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U.S. franchised dealers sold approximately 4.1 million used cars in 2019, an all-time high. Overall, there were about 40 million used cars sold versus about 17 million new. Used car sales are becoming a greater percentage of dealer sales generally. Consumer “sticker shock” on new vehicle pricing (the average U.S. new vehicle sold for more than $37,000 in 2019, compared to just over $20,000 for a used vehicle) and the greater inventory of used vehicles spawned largely by vehicles coming off lease, were major factors.
But used car selling brings with it compliance risks that new car selling does not. A new car typically comes with a manufacturer warranty and is priced at or below the manufacturer’s published MSRP. The manufacturer assumes much of the risk relating to a new car sale.
A variety of different factors come into play with used cars including valuation, prior uses and vehicle condition, dealer or third-party warranties, title issues, and the dealer’s selling used vehicles that may be defective or less reliable than the consumer expects. Litigation and arbitration relating to used vehicle sales is significantly higher than litigation and arbitration claims on new car sales.
Let’s look at some compliance issues you need to be aware of in selling used vehicles.
Used Car Buyers Guide
The Federal Trade Commission (FTC) requires a Used Car Buyers Guide to be prominently affixed to every used vehicle a dealer offers for sale. If the sales transaction is negotiated in Spanish, the customer must be given a Spanish copy of the Buyers Guide. (Best practice: Give a copy of the Spanish Buyers Guide to any customer whose primary language is Spanish, even if the deal is negotiated in English). The Buyers Guide becomes part of the sale contract and overrides any inconsistent terms.
The FTC revised the Used Car Buyers Guide form in 2017. You can find a copy on the FTC’s website, https://www.ftc.gov/tips-advice/business-center/guidance/buyers-guide. Except in Maine and Wisconsin (which have their own forms), you should complete and display the FTC form on every used vehicle in inventory. An FTC sweep of 94 dealers in 2018 revealed that only 7 were in compliance. The others received a warning from the FTC that failure to comply may result in a fine of $43,280 per violation. This is the measure of damages under Section 5 of the FTC Act prohibiting unfair and deceptive practices.
The Used Car Buyers Guide focuses on dealer warranties, or the absence thereof. Approximately 37 states permit “as is” sales of used vehicles without any dealer warranties. The other 13 states and the District of Columbia do not permit disclaimer of implied warranties such as the warranty of merchantability which means the car runs as expected.
If you offer a warranty, it must be designated as a “full” warranty or a “limited” warranty. You need to give the duration of the warranty, the specific vehicle systems covered in a limited warranty (the back of the Buyers Guide lists vehicle systems), the percentage of repair costs the dealer will pay, and any exclusions. If a manufacturer or third-party warranty applies, you may, but are not legally obligated to, disclose that as well. The detail is required only for a dealer warranty.
There is no legal obligation for the consumer to sign the Buyers Guide but it is a good practice to do so. You can put a box on the back of the Guide stating “I hereby acknowledge receipt of the Buyer’s Guide at the closing of this sale.”
Complete the dealer information on the back of the Buyers Guide and designate a named person (not Used Car Sales Manager) and their phone number for a customer to contact.
Remember that the Buyers Guide is not the warranty, only a summary of it. Give the customer a copy of the complete warranty terms and conditions.
Certified Used Vehicles
A dealer can designate a used vehicle of the same franchise it represents as “certified’ if all of the following conditions are satisfied:
“As Is” Sales and Disclaiming Warranties
As noted above, in approximately 37 states, a dealer can sell a used vehicle “as is” without any warranties. In the other 13 states and the District of Columbia, implied warranties cannot be disclaimed. In all states, implied warranties cannot be disclaimed if you provide an express warranty or sell the customer a vehicle service contract within 90 days of sale.
Just because you are selling a vehicle “as is” does not mean you can withhold negative information about the vehicle from the consumer such as its prior use, whether it was in an accident, or is a lemon law or rebuilt salvage vehicle. A number of states have lemon laws that define a “lemon” (usually based on the number of unsuccessful repairs) and require that the vehicle be disclosed as such. Giving the customer a vehicle history report like a CarFaxÒ is a good idea but not an assurance of no liability.
