Is Zero Tolerance Enough?

A recently filed lawsuit against an auto dealership accused a sales manager of sexual harassment and sexual battery against a salesperson. According to the complaint, the employee was harassed continuously over a ten day period and ultimately quit due to the alleged behavior. The complaint further stated that the dealership should have known what was going on and tried to correct it.


The dealership responded that the claims have no merit; that it has a zero-tolerance harassment policy; and that human resources was not contacted about the situation, as its employee handbook specifies.

I have no idea what the true merits of this particular case are, but it brings to mind what an uphill battle fighting these claims can be.

In some cases, employers may be considered to be “strictly liable” for sexual harassment, meaning that the employer is liable for harassment by an employee or other individual even if the employer did not know about the harassment or acted immediately to stop it. Fortunately, the Supreme Court has recognized a viable defense to this liability. If an employer can prove that it exercised reasonable care to prevent and promptly correct any sexually harassing behavior and the complaining employee unreasonably failed to take advantage of any preventative or corrective opportunities the employer provided or to otherwise avoid harm, the employer may avoid liability for unlawful harassment. Note however, where a supervisor’s harassment includes a tangible employment action (for example, firing the individual); this defense may not be used. An employer is always liable for harassment by a supervisor on a prohibited basis that culminates in a tangible employment action. The Supreme Court recognized that this result is appropriate because an employer acts through its supervisors, and a supervisor's undertaking of a tangible employment action constitutes an act of the employer.

The result in the this case may well come down to whether or not the court believes that the employer exercised “reasonable care” and that the employee “unreasonably” failed to take advantage of opportunities that the employer provided.

Most dealerships have an anti-harassment policy in place that they have all of their employees sign. That’s a great first step, but the questions remain: Have the employees actually read the policy and do they really understand it? Are they really aware of the procedures set forth in the policy to protect them from harassment?

If employees are trained on exactly what to do in the case of harassment (like who to report it to, and so forth) and fail to do so, the dealer will likely be in a better position to defend itself against a claim. On the other hand, if victims of harassment are uncertain about whom to report the harassment to within the company or worse yet, their claims are not taken seriously; they may feel their only recourse is to contact an attorney. That’s when it gets ugly.

The following procedures can be helpful in demonstrating that an employer has taken reasonable care in preventing or mitigating harassment:

• Preparing and adopting an anti-harassment policy and communicating the anti-harassment policies to all employees.

• Clearly communicating that harassment will not be tolerated and clearly explaining prohibited conduct.

• Creating a sexual harassment complaint procedure and explaining the employee’s obligation to report any conduct that may be viewed as harassing.

• Providing every employee with a copy of the harassment policy and complaint procedure, and redistributing it periodically. The policy and complaint procedure should be written in a way that will be understood by all employees in the employer's workforce.

• Making the anti-harassment policy easily accessible via the company intranet, posters, employee handbooks and including it in the new-hire process.

• Providing sexual harassment training to all employees to ensure that they understand their rights and responsibilities.

• Taking any claim seriously and investigating it.

• Taking prompt and appropriate action.

Unfortunately, being a traditionally male-dominated industry, harassment claims against auto dealerships are not an uncommon occurrence. Having a policy in place and hanging posters may not be enough to adequately protect yourself.

Learning to Play the Right Way

Much of what employees learn in the car business is from watching and listening to their co-workers. This type of education can be invaluable in many areas such as sales presentation, demonstration, and closing techniques. Of course, it can also lead to picking up bad habits like pre-qualifying customers by appearance or shortcutting the sales process.

An area that is frequently learned more by osmosis than by formal training is legal compliance. Dealers often assume that their employees possess adequate regulatory know-how simply because they’ve been in the business for a while. But who taught them the rules? Have they been properly trained in compliance or are they just winging it? It’s important to realize that at some point in their career, many automotive professionals were taught the “old school” way of doing business. Some dealership practices they’ve learned are not necessarily legal or ethical but the employees simply rely on doing business the way it’s always been done. Many of these old school tactics are so common that employees don’t realize how risky they are:

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”.

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”.

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”.

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

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”.

Sales manger to sales person: “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.”

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!”

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.”

