According to a recent study by JD Power, customers visit an average of 1.4 dealerships before purchasing a vehicle. As recent as 2005, consumers visited 4.5 dealerships before purchasing. By using the internet to gather information, customers are significantly narrowing the list of potential vehicles they wish to purchase prior to visiting dealerships. Before online advertising, dealers often advertised a limited number of vehicles in print, on the radio, or on television. Now, it is common for dealerships to advertise their entire inventory on their own websites, as well as inventory aggregation websites such as Cars.com or Autotrader. This leads to higher occurrences of pricing errors and disputes arising from selling a vehicle for a price higher than the price advertised online.
The Federal Trade Commission (“FTC”) recently revised the .com Disclosures, which offer businesses guidance on what types of disclosures businesses should include in their online advertisements to avoid claims of unfair and deceptive practices. Disclosures should be “clear and conspicuous,” and placed in close proximity to pricing information or triggering terms such as APR, lease payments, and down payments. If a vehicle is priced incorrectly, a consumer may claim that the dealership’s refusal to honor the posted price constitutes a deceptive practice. Your goal should be to minimize errors occurring, and promptly correcting any errors you find. If you fail to do so, consumers may claim that these errors are endemic of the dealership’s deceptive practices.
If you decide to offer “internet only” pricing, you will have to make additional disclosures in your online advertisements. First, your disclosure should state that the price is only available if the consumer produces something, like a printout of the vehicle display page from your website or the inventory aggregation website. Also consider excluding prior sales, in case a customer purchases a vehicle and later checks your listings to see what the price posted online is. If you do not, your failure to honor the advertised price may be deceptive. This disclosure must be on each vehicle display page, and not only at the bottom of your website’s home page or each department’s webpage. Your pricing online should be realistic; a customer should be able to purchase the vehicle at the advertised price without making additional down payments, having a particular FICO score, financing the purchase through your dealership, or qualifying for rebates that are not available to all customers. Remember, if you provide an inventory feed to a third party website, you will be responsible for errors on the third party’s website. You should review each website to determine whether the disclosures are compliant.
The Federal Trade Commission (“FTC”) has recently targeted dealers whose advertisements are deceptive or who engaged in unfair trade practices. Because businesses from different industries may conduct their affairs in a similar fashion, it is important to monitor actions brought by the FTC against other businesses. A recent enforcement action initiated by the FTC against a medical billing company may have a profound impact on automobile dealers.
Accretive Health, Inc. (“Accretive”), provides medical billing and revenue management services to medical providers throughout the United States. Because of the services it provides, Accretive collects significant amounts of nonpublic personal information on patients. This information includes social security numbers, dates of birth, billing information, and medical records. The laptop of an employee of Accretive was stolen from the employee’s car. The laptop contained twenty million pieces of information on twenty three thousand patients. The FTC alleged in its complaint that Accretive’s practices were inadequate to safeguard against these kinds of thefts, and placed patients’ information at considerable risk. Citing Section 5(a) of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce,” the FTC claimed that Accretive’s practices likely caused “substantial injury to consumers that is not offset by countervailing benefits” and “is not reasonably avoidable by consumers.”
With the popularity of “Bring Your Own Device,” it is easy to imagine a situation where a dealership’s data is compromised in a similar manner as Accretive’s. For example, suppose your employees use their personal smartphones or laptops to access your DMS or CRM. The theft of a smartphone or laptop could allow an unauthorized individual access to consumers’ nonpublic personal information. Without processes in place to safeguard consumers’ data, dealers may face liability for violating several laws, including the FTC Act.
Many dealers are aware of their responsibilities to protect nonpublic personal information from theft or other loss. The Safeguards Rule of the Gramm-Leach-Bliley Act requires dealers to implement processes to safeguard consumers’ information, and make modifications to their processes that are necessary to protect this information. The Red Flags Rule requires dealers to implement and maintain processes to detect identity theft, and make any changes required to improve the efficacy of the processes. Each of these laws has its own enforcement mechanisms and civil penalties. Now, the FTC appears willing to interpret Section 5 of the FTC Act to include data losses, under certain circumstances, as deceptive practices. Unfortunately for dealers, this means that a data loss may trigger liability under the FTC Act, in addition to any liability under the Safeguards Rule or Red Flags Rule.
