State Attorneys General (“AGs”) are being very aggressive in going after auto dealer advertising. State unfair and deceptive practice (“UDAP”) laws as well as Section 5 of the FTC Act allow for the recovery of damages, attorney’s fees, and restitution for wrongful conduct. Let’s take a look at some of the activity from this year.
Indiana
We’ve all seen them and most of us have probably used them to attract customers. Mailing pieces to consumers indicating that if a scratch-off number on the mailing matches a prize number on the mailing (and they all do), they have won a sweepstakes. Large photos of prizes such as a new vehicle, a large amount of cash, a big screen color TV, and the like are blasted across the top. All the customer has to do is come to the dealership to match their prize number against a board at the dealership to see what they have won.
Only in small mouse type, frequently not on the same page, does the mailing indicate that no purchase is necessary and the odds of winning the prizes. One of these pieces that I reviewed recently gave the odds of winning the vehicle and other displayed prizes at 1,000,00:1. The odds of winning a $5 gas gift card were 1:999,996 meaning only four people in a million would win a large prize and all others the gift card. Unclaimed prizes were not awarded and were deemed to be forfeited. By making everyone a “winner” of a prize, I was told the sweepstakes eliminated the element of chance and thus was not an illegal lottery. But that is not the end of the story.
The Indiana AG recently saw a similar piece and apparently was not amused.
Instead of suing individual dealers (over 56 of whom sent these pieces to over 2.1 million Indiana consumers), the AG sued the promotional advertising agency that designed the pieces. The AG alleged an unfair trade practice under Indiana law which has the same standard for an unfair trade practice as does a violation of Section 5 of the FTC Act.
The complaint alleges that all the mailings contained game pieces purporting to determine whether recipients had won prizes – which included such valuable items as vehicles, TVs or $1,000 in cash. Each mailing, however, contained identical game pieces with winning numbers. Thus, each mailing allegedly communicated to all recipients that they had won significant prizes when they had not. Recipients who went to dealerships to claim winnings were awarded “prizes” much less valuable than those advertised – typically such items as a $5 Walmart gift card, a scratch-off lottery ticket, a cheap MP3 player or a mail-in rebate coupon for $10 off the purchase of a turkey.
The Indiana AG seeks a permanent injunction; $500 per consumer who was mailed a piece and went to a dealership; civil penalties under Indiana law; and reimbursement of the AG’s investigative and other costs.
Pennsylvania
Pennsylvania has established a mini-Consumer Financial Protection Bureau in its AG’s office and the Bureau of Consumer Protection has been taking dead aim on dealer advertising.
In a recent action, the AG sued 20 dealers as part of an advertising sweep that targeted auto dealers and their salespeople who advertised vehicles for sale without disclosing that the sale was being conducted by a dealer, as is required under Pennsylvania law. All auto dealers in this sweep advertised on Craigslist as individual sellers, rather than as dealers, providing insufficient information to consumers viewing their postings.
The Office of Attorney General has so far collected more than $10,500.00 in civil penalties and costs for the illegal advertisement of at least 178 vehicles to Pennsylvania consumers. A few the lawsuits remain outstanding.
New Jersey
Another state that is establishing its own mini-Consumer Financial Protection Bureau sued (and put out of business) two buy-here-pay-here dealers and their owner personally for deceptive and unconscionable business practices which included deceptive advertising.
Violations alleged that defendants sold high-mileage, used autos at grossly inflated prices with excessive down payments; financed the sales through in-house loans with high interest rates and “draconian” terms that created a high risk of default; and then repossessed and resold the vehicles over and over again to different consumers in a practice they refer to as “churning.”
The AG also alleged that defendants engaged in deceptive advertising, failed to disclose the damage and/or required substantial repair and bodywork required for used motor vehicles, and failed to provide consumers with complete copies of signed sales documents, including financing agreements.
In addition to significant civil money penalties, the State is seeking to permanently close the two subject car dealerships and ban the owner from ever operating a car dealership again. The case also seeks restitution for affected consumers.
Ohio
The Ohio AG felt it necessary to issue guidance to auto dealers describing advertising requirements under Ohio law and warning about the consequences of deceptive advertising. Ohio also allows consumers to sue auto dealers under a private right of action for triple their damages and their attorneys’ fees.