Finance manager to used car manager: “We’re over-advanced on that Tahoe deal. I need a book sheet for $15,500. Book it with premium wheels and sound.”

The vast majority of dealership employees are well-meaning, honest people, but assuming that they know everything they need to about compliance, especially in the current environment, is risky at best. When was the last time you had a comprehensive compliance check-up done? If it’s been a while (or never), now is the time. Once you have identified the areas that are in need of attention, the staff should be properly trained. Education is a vital step towards protecting your business. After all, if employees don’t know or understand the rules, how can they be expected to follow them?

Chances are, you wouldn’t let someone drive your car unless you were certain that they knew how to drive. It makes sense to be just as careful when you’re handing them the keys to the dealership.

Is Anyone Else Getting Sick of Consumer Attorneys Cashing In?

I’m sure you’ve heard by now about the dealer who lost a class action lawsuit and was ordered to buy back over 1,500 vehicles from customers whose rewritten contacts were backdated. Another big win for consumer attorneys.

Not surprisingly, the news of this devastating decision has led to plenty of Monday morning quarterbacking. Naturally, the consumer advocate contingent is broadcasting that this is just another example of an unscrupulous dealer who got what was coming to him. On the other hand, most people who know anything about the automotive business realize that this was just another example of sleazy attorneys preying on dealerships for technical violations. I mean, let’s face it, how does a dealer even benefit from backdating a contract? Why would a dealer knowingly break the law? Personally, I don’t think they did. I believe that these were innocent oversights.

It just seems to me like many dealers are making it much too easy for these lawyers by not paying enough attention. So, what can you do to avoid this type of exposure? Obviously, it’s important to not backdate any more contracts. That’s a good start, but what about those other potential legal nightmares? You know the ones I’m talking about: advertising violations, adverse action notices, hidden finance charges, privacy policies, information safeguards, overcharging fees, deferred downpayments, prior vehicle history disclosures, falsified applications, power booking, and so on. And don’t forget the new Red Flags Rule and Risk Based Pricing Notices. I bet the lawyers are licking their chops just thinking about those new opportunities.

Enforcement actions against dealers by regulators have been few and far between, so you may think that it’s easy to fly under the radar. Maybe so, but it’s important to understand that you probably have far less to fear from the FTC or an attorney general than you do from a consumer attorney with your customer’s deal paperwork in his hands.

So, you can stick your head in the sand and keep the lawyers fat and happy, or you can be proactive. It’s really not that difficult. If you haven’t had your deals audited lately, audit them. If your staff hasn’t received compliance training lately, train them. If, despite your best efforts, certain staff members don’t take compliance seriously, replace them.

It’s time to stop the insanity and keep the money in your own pocket – the lawyers have made more than enough.

So You Have a Red Flags Program – Now What?

The new federal regulations that went into effect this year have added to the never-ending compliance requirements that dealerships have to deal with. Fortunately, most dealers have found that the Risk Based Pricing Notice and updated Privacy Notice requirements are pretty easy to handle. Utilizing the Credit Score Disclosure exception to Risk Based Pricing Notices and using the New Model Privacy Notices is relatively simple – just a few more forms to add to the pile. The Red Flags Rule is another story.

Red Flags regulations require a dealership to not only be a good citizen, but to be a cop as well. There’s no two ways about it, if red flags are detected during a credit transaction, certain proactive steps are required that will create extra work and slow down the deal process.

Many dealerships are utilizing automated Red Flags programs to help stay in compliance with the new regulations. These programs, such as those available through DealerTrack, RouteOne and the credit reporting services, are excellent and certainly make it easier to navigate the Red Flags Rule. The challenge begins when potential “red flags” are detected by these systems. Unfortunately, this is not an uncommon occurrence. Fraud or active duty alerts on credit bureaus, address discrepancies, multiple recent inquiries, or multiple new accounts recently opened are just a few of the situations that are considered to be identity theft “red flags”.

During compliance reviews in the last few months, we have been paying particular attention to how dealership employees are handling the new Red Flags requirements. Not surprisingly, we’re finding that in many instances when red flags are detected during a transaction, staff members are struggling with what to do next.