On January 9, 2013 the Federal Trade Commission (“FTC”) announced enforcement actions against nine automobile dealerships over allegations of deceptive and unfair trade practices. The FTC alleged that these dealers violated the FTC Act, which prohibits businesses from making false or misleading statements regarding products and services. The complaints filed by the FTC also included allegations that the dealers violated the Consumer Leasing Act and the Truth in Lending Act by failing to disclose fees, interest rates, and other credit related terms.
Of particular interest is the FTC’s complaint involving a dealer’s advertisement of a purchase price reduced by a down payment. For example, the dealership advertised a 2008 Chevrolet Tahoe for $17,995 and included in the disclosure that the price was “after $5000 down.” Even though the advertisement disclosed that the price was conditioned upon the consumer making a down payment of $5000, the FTC alleged that the advertisement was deceptive because the vehicles “are not available for purchase at the prices prominently advertised” since consumers “must pay an additional $5000 to purchase the advertised vehicle.” Based on anecdotal observation, this practice is far more common than many dealers may believe.
Dealers should closely review their own advertisements to see whether they may be deemed deceptive. If you have advertisements that show a price contingent upon making a down payment, you should avoid making these kinds of offers. If you advertise lease or installment payments, you must make sure that you properly disclose any “trigger terms,” such as APR, duration of the loan, and any additional fees associated with the purchase or lease. Payments that are “No Money Down” must really be no money down. If the consumer must pay more to obtain the advertised payment or price, then the offer may be deceptive.
The Occupational Safety & Health Administration (“OSHA”) recently approved changes to how whistleblowers may file complaints against firms who violate any of twenty-two statutes related to safety and pollution. Previously, whistleblowers could only file complaints by writing to OSHA, calling a hotline, or calling an OSHA regional office. Now, whistleblowers can file complaints online, by using a simple form, which includes descriptions of allegedly retaliatory acts by the business. This seemingly minor change to modernize OSHA’s processes may have dramatic effects on businesses that must comply with OSHA regulations. By simplifying the filing process, many predict that the volume of whistleblower claims will grow dramatically.
How may this affect your business? Now that your employees can file claims online, they may be more likely to notify OSHA of potential violations than they were before. Therefore, you should consider revising your own internal processes regarding OSHA complaints to include these changes and the possibility of additional complaints filed against your business. Your supervisors should know how to respond if employees raise a complaint, and how they should respond to employees who actually file complaints. Even if the employee does not contact OSHA, you should proactively investigate any safety complaints. By actively investigating complaints, you decrease the likelihood of the employee seeking outside counsel because you do not seem interested in rectifying a safety concern. Make sure that your employees are current on all OSHA training requirements and safety regulations, and that the standards required by OSHA are followed. Taking these steps will help you identify and address potential OSHA violations, rectify safety concerns, and respond to employee complaints promptly.
Recently the Federal Communication Commission (“FCC”) enacted new rules and regulations related to the Telephone Consumer Protection Act (“TCPA”), which regulates how companies may contact consumers by telephone. TCPA prohibits companies from contacting consumers via automated dialing systems, either by text or by telephone, without prior express consent of the party called. These rules, effective October 16, 2013, significantly change what constitutes prior express consent.
TCPA now requires firms to obtain prior written consent for auto-dialed marketing or advertising calls and text messages. Acceptable written consent must include clear and conspicuous disclosures that the consumer consents to receiving auto-dialed calls or text messages, including pre-recorded messages, on behalf of a specific seller, and clear and unambiguous acknowledgement that the consumer consents to receive such calls and text messages at the number provided. The company cannot condition the sale of goods or services on the consumer consenting to receive auto-dialed marketing or advertising calls, and the caller bears the burden of demonstrating the consumer consented to the contact. An “opt-in” text reply alone may not meet the new prior written consent required by TCPA. These revisions apply retroactively, so any companies that have received consent prior to the enactment of these new rules will likely have to obtain consent from the consumer again.
