Tuesday, May 25, 2010

The New Breed of Shakedown Lawsuits

It seems like dealers just can’t catch a break when it comes to lawyers and lawsuits. Back in 2004, California businesses won a hard-fought battle against “shakedown” lawsuits with the passing of Proposition 64. Previously, the law had allowed any party to sue a company regardless of whether the plaintiff was directly affected. For example, lawyers were able to review car dealer ads in the newspaper, spot a violation of the Vehicle Code and file a lawsuit against the dealer, without any client who was misled. Proposition 64 restricts private lawsuits against a company only to those where an individual is actually injured by and suffers a financial loss due to an unfair, unlawful, or fraudulent business practice. It also provides that otherwise only public prosecutors may file lawsuits charging unfair business practices. Of course, this was a tremendous blow to greedy attorneys who specialized in these shakedown lawsuits.

Unfortunately, many dealers are still falling victim to other types of class action lawsuits that are no less mind-boggling. It should come as no surprise that these cases typically end up with the allegedly wronged consumers getting little or nothing while the attorneys collect a fortune.

Here are some recent examples of class action lawsuits in California:

• A Toyota Dealer failed to properly disclose an “Optional DMV Electronic Filing Fee” on leases that were assigned to Toyota Motor Credit Corporation and charged the fee without the customer’s knowledge or consent. It is believed the case affects over 50,000 persons who leased vehicles from over 60 Toyota dealerships in the last five years. (We’re talking about a $28 fee).

• A dealership settled a class action suit where a customer alleged that when she was called back to the dealership to sign a new contract to purchase the same vehicle, the dealership dated the subsequent contract the same date as the original contract, thereby causing undisclosed charges. Members of the class, believed to be up to 500 customers, will receive up to $1,400 for valid claims.

• A class action lawsuit that consisted of all persons who executed a Retail Installment Sale Contract with the dealership that included in the “Cash Price of Motor Vehicle,” on the contract the cost of insurance. The Court awarded members of the Class a refund of all of their payments, as well as having the option to rescind their contracts.

• A suit where the Class consisted of all persons who purchased a used vehicle from the dealership for personal use and were charged “California Tire Fees” even though the dealer had previously paid the tire fees to the seller of the tires at the time the dealer purchased the tires. (Tire fees are $1.75 per new tire).

• Another Class consisted of all persons who purchased a diesel vehicle from the dealership for personal use and were charged a smog fee and a smog certification fee.

• A lawsuit where the Class consisted of customers who made a deferred down payment, and whose RISC does not disclose that some portion of the down payment would be deferred until a later date.

• Another action naming all persons who purchased a used vehicle for personal use that was not equipped with new tires, but who were charged a California Tire Fee.

• A Class was defined as all persons who executed a Retail Installment Sale Contract for the purchase of a vehicle for personal use where registration and licensing fees were not properly disclosed.

• Another Class including all customers who were not properly notified within ten days of the execution of their purchase contract that the dealer was exercising its contractual right of rescission.

• Customers who signed a Retail Installment Sale Contract that failed to separately itemize the amounts paid for license fees and registration/ transfer /titling fees on the retail installment sale contract. (Are they kidding? The dealer did not overcharge the fees, but simply did not split them up!)

• A class action settlement was reached on behalf of all consumers who purchased undisclosed prior rentals, entitling class members to $1,000 refunds from the dealership.

• Another class action that involves the failure of the dealer to disclose the itemization of capitalized cost in the precise manner required by law.

You may be thinking that since you have your customers sign an arbitration agreement you don’t have to worry about class-action lawsuits, right? Well, in two recent cases, a law firm successfully defeated motions to compel arbitration in backdating and deferred down payment class actions. One of the Courts held that the customer could not waive her unwaivable rights under the Consumers Legal Remedies Act, which included the right to bring a class action lawsuit. The other Court held that the arbitration clause was procedurally and substantively unconscionable.

Although the cases above are all from California for illustration, be assured that there are attorneys in every state finding ways to exploit dealers. In many states, a plaintiff suing under the state consumer protection laws does not need to prove that the dealer intended to defraud the consumer in order to make out a case. The lack of any element of intent on the part of the dealer not only lowers the bar for proving liability, but also makes the case more susceptible to treatment as a class action.

What’s really sad about all of this is that most of these lawsuits have nothing to do with unfair or deceptive practices on the dealer’s part. The lawyers are simply taking advantage of mistakes and oversights. Take tire fees for example. These fees are often mistakenly charged because the dealer’s DMS isn’t programmed to differentiate between new and used tires. If an employee inadvertently overcharges the fee, it is not retained by the dealer, but sent to the state. So, does that mean that California and the dealer are in cahoots in defrauding the poor consumer? And how about the need to separately itemize the amounts paid for license fees and registration/transfer/titling fees? C’mon, that’s just ridiculous.

The good news is that exposure to these types of lawsuits is avoidable. It is important for dealers to review their company policies and practices and ensure that all employees are properly trained. It may also be a good idea to have a highly-qualified second set of eyes on every deal. Personnel can get very busy and may overlook important details when trying to move customers through the sales process in a timely fashion.

