Thursday, December 27, 2012

Don’t Get Caught In a UDAP Trap

Dealers have plenty to worry about when it comes to rules and regulations governing the industry, but perhaps the most harrowing are known as “UDAPs”.

Unfair and Deceptive Acts and Practices (UDAP) statutes are consumer protection laws that address what lawmakers consider to be “unethical” or otherwise “bad” business practices. The Federal Trade Commission Act prohibits unfair or deceptive acts or practices and each of the fifty states and the District of Columbia have enacted consumer protection laws that also prohibit these practices. These statutes have far-reaching implications for auto dealers because they typically provide both for enforcement by the government to stop the practice and individual actions for damages brought by consumers who are hurt by the practices.

Dealers need to be aware that these statues are extremely broad and not only prohibit acts and practices that fall directly under the purview of specific laws, but also any other practice that is determined to be unfair or deceptive to the consumer. A behavior can be found to be unfair and deceptive and thus actionable even though it does not constitute fraud, breach of contract, or negligence under more traditional law. As a result, UDAP claims are a favorite among consumer attorneys – especially those seeking class action lawsuits.

In many states, courts are empowered to award double or triple damages as well as punitive damages and attorney’s fees for UDAP violations. Under many of statutes, courts can also issue an injunction against the defendants from engaging in similar practices in the future. Under almost every statute, some state agency, usually the attorney general, is authorized to pursue the matter even if a consumer does not pursue it.

There are a wide variety of dealer sales, F&I, and advertising practices that may be considered to be unfair or deceptive by regulators or courts. Several of these are well-known, while others may surprise you. Here are some examples of potential UDAP violations:

  • “Drip Pricing” which the FTC defines as a pricing technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process.
  • “Payment Packing” or inflating a monthly payment amount in order to allow room for adding additional goods or services while leading the customer to believe that the quoted payment is for the vehicle purchase only or “base payment”.
  • “Yo-yo” Financing” or delivering a vehicle with terms that the consumer will most likely not qualify for, with the intention of having the customer re-write the contract under less desirable terms. Spot delivery has been on regulators’ radar screens lately, so these claims are becoming more common.
  • Informing a buyer that financing for the car will not be approved unless the buyer purchases a service contract, insurance or other products.
  • Leading a consumer to believe that he or she is purchasing a vehicle when it is in fact a lease.
  • Failing to disclose dealer-added accessories on advertised vehicles.
  • Leading a consumer to believe that the dealer will be assuming all liability under the lease of a trade-in vehicle, when the dealer intends to only make the final lease payments and assume no other liability, such as excess wear and tear or over-mileage.
  • Oral promises made to the customer that the dealer fails to deliver upon. A common misconception by dealership staff is that only written agreements are enforceable and oral agreements are irrelevant once the customer signs a contract. This is simply not the case. Even if the final contract is in perfect form, the transaction can be legally second-guessed based purely on oral, pre-contract communications between the buyer and seller.  Be careful what you say!
  • Bait & Switch - The FTC defines bait advertising as “an alluring but insincere effort to sell a product or service which the advertiser in truth does not intend or want to sell.  Its purpose is to switch consumers from buying the advertised merchandise in order to sell something else, usually at a higher price or on a basis more advantageous to the advertiser.”
  • Failure to disclose known vehicle history, such as that the vehicle was previously used as a rental or demonstrator, was previously sold and returned, suffered damage, stolen-recovered, flood-damaged, hail-damaged, a salvage vehicle, rebuilt or reconditioned.
  • Breach of warranty claims - The FTC Used Car Rule declares that it is a deceptive act or practice for a dealer to misrepresent the mechanical condition of a used vehicle, misrepresent the terms of any warranty offered in connection with the sale of a used vehicle, or to represent that a used vehicle is sold with a warranty when it is not.
  • Representing that vehicles are new when they are in fact, used.
  • Representing that a vehicle is of a particular standard, quality, or grade when it is not.
  • Misrepresenting discounts in advertising and not disclosing important limitations.
  • Posting false testimonials or online reviews.

It’s more important than ever to be very careful when dealing with consumers. Plaintiff’s attorneys are constantly on the prowl for cases and regulators recognize the political capital in going after dealers. There’s just no upside to being accused of deceptive practices.


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  2. Great Article Jim- as always- every dealer should read this article and understand why utilizing a fully disclosed menu presentation makes the difference in a potential law suit. I just think some of these guy's think, "it's not going to happen to me."