Among other things, an advertised purchase price must include the total amount that a consumer is required to pay the dealer pursuant to the contract. Only tax, title, and registration fees and documentary service changes may be excluded, and the exclusions must be referenced in a disclosure. If a rebate, discount, or price reduction is not available to all consumers, the amount may not be subtracted to arrive at an advertised price.
Massachusetts and Delaware
These two states jointly settled an action with Exeter Finance for unfair trade practices in providing subprime auto financing to dealer customers. Exeter was fined $6 million, $5.5 million by the Massachusetts AG and $500,000 by the Delaware AG. As part of the settlement, Exeter will waive deficiency balances and other post-default charges on some of its loans and ask major credit reporting agencies to delete trade lines associated with the accounts of affected borrowers.
Exeter, a subprime lender, was accused of facilitating the origination of auto financing in Massachusetts and Delaware that the company knew or should have known were unfair and in violation of the state consumer protection laws. Officials explained courts have held that lending is unlawful under the state UDAP statutes if finance companies do not have a basis for believing that borrowers will be able to repay their loans in normal course.
Previously, the Massachusetts AG settled with Santander Bank in the sum of $22 million for similar conduct.
While directed at the lender, the allegations of putting customers into financing a reasonable dealer knows they cannot afford (an example being an unwound spot deal with worse credit terms for the customer) could apply to dealers as well.
What This Means for Auto Dealers
These are not the only states that have shown aggressive policing of dealer ads. Many states are establishing watchdog groups focusing on dealer ads that in the past may have been on the bubble such as the sweepstakes ads. And the FTC too has identified auto dealer advertising as a priority for 2019.
Here are ten best practices for all dealer ads:
Expect more regulatory enforcement actions and more lawsuits involving dealer advertising.
Indiana
We’ve all seen them and most of us have probably used them to attract customers. Mailing pieces to consumers indicating that if a scratch-off number on the mailing matches a prize number on the mailing (and they all do), they have won a sweepstakes. Large photos of prizes such as a new vehicle, a large amount of cash, a big screen color TV, and the like are blasted across the top. All the customer has to do is come to the dealership to match their prize number against a board at the dealership to see what they have won.
Only in small mouse type, frequently not on the same page, does the mailing indicate that no purchase is necessary and the odds of winning the prizes. One of these pieces that I reviewed recently gave the odds of winning the vehicle and other displayed prizes at 1,000,00:1. The odds of winning a $5 gas gift card were 1:999,996 meaning only four people in a million would win a large prize and all others the gift card. Unclaimed prizes were not awarded and were deemed to be forfeited. By making everyone a “winner” of a prize, I was told the sweepstakes eliminated the element of chance and thus was not an illegal lottery. But that is not the end of the story.
The Indiana AG recently saw a similar piece and apparently was not amused.
Instead of suing individual dealers (over 56 of whom sent these pieces to over 2.1 million Indiana consumers), the AG sued the promotional advertising agency that designed the pieces. The AG alleged an unfair trade practice under Indiana law which has the same standard for an unfair trade practice as does a violation of Section 5 of the FTC Act.
The complaint alleges that all the mailings contained game pieces purporting to determine whether recipients had won prizes – which included such valuable items as vehicles, TVs or $1,000 in cash. Each mailing, however, contained identical game pieces with winning numbers. Thus, each mailing allegedly communicated to all recipients that they had won significant prizes when they had not. Recipients who went to dealerships to claim winnings were awarded “prizes” much less valuable than those advertised – typically such items as a $5 Walmart gift card, a scratch-off lottery ticket, a cheap MP3 player or a mail-in rebate coupon for $10 off the purchase of a turkey.
The Indiana AG seeks a permanent injunction; $500 per consumer who was mailed a piece and went to a dealership; civil penalties under Indiana law; and reimbursement of the AG’s investigative and other costs.
Pennsylvania
Pennsylvania has established a mini-Consumer Financial Protection Bureau in its AG’s office and the Bureau of Consumer Protection has been taking dead aim on dealer advertising.
In a recent action, the AG sued 20 dealers as part of an advertising sweep that targeted auto dealers and their salespeople who advertised vehicles for sale without disclosing that the sale was being conducted by a dealer, as is required under Pennsylvania law. All auto dealers in this sweep advertised on Craigslist as individual sellers, rather than as dealers, providing insufficient information to consumers viewing their postings.
The Office of Attorney General has so far collected more than $10,500.00 in civil penalties and costs for the illegal advertisement of at least 178 vehicles to Pennsylvania consumers. A few the lawsuits remain outstanding.