It’s a shame that dealers have to contend with these issues. It’s tough enough trying to stay afloat without the sharks circling.

Saturday, May 15, 2010

AutoSuccess: The Podcast

AutoSuccess: The Podcast It might not be fun, but educating your staff about legal compliance can make the difference between happy customers and employees and business-threatening lawsuits. On episode #132, we speak with Jim Radogna, President of Dealer Compliance Consultants about some of the obvious and less-than-obvious benefits to educating your staff on legal compliance.

Friday, May 14, 2010

Dealers Suffer Either Way with the Brownback Amendment

First, I’d like to go on record as saying that I sincerely believe that the Brownback Amendment is a good thing. The last thing auto dealers need is more regulation. Most dealerships are highly ethical and provide a great service to the public by helping provide affordable auto financing. NADA, as usual, is doing an outstanding job of lobbying for dealers’ interests.

Unfortunately however, the media spotlight this amendment has received has once again brought negative attention to the auto industry. Any way you look at it, the President of the United States, the U.S. Military and numerous consumer groups are fundamentally stating the auto dealers can’t be trusted. That’s never a good thing.

Whether we like it or not, it’s difficult to deny that there are unscrupulous dealers out there who do indeed prey on consumers – often they run small lots close to military bases. This is unfortunate but should not be a reflection of the industry as a whole because these sleazy operations represent just a tiny percentage of auto dealerships in this country.

It’s the other end of the spectrum that is far more concerning. Take for example, the late, great Bill Heard Chevrolet. Here was a dealer group that was in business for almost a century, had 14 big stores, did over $2 billion in annual sales, and employed 3500 people…hardly a corner lot next to a tattoo parlor.

Before they went out of business, Bill Heard was battling all kinds of accusations, lawsuits and regulatory actions - including forgery, deceptive advertising, credit fraud, identity theft, sexual harassment, and just about anything else you can think of. Once the dealerships closed their doors, the media couldn’t say enough about the compliance issues – it was instant national news. Besides the pending lawsuits, hundreds of Consumer Affairs and Better Business Bureau complaints came to light. To add insult to injury, Bill Heard was also cited with labor violations for violating the WARN act after it closed.

Although Bill Heard was a victim of the economy, I can’t help but think that they also suffered the consequences of their own bad behavior in their demise. It’s very sad for the many, many honest, hard-working employees that lost their jobs. As for the few dishonest employees that committed the illegal, unethical acts – they have blemished the entire industry.

 Dealers just don’t need any more bad press.

Thursday, May 6, 2010

Can't Blame Them For Doing What They're Told

Back when I was a green-pea salesman, I listened carefully to everything the closers and sales managers said. These guys were good! It seemed that no matter what the customer said, they had an answer. So I listened and learned. When I got my shot and became a closer, I carefully followed my sales manager’s lead. Same thing as I moved up through the ranks – I listened and learned from the old timers. By the time I became a GM, I knew it all, right? Well, not exactly. Any of this sound familiar?

Sales manager to salesperson: “Your customer has great credit but the bank is going to need more income. I don’t think they’ll ask for proof”. (falsifying credit information)

Sales manager to finance manager: “Listen, these folks are in a hurry. Let’s make them mental owners. Just have them sign a contract real quick and we’ll get the rest of the paperwork done another time. If they leave without signing something, they won’t be back”. (improper disclosure)

Sales manager to salespeople: “Guys, that ad car is a big loser. Switch your customers to something else unless we can make a ton on the back end”. (bait and switch)

Sales manager to finance manager: “Joe’s got this guy committed at $30 a month more then we need. Let’s make some money!” (payment packing)

Sales manager to salesperson: “We can probably get this guy done, but there’s going to be a big bank fee. If he wants that Sentra, don’t mention the ad price. We need to sell it for a few grand more for the deal to make sense. He’ll be happy we can get him done”. (hidden finance charge and failure to sell at advertised price)

Sales manger to salesperson: “It looks like the negative equity is her hot button. Here’s what we’ll do: Tell her that we’ll pay off her trade and get her committed at $379 a month. I’ll just add the negative equity to the price.” (failure to properly disclose negative equity)

Finance manager to salesperson: “Let your customer know that the bank may call her and ask some questions. Make sure she tells them that the car is for her and not her brother!” (straw purchase)

Finance manager to sales manager: “I don’t care if you take a hold check for the downpayment, but the bank isn’t going to go for a deferred down, so we need to show it as cash on the contract.” (failure to disclose deferred downpayment)

Finance manager to used car manager: “We’re over-advanced on that Tahoe deal. I need a book sheet for $15,500. Doesn’t it have premium wheels or something?” (power booking)

Many long-standing dealership practices are not necessarily legal or ethical but often times staff members have no idea they are breaking the law. The vast majority of dealership employees are well-meaning, honest people just trying to earn a living. However, if they have never been properly trained in compliance matters, they may simply rely on doing business the way it’s always been done. Dealers should not assume that employees know all the rules. Education is the first and most vital step towards building an ethical organization. After all, if employees don’t know or understand the rules, how can they be expected to follow them?

Jim Radogna is the President of Dealer Compliance Consultants, Inc., a San Diego, California training and consulting firm.