, or (2) products or services that do not provide coverage for the vehicle, the consumer, or the transaction, or are duplicative of warranty coverage for the vehicle, including a GAP Agreement if the consumer’s vehicle or neighborhood is excluded from coverage or the loan-to-value ratio would result in the consumer not benefiting financially from the product or service.

The Rule notes that the products or services of questionable benefit to consumers are not limited to those listed, giving the FTC discretion to make this value judgment in individual cases.  How is one to determine what Add-on is beneficial to one consumer but not another? Or, if the customer does find the Add-on to be beneficial at the time of purchase, will the FTC later determine otherwise?

  • Express, Informed Consent to be Charged. The Rule specifically prohibits any charge “unless the Dealer obtains Express, Informed Consent of the consumer for the charge.”

According to the Rule:

“Express, Informed Consent” means an affirmative act communicating unambiguous assent to be charged, made after receiving and in close proximity to a Clear and Conspicuous disclosure, in writing, and also orally for in-person transactions, of the following: (1) what the charge is for; and (2) the amount of the charge, including, if the charge is for a product or service, all fees and costs to be charged to the consumer over the period of repayment with and without the product or service. The following are examples of what does not constitute Express, Informed Consent: (i) a signed or initialed document, by itself, (ii) prechecked boxes, or (iii) an agreement obtained through any practice designed or manipulated with the substantial effect of subverting or impairing user autonomy, decision-making, or choice.

Under the FTC’s abrogation of state law on contracting, a consumer’s signature on a document is no longer enough.  Based on the word salad definition there must be more.  But how much more, and how does a dealer document that?  The comments to the Rule do not help clarify what this means, but provide:

“A signed and dated document would not satisfy the requirement for express, informed consent, for example, if the consumer was directed to sign the final page of a contractor an electronic signature pad and the signed and dated document did not reflect the terms to which the consumer had agreed.  In such cases, the signed and dated document does not represent the consumer’s unambiguous assent to be charged, made after receiving, and in close proximity to, a clear and conspicuous disclosure of what the charges are for and the amount of the charges.”

  • Language of Negotiations and Contracts. The Rule provides that “the disclosure must use diction and syntax understandable to ordinary consumers and must appear in each language in which the representation that requires the disclosure appears.”  According to the FTC, a clear and conspicuous disclosure requires that it be “easily understandable.”  Thus, if a disclosure is being made in a language the consumer does not understand, it does not meet the clear and conspicuous requirement.  Therefore, for an advertisement that references a specific vehicle in Spanish, the offering price disclosure must be in Spanish.  If the negotiations for a sale of a vehicle, including offering price, financing terms, and Add-ons, are done in one language, the disclosures must be in that language.

What other burdens does this Rule impose?  We have often warned dealers about getting on the wrong side of the FTC and becoming party to a cease-and-desist order.  The practices prohibited or mandated by an order are bad enough, but the recordkeeping and oversight provisions are much worse. Many state franchise acts already require recordkeeping of years for deal paperwork, but the FTC goes well beyond the current recordkeeping requirements by the states in this new Rule.

The Rule’s recordkeeping requirements are:

Any Motor Vehicle Dealer subject to this part must create and retain, for a period of twenty-four months from the date the record is created, all records necessary to demonstrate compliance ….

That includes all advertisements, training materials, “scripts”, training materials, marketing materials, records demonstrating Add-ons in consumers’ contracts, and detailed deal information not only regarding completed deals, but also as to dead deals where a purchase order may have been signed, and, of course, all information developed to show compliance with the Rule.

Just to make sure dealers don’t get the idea they can get consumers to agree to engage in a transaction without “benefit” of these requirements, it contains a provision prohibiting waiver of the Rule’s requirements.

The Rule also preempts state law unless the law is more stringent than this Rule.

What is next? The Rule was set to go into effect on July 30, 2024, but has since been stayed by the FTC pending resolution of the legal action filed by The National Auto Dealers Association and the Texas Auto Dealers Association in the United States Court of Appeals for the Fifth Circuit.  Resolution of the Court proceeding will determine if the Rule is revoked or modified by Court order or if the Court finds in favor of the FTC, the Rule will presumably go into effect some time in later 2024.