State laws govern the duty to inspect and disclose both patent and latent defects. Any merchant is considered to be more qualified than a consumer to inspect and disclose any defects that a reasonable inspection would uncover. Actively concealing defects or misrepresenting the condition of a vehicle is always a no-no. Check with your local attorney to understand how far your state’s law goes in requiring inspections and disclosing the results. It is always a good idea to keep a copy of the inspection report in the deal jacket to show your good faith.
Claims Involving Vehicle Titling
Some used car dealers retitle vehicles to avoid having to disclose vehicle damage. A vehicle that has incurred water or hurricane damage may need a water damage title in some states and most states require a salvage title if an insurance company has declared the vehicle a total loss. But some states do not. “Title washing” occurs when a dealer takes the vehicle to a state that does not have the necessary title branding to obtain a clean title. Title washing also occurs when an unscrupulous dealer removes the damage branding from the physical title.
Title washing is a federal and state felony and dealers have served jail time for mass title washing. Don’t even think about it.
The federal Truth in Mileage Act requires the seller of a vehicle to disclose the odometer reading on the vehicle and certify whether, to the best of their knowledge, the odometer reading is accurate, the reading is inaccurate, or the mileage is in excess of the odometer’s limits, such as if a car with a million miles was sold. This is typically done on the title and both the buyer and the seller must sign the certification and disclosure.
Odometer tampering is relatively easy to do. It involves removing the vehicle’s circuit board or using a device on the circuit board. A recent eBay search found such devices for sale for a price of approximately $120.
Rolling back odometers violates federal and state law. Penalties start at $43,280 per violation as a deceptive practice under Section 5 of the FTC Act. The Truth in Mileage Act provides for civil penalties of up to $10,281 per violation with each vehicle a separate violation, criminal penalties, and up to three years imprisonment for willful violations.
Be careful when advertising used cars. Try to avoid qualitative descriptions like “good as new,” “near new,” “runs perfectly.” These can come back and bite you. Stick to quantitative descriptions such as giving the year, make, model, and mileage, indicating the number of owners, and whether a full service history is available. You also need to comply with Truth in Lending triggered terms if you are advertising financing of the vehicle. Many states also have laws requiring that if you advertise a vehicle in any medium for a set price, you must offer that price to every consumer, even those who never saw the ad. Be able to defend your pricing with reference to an industry source such as NADA, Kelley Blue BookÒ, or Black Book.
Some dealers sell used vehicles without airbags or defective aftermarket airbags. Unless disclosed to the consumer, some Attorneys General have ruled this to be an unfair or deceptive trade practice and it likely violates an implied warranty of merchantability as well.
Selling ‘grey market” vehicles from Canada or Mexico should also be avoided. These vehicles may not meet U.S. environmental and safety requirements and their sale in the U.S. frequently voids the manufacturer’s warranty.
Recent Enforcement Activity
State Attorneys General have been particularly active in scrutinizing dealer used car sales for violations.
In 2020, the Arizona Department of Transportation brought criminal charges against seven persons operating an illegal ring that altered over 31,000 vehicle titles from unlicensed dealers in 42 states for about $100 per title. The defendants altered the titles to make it appear as though the unlicensed dealers bought the vehicles from one of the suspects’ 31 operations with dealer licenses.
In 2019, the California Attorney General brought two actions. One against a dealership for title washing to conceal liens on used vehicles and another for deceptive advertising of used vehicles. The Pennsylvania Attorney General sued for deception and missing disclosure documents, Massachusetts and Delaware sued for financing customers on terms they could not afford, and the Ohio Attorney General brought two actions for failing to deliver clean titles. Many Attorney General actions are brought and settled in confidential examinations and enforcement actions. The settlements usually involve substantial penalties and reimbursements to affected customers.
As the front-line seller of used vehicles, your obligations to disclose warranties, defects, and odometer readings, along with your obligation to deliver a clean and accurate title, can provide challenges in used car selling. Do a reasonable inspection (and a beyond-reasonable inspection for certified vehicles) and be up front with the customer about issues and expectations for the vehicle. Selling used vehicles is an area ripe for regulatory investigations, arbitration claims, and lawsuits, but having a systematic process to obtain, inspect, and disclose issues with the vehicle should help you manage used car selling successfully.
Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com