Tuesday, December 27, 2011

Legal Lessons to be Learned from the TrueCar Discussions

As the TrueCar debate rages on, one thing is certain: there is going to be increased scrutiny on auto sales practices by a number of state regulatory agencies. While TrueCar has a number of challenges to overcome and may be forced to alter their business model, the real concern is how these legal issues may affect dealers. Several state authorities have indicated that they will hold dealers responsible for any violations. It’s important that dealers are aware of these issues and protect themselves accordingly.


Brokering – TrueCar has been accused of operating as an illegal broker in some states due to their method of compensation (i.e. charging a fee for the sale of a vehicle). What has also come to light is that some states may also consider other common lead-provider compensation arrangements to be illegal as well. For instance, the Virginia Motor Vehicle Dealer Board has indicated that "motor vehicle dealers may only compensate an unlicensed third party vendor by flat payment structure (e.g., per month) rather than per sale, per referral, or any other transactional basis". As an example, they stated that "a monthly fee tied to the number of consumers who submit their contact information to the dealership via a vendor’s website...would appear to be in violation of Virginia law in that any search that resulted in a sale would mean that the dealer has compensated an unlicensed individual in connection with the sale of a motor vehicle." Does this mean that paying a lead provider a fixed amount per lead (a common arrangement) is not allowed in Virginia or some other states? Maybe.

The lesson to be learned here is that is important for dealers to have their legal counsel scrutinize vendor contracts and ensure that they are compliant. It’s conceivable that some vendors are either not aware of state prohibitions or are trying to fly under the radar. TrueCar altered their compensation program in Virginia last year in an attempt to comply with state brokering prohibitions, but apparently is still out of compliance.

Advertising – It’s been noted that TrueCar’s current advertising practices run afoul of certain states’ regulations. It remains to be seen if TrueCar will be able to adjust their adverting accordingly to comply, but there’s a lesson to be learned for dealers. A number of complaints have been published by TrueCar customers about dealerships failing to honor advertised prices, attempting to add additional fees, and alleged “bait and switch” tactics. While these accusations may or may not be true, it’s a good reminder for dealers to ensure that their staff members fully understand and follow state and federal advertising guidelines. Advertising violations can be quite serious and the potential penalties are substantial. Once again, state regulators have indicated that they will be taking a closer look at dealerships since being made aware of the TrueCar model. It’s a good idea to train employees on advertising rules of the road and hold them accountable for strict compliance.


Privacy – The TrueCar discussions have also brought into question the sharing of dealers’ DMS data with vendors. It’s vitally important for dealers to ensure that their privacy policies accurately reflect their actual practices in sharing of consumers’ Personally Identifiable Information (PII). Many dealers have boilerplate privacy policies that may state that they do not share PII with non-affiliated parties. If vendors are accessing DMS data from the dealership, that statement may not be true. The Federal Trade Commission and state regulators have been taking an increasingly aggressive stance against companies that fail to follow their own privacy guidelines. It’s time for dealers to dust off their privacy policies and adjust them if necessary.


The good news is that the regulators have given fair warning that they’re going to be looking closely at these issues. The increased legal scrutiny on dealerships may be an unintended consequence of the TrueCar debate, but at least the dealers that are paying attention won’t be blindsided.

1 comment:

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