Dealers have to be mindful of how these changes to TCPA affect their businesses. First, if you utilize a third-party to solicit consumers via calls or text messages, you must ensure that your vendor complies with TCPA. If not, you may find your business liable for violations of the law (see: “Lithia Faces $2.5 Million Tab For Texting”). Even if you do not use an outside vendor in the aforementioned manner, you may still have to comply with TCPA if you use a device capable of auto-dialing to contact consumers by text or by telephone. It is likely that TCPA’s restrictions encompass computers capable of auto-dialing. So, if you utilize a service such as Google Voice, Skype, or an auto-dialer through a CRM system, you will likely need to obtain prior written consent before soliciting consumers by calls or text messages.
An editor of Automotive News recently reported on a seminar held at a F&I conference where the panelist generally endorsed using video cameras to record transactions in the F&I office. There are pros and cons to recording these transactions. While recordings can be helpful tools for enforcing compliance, training staff, and rebutting accusations by consumers of wrongdoing in the F&I office, they can also be the “smoking gun” of unlawful business practices that provide plaintiffs or regulators with the evidence needed to impose costly penalties and damages.
Deciding whether to record F&I transactions takes more thought than merely selecting what equipment to use. Before you get your cameras rolling, you should consider the following:
Will You Record Every Transaction? That one transaction your staff forgets to record could be the one where problems arise. Worse, an employee who is violating the law may selectively record transactions or edit recordings in order to hide any transgressions. If you decide to record your F&I staff, you should consider mandating that every F&I transaction is recorded. If a consumer refuses to be recorded, document the refusal, and maintain adequate records to help reconcile all transactions against ones recorded.
How Does Recording F&I Transactions Fit With Your Coaching And Counseling Processes? You should train your staff on how to record the transactions, including obtaining the consumer’s informed consent. This will require developing a consistent script to use with consumers to obtain consent, and some written document signed by the consumer evidencing consent. You will need to designate who will review the videos and what remedial steps are taken when problems are discovered. Remember, supervisors should not to use the videos in a manner that demeans or humiliates their subordinates. These ‘candid camera’ moments, used at the expense of the employee, could provide ample evidence for an employment discrimination claim.
How Does Recording F&I Transactions Fit With Your Compliance Programs? Laws such as the Safeguards Rule and the Red Flags Rule impact how you record F&I transactions and store the recordings. It is likely that these recordings will capture information protected by state and federal law, such as nonpublic personal information, so you will have to take necessary steps to protect this information, and determine when breaches occur. You will need to amend the documents and records you maintain for compliance programs accordingly.
I recently wrote about the Federal Trade Commission’s (“FTC”) vigorous enforcement of consumer protection and privacy laws against automobile dealers. In these previous enforcement actions targeting dealers, the FTC found that advertisements related to negative equity were deceptive and unfair, and that dealers failed to take adequate steps to safeguard consumers’ nonpublic personal information from tampering via Peer to Peer (“P2P”) networks. Now, two dealers entered into consent agreements with the FTC to settle claims of unfair and deceptive trade practices related to advertisements placed by the dealerships online and in print.
The FTC charged that dealers in Maryland and Ohio “violated the FTC Act by advertising discounts and prices that were not available to a typical consumer…[and] misrepresenting that vehicles were available at a specific dealer discount, when in fact the discounts only applied to specific, and more expensive, models of the advertised vehicles.” The Maryland dealer’s website “touted specific “dealer discounts” and “internet prices,” but allegedly failed to disclose adequately that consumers would need to qualify for a series of smaller rebates not generally available to them.” The Ohio dealer “allegedly failed to disclose that its advertised discounts generally only applied to more expensive versions of the vehicles advertised.” To settle these actions, the dealers agreed to comply with the FTC’s order for twenty years, and maintain records of advertisements and promotional materials for the FTC’s inspection, upon request, for five years.
Once again the FTC demonstrated its willingness to extend protections offered by the FTC Act against deceptive and unfair practices to online advertisements placed by dealers. The FTC’s scrutiny of dealers’ advertisements clearly is not limited to “traditional” media, such as television and newspaper. Furthermore, the Maryland and Ohio dealer used advertising methods (combining rebates and stating a percentage discount from MSRP) that dealers use frequently. Therefore, dealers must endeavor to curtail the use of terms and methods that the FTC has determined are deceptive and unfair.