New Jersey
Another state that is establishing its own mini-Consumer Financial Protection Bureau sued (and put out of business) two buy-here-pay-here dealers and their owner personally for deceptive and unconscionable business practices which included deceptive advertising.
Violations alleged that defendants sold high-mileage, used autos at grossly inflated prices with excessive down payments; financed the sales through in-house loans with high interest rates and “draconian” terms that created a high risk of default; and then repossessed and resold the vehicles over and over again to different consumers in a practice they refer to as “churning.”
The AG also alleged that defendants engaged in deceptive advertising, failed to disclose the damage and/or required substantial repair and bodywork required for used motor vehicles, and failed to provide consumers with complete copies of signed sales documents, including financing agreements.
In addition to significant civil money penalties, the State is seeking to permanently close the two subject car dealerships and ban the owner from ever operating a car dealership again. The case also seeks restitution for affected consumers.
Ohio
The Ohio AG felt it necessary to issue guidance to auto dealers describing advertising requirements under Ohio law and warning about the consequences of deceptive advertising. Ohio also allows consumers to sue auto dealers under a private right of action for triple their damages and their attorneys’ fees.
Among other things, an advertised purchase price must include the total amount that a consumer is required to pay the dealer pursuant to the contract. Only tax, title, and registration fees and documentary service changes may be excluded, and the exclusions must be referenced in a disclosure. If a rebate, discount, or price reduction is not available to all consumers, the amount may not be subtracted to arrive at an advertised price.
Massachusetts and Delaware
These two states jointly settled an action with Exeter Finance for unfair trade practices in providing subprime auto financing to dealer customers. Exeter was fined $6 million, $5.5 million by the Massachusetts AG and $500,000 by the Delaware AG. As part of the settlement, Exeter will waive deficiency balances and other post-default charges on some of its loans and ask major credit reporting agencies to delete trade lines associated with the accounts of affected borrowers.
Exeter, a subprime lender, was accused of facilitating the origination of auto financing in Massachusetts and Delaware that the company knew or should have known were unfair and in violation of the state consumer protection laws. Officials explained courts have held that lending is unlawful under the state UDAP statutes if finance companies do not have a basis for believing that borrowers will be able to repay their loans in normal course.
Previously, the Massachusetts AG settled with Santander Bank in the sum of $22 million for similar conduct.
While directed at the lender, the allegations of putting customers into financing a reasonable dealer knows they cannot afford (an example being an unwound spot deal with worse credit terms for the customer) could apply to dealers as well.
What This Means for Auto Dealers
These are not the only states that have shown aggressive policing of dealer ads. Many states are establishing watchdog groups focusing on dealer ads that in the past may have been on the bubble such as the sweepstakes ads. And the FTC too has identified auto dealer advertising as a priority for 2019.
Here are ten best practices for all dealer ads:
- Make sure your ads contain all triggered terms required by federal Regulations Z (credit sales) and Regulation M (leases);
- Make sure your ads are accurate and for the advertised price, omit only tax, title, registration and the document fee permitted by your state’s law. Indicate in a conspicuous disclosure that those items are extra;
- Don’t advertise terms that most of your customer base will not qualify for such as price reductions or low APRs for customers with high credit scores;
- Make sure you have enough of the advertised vehicles to meet the reasonably anticipated consumer demand. If not, give the exact number available. A very low number of such vehicles may be interpreted as a “bait and switch” ad;
- Many states require you to give the advertised price to any qualified customer even if the customer has not seen the ad;
- Don’t stack rebates especially unconditional rebates (available to everyone) with conditional rebates (available only to certain groups like recent graduates, military or first responders, or returning customers), Itemize the rebates you want to advertise;
- Don’t put disclosures in mouse type, text that bleeds into the background, or are not in proximity to the headine the disclosure explains. Putting a disclosure on a different page from the headline is not recommended;
- Be careful with sweepstakes ads. They are easily shown to be come-ons designed to get the customer into the showroom with no real possibility of winning a meaningful prize. See Indiana above;
- For Internet ads, place the disclosures in close proximity to the headline, don’t use pop-up disclosures unless absolutely necessary, make disclosures clear and conspicuous and put an expiration date on every Internet ad; and
- Don’t bury Internet disclosures in long columns of text and be sure the disclosures are optimized to be clear and conspicuous on any device that can access them.
Expect more regulatory enforcement actions and more lawsuits involving dealer advertising.
RSS Feed