Enforcement Action By NYAG Results In Termination of NY Dealer’s Franchise Agreement

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.

Minimizing The Risks Of Taking Credit Applications Over The Telephone Or Internet

The Fair Credit Reporting Act (“FCRA”) restricts reasons dealers may use to obtain, use, and share credit reports.  In addition to these restrictions,FCRA requires dealerships to provide certain notices to consumers applying for credit.  Dealerships should only obtain credit reports from consumers when they have express permission to do so.  Issues arise when consumers make inquiries about obtaining financing when they are not physically present at the dealership.  In these cases, it is imperative that the dealership has processes in place to obtain consumers’ written consent or otherwise show they have permission to obtain credit reports on behalf of consumers.  Otherwise, consumers may claim the dealership violated FCRA by accessing the their credit reports without prior consent.

You will need to determine whether your dealership will accept credit applications from consumers that are not physically present at the dealership.  There are inherent risks associated with accessing credit reports when the applicant is not at the dealership that you will need to balance with business considerations such as customer expectations, convenience, and pressure from competitors.  If you choose to accept credit applications and obtain credit reports for consumers prior to them visiting the dealership, you will need to consider implementing the following safeguards in order to stay complaint with FCRA.  For inquiries initiated over the internet, make sure your website requires credit applicants provide “digital authorization,” such as a box applicants check signifying they consent to the dealership accessing their credit reports.  Also, you should only accept credit applications that applicants submit through an encrypted system, such as a form on your website, and not unencrypted media such as email.  If the applicant submits an inquiry over the telephone, you should consider asking the applicant to make an inquiry over a secured, encrypted, form such as one located on your website.  If the applicant is unable to do so, your staff should note on the credit application the date and time they received the application and ask the applicant to send a facsimile authorizing the dealership to access the credit report.

Once the applicant visits the dealership, you should have him or her compete a credit application, sign it, and retain a copy in the applicant’s file.  You are required to provide adverse action notices or credit score disclosures regardless of whether the consumer initiated a credit inquiry at your dealership or remotely, and your processes regarding credit applications submitted by telephone or the internet should incorporate your dealership’s Red Flags Rule and Safeguards Rule compliance programs.  Effective training and monitoring of employees’ access to consumers’ credit reports will help your dealership stay compliant with the FCRA and avoid potential lawsuits.