If you have not done so, you should download the FTC’s “.com disclosures,” which offer guidance on what you must disclose in your online advertisements. Your state’s Attorney General’s office may provide similar guidance. For example, New York’s Attorney General publishes advertising guidelines for New York dealers. While your state’s Attorney General may not have issued guidance regarding online advertising, you should not interpret this absence as carte blanch to advertise however you wish. Each state has enacted its own version of the FTC Act, and many state Attorney General’s closely watch the FTC and adopt it’s posture related to enforcement of consumer protection laws. So, even if your state’s Attorney General has yet to act, chances are that advertisements like the ones cited above may be deemed deceptive and unfair under your state’s law should a consumer or the Attorney General challenge the advertisements.
Recently Edmunds.com sued an online reputation company that posted reviews to its website, and other websites such as Yelp. The lawsuit alleges that the company, Humankind, posted fake reviews on behalf of dealership clients that showed the dealerships in a favorable light. Last year, Yelp began flagging reviews that it believed were paid for by businesses hoping to boost their popularity on Yelp. These actions by Edmunds.com and Yelp highlight a growing concern that the parties are trying to manipulate ratings on review websites in order to attract additional business. Many dealers do not understand that services that offer to post reviews on a business’s behalf for a fee may breach state and federal consumer protection laws.
According to guidance issued by the Federal Trade Commission (“FTC”) on paid reviews:
The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed [emphasis added].
A favorable review posted online about a dealership’s services would fall within the definition of an endorsement. It is likely that the FTC would find a material connection between dealerships that pay for reviews and the individual endorsers or businesses that compile these endorsements. If material connections exist between your business and the endorser, the FTC requires full disclosure of this relationship. In case above, full disclosure would mean each review stating clearly what consideration the dealership paid for the review. Even if you do not contract with a vendor to submit reviews, you have to comply with the FTC’s rules. For example, if you give a consumer a gift card in return for a favorable review, the customer must disclose he or she received the gift card in exchange for the review. Failing to make the necessary disclosures may result in significant fines and penalties. In one enforcement action, the FTC levied $250,000 in fines against a business for failing to disclose it compensated reviewers for favorable reviews.
If your dealership pays for favorable reviews, you should reconsider this practice. Failing to disclose material connections between the dealership and the reviewer may result in enforcement actions and significant fines. If you contract with vendors to provide this service, you are responsible for their conduct. It is not enough to plead ignorance regarding the vendor’s practices. When selecting a vendor offering “reputation management” services, you must ask whether or not the vendor pays reviewers for reviews.
On June 13, 2013 a federal grand jury charged a dealer in Ohio with illegally structuring bank deposits to avoid IRS reporting requirements. The 26-count indictment alleges that the dealer “made multiple cash deposits in amounts less than $10,000 on the same day or consecutive days” in order to avoid filing a Form 8300. The dealer faces penalties of up to five years in prison for each count, while the business faces penalties up to $50,000 for each count.
This case illustrates that the authorities remain vigilant in monitoring cash transactions and prosecuting individuals and businesses that violate reporting requirements. You should take cash reporting requirements seriously, and establish safeguards so that your employees will not only report cash transactions that exceed $10,000, but also detect efforts by others to avoid reporting requirements by making several smaller cash transactions. Here are several things to remember when evaluating your dealership’s cash reporting processes:
- Report cash down payments on retail installment sale contracts and lease agreements: Many people incorrectly believe that a business does not have to report cash down payments made as part of a retail installment purchase or lease. The IRS penalizes many businesses that fail to report cash amounts included in down payments that exceed reporting requirements. Avoid these penalties by reporting cash and cash equivalent amounts above the reporting threshold used as down payments on installment purchases and leases.
