Now Is The Time To Stop Paying For Favorable Reviews

Recently 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 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.


Auto Dealer Indicted For Illegally Structuring Cash Transactions

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.


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.

Three Things To Remember When Selling Vehicles Online


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 resources available on the internet to gather information, customers can significantly narrow the list of potential vehicles they wish to purchase without having to visit as many dealerships.  Many dealers recognize the power of the internet and resources available to generate leads and traffic. Moreover, state and federal regulators recognize that customers are relying on information provided on the internet when making purchases.  In response, regulators are becoming more inclined to intercede on behalf of consumers and target questionable practices related to advertisements on the internet.  Here are three points to help keep your dealership compliant when marketing and selling vehicles online:

  • Treat Your Online Ads Like Your Offline Ads:  Recently the Federal Trade Commission (“FTC”) published its long-awaited guidelines on how the FTC views practices related to online advertisements.  In summary, the guidelines apply many standards that the FTC applies to advertisements placed in newspapers, television and radio.  For example, when online advertisements include “trigger terms,” like payments or price, dealers must make full disclosure of how they arrived at the price or payment, including down payment, APR, availability, credit score requirements, and so on.  Not only must you make the necessary disclosures and avoid claims that are “unfair,” or “deceptive,” but you also must make sure that these disclosures are legible on a host of devices, including desktop computers and mobile phones.  This requirement mirrors the FTC’s requirement for legible disclosures appropriate to the advertising medium used.  So, download the FTC DotCom Disclosures, review it thoroughly, and remember to be as vigilant with monitoring your online advertisements as you would be monitoring your offline advertisements.
  • Safeguard Consumers’ Data:  In addition to researching pricing and availability of vehicles online, many consumers seek to secure financing by submitting their credit information to dealers.  If your dealership collects nonpublic personal information via online submissions (over email or by a form on your webpage), you must make sure your Safeguards Rule and Red Flags Rule compliance plans address how you protect this information and detect possible identity theft.  You should inventory who has access to this information and where the information is sent.  For example, if you allow sales personnel to receive consumers’ nonpublic personal information on their smartphones or personal email account, your policies should address how you protect this information.
  • Deliver Vehicles At Your “Brick And Mortar” Location:  Even though consumers conduct the bulk of their research online, vehicle transactions typically occur at a dealership’s physical location.  That may not always be the case, especially as more and more consumers rely on the internet to facilitate exceedingly complex transactions.  While you may choose to aggressively market your business online, your goal should be to encourage consumers to take physical delivery at your dealership.  Why?  Some states allow for “cooling off” periods where consumers can rescind the contract if they take delivery of vehicles away from the dealer’s premises.  Also, many states allow consumers to rescind retail installment contracts if both parties have not executed the agreement.  For example, if you print the deal paperwork and mail it to a customer to sign, the consumer may void the contract up to the point your dealership’s representative countersigns the contract.  Furthermore, if you sell and deliver a number of vehicles to consumers in a different state than your state of residence, consumers in that state may seek to sue you in that state’s courts, should a conflict arise.  They may successfully argue that you have availed your business of the state’s jurisdictions by soliciting business within the state.  Requiring consumers to complete the transaction by signing the paperwork, and taking delivery, at the dealership should mitigate risk of consumers bringing these kinds of claims.

Image Courtesy of