- Add up the cash equivalents and report: Businesses often ask if they have to report consumers that use a combination of cash and cash equivalents, or a variety of cash equivalents, that, when combined, exceeds $10,000. The answer is that you should report these transactions. Remember, the IRS considers forms of payment such as cashier’s checks, traveler’s checks, and money orders as equivalent to cash. So, if you have a combination of cash and cash equivalents, or no cash but an assortment of cash equivalents, that exceed $10,000, report this transaction to the IRS.
- Your accounting office should not be only department responsible for compliance: The accounting office will need the help of your sales staff to report cash and cash equivalents on the Form 8300. For example, the Form 8300 asks the identity of a person in addition to the buyer who provides cash. The accounting office may not have this information if it is not gathered by the sales staff at the time of the sale.
- Don’t delay in notifying consumers that you filed a Form 8300 with the IRS: While the law allows businesses to wait until next January to notify consumers of the Form 8300 filing, you should try to notify the consumer sooner. The earlier you send the notification, the earlier you may be alerted to suspicious activity by the consumer, like providing the wrong mailing address to your staff.
- Cash transactions involving $10,000 are not as rare as they used to be: As vehicles have become more expensive, transactions involving amounts greater than $10,000 are more common. As these transactions become more commonplace, your staff may become complacent. Check with your DMS to see what reporting you can create that identifies transactions that you should report so you can create another safeguard should employees miss a transaction.
- Know all of your customers, not just the ones that trigger cash reporting requirements: The United States Criminal Code, and most state criminal codes, prohibits transactions where the business knows, or should know, that funds used in the sale came from criminal activity. If you have reason to believe a consumer or your employees structured a deal to avoid cash reporting requirements, you should report such activity to the authorities, even when the transaction ultimately does not occur.
While every business should take care to conduct its affairs in ways that do not violate state or federal law, dealers franchised to sell new vehicles must take particular care. As a recent case demonstrates, manufacturers may terminate franchise agreements, without an opportunity for the dealer to cure the condition precedent, when the dealer has been found to have violated state consumer protection laws.
The New York Attorney General initiated an enforcement action against a New York new vehicle dealer, alleging, among other charges, that the dealer violated the New York Consumer Protection Act, which bars New York businesses from using deceptive or unfair trade practices to sell products. The parties litigated the matter in the Supreme Court of Kings County, and the court found in favor of the Attorney General. In particular, the court found several of the Attorney General’s allegations to be persuasive. The court noted that the owner of the dealership was active in the day-to-day operations of the dealership, as well as other dealerships he owned. Also, the Attorney General demonstrated that the dealership had a history of defrauding customers, particularly the elderly and those who did not speak english. The alleged unfair practices the dealer conducted included bait and switch advertising, having consumers sign blank contracts, and payment packing.
Relying upon the finding by the Supreme Court, the manufacturer issued a termination notice pursuant to the New York Franchised Motor Vehicle Dealer Act. The manufacturer asserted that the dealer’s conduct constituted a material breach of the franchise agreement, triggering default and termination when “any finding or adjudication by any court of competent jurisdiction or government agency that [the dealer] has engaged in any misrepresentations or unfair or deceptive trade practices.” When the dealer challenged the termination notice in federal court, the judge dismissed the dealer’s suit, allowing the manufacturer to terminate the franchise agreement, stating that the dealer’s “actions were a flagrant violation of a provision going to the root of [the franchise agreement]” and that, in such cases involving material breach of the franchise agreement, the manufacturer is not required to provide an opportunity to cure prior to termination.
Practices that violate the law may result in fines, awards for consumers, and damage to the business’s reputation. When the Attorney General or another governmental agency intervenes, a ruling against a dealer may lead to the manufacturer alleging a breach of the franchise agreement under the circumstances described above. Most franchise agreements contain provisions similar to the one cited by the manufacturer in this case and all states have consumer protection laws that forbid deceptive and unfair trade practices. Therefore, even if your dealership is not in New York, your franchise may be at risk if you violate your state’s law. It is imperative that you monitor your sales practices to make sure that they do not involve conduct that may be deceptive or unfair. This includes promptly answering complaints filed by consumers with state or federal regulators. As this case demonstrates, an enforcement action by the Attorney General of your state may be the beginning of the end of your new vehicle dealership.