For instance, we’ve found a number of situations where the red flags program has prompted that a “high risk has been detected” and that “out of wallet questions are required”, but the questions have not been asked of the customer. While it can certainly be uncomfortable to ask a customer personal questions or request that they supply additional proof of identity or address, it is important that these steps not be avoided. If an identity theft does occur, and the system-recommended steps were not taken, it’s conceivable that the dealership’s exposure to liability will be increased dramatically. The same holds true in a situation where the dealer’s Red Flags procedures are audited by a regulator. Staff members’ proclamations that they had a ‘gut feeling’ that the customers were who they said they were will not likely be enough to satisfy the investigators. The fact that the employees were prompted to follow a particular procedure and failed to do so would almost certainly make matters much worse.

Training is a mandatory requirement of the FTC’s Red Flags Rule. Employees should be well-trained in all aspects of the company’s Identity Theft Protection Program and features of any automated Red Flags systems, including the proper procedures necessary if Red Flags are detected. The training should explain the spirit of the law as well. It is important that staff members understand that the Red Flags Rule requires employees to be proactive in attempting to prevent identity theft and that any shortcuts taken in the process can create extreme liability to the dealership.

Even the best Red Flags program is not infallible. Chances are that an experienced identity thief will succeed despite a dealership’s best efforts. That’s okay. As long as the company can show that they have performed their due diligence and did not take any shortcuts, their exposure will likely be lessened dramatically.

When Little Complaints Become Big Problems

The vast majority of dissatisfied customers who threaten to call an attorney never do. For the few that follow through, the results can be devastating. While it’s true that many customers’ complaints have little or no merit, there can be a real danger if the wrong plaintiff’s attorney gets involved.

You may be thinking “we have lawyers of our own and insurance for that sort of thing, so bring it on”. Well, here’s the problem: many lawsuits that stem from seemingly insignificant complaints snowball into massive class action cases based upon other issues entirely. There are a number of plaintiffs’ attorneys out there who are absolutely brilliant at turning dealer oversights or technical violations into class action lawsuits. For instance, one dealership’s failure to honor its promise to swap rims on a vehicle resulted in a class action lawsuit for backdating rewritten contracts where the court ordered that the over 1,500 class members could elect to return their vehicles and rescind their contracts.

Let’s face it, most common consumer vs. dealer lawsuits or Lemon Law claims don’t pay big attorney fees, but class action lawsuits do. It doesn’t matter if the customer’s complaint is valid or if they have actually suffered any real damage; these attorneys simply want the opportunity to get their hands on your files. A Missouri dealer group recently settled a documentation fee class action lawsuit for over $8 million. The attorneys alleged that the charges constituted the “unauthorized practice of law”. Ridiculous, yes, but the attorney fees totaled $675,000.

Other lawsuits have begun from mechanical issues, alleged misrepresentation of a vehicle’s condition, lies or unkept promises, undisclosed prior damage or vehicle history, payment packing claims, failure to honor warranties or service contracts, you name it. They’ve ended up becoming class action claims for improper disclosures, overcharging of fees, improper contract rescissions, undisclosed deferred downpayments, backdated contracts, etc.

Even if class action status is not pursued or granted, attorneys often seek unfair and deceptive acts and practices claims for technical violations by painting a picture of “the greedy dealer profiting from the poor, unsuspecting consumer”. Believe me; it’s not that tough to sell to most judges and juries, and the ultimate cost to the dealership is often substantially more.

The good news is that these lawsuits are avoidable. Most customers will not seek out an attorney unless they feel that they have no other choice or feel that they are being ignored or mistreated by dealership personnel. Two things that are virtually guaranteed to enrage a customer are unreturned calls or being treated in a confrontational manner by staff members. Many potential legal issues can be avoided by simply responding to customer complaints and perhaps offering a goodwill concession.

All customer concerns should be addressed promptly by qualified personnel, regardless of their perceived validity. It’s vitally important that care be taken when communicating with customers – their attorney may use what you say against you. Many times a customer will contact an attorney after they have felt that they were being ‘bullied” into signing a new contract or threatened with repossession, legal action or consequences to their credit rating. It’s a good idea to have customer complaints reviewed by your legal counsel or compliance officer to make sure that all your ducks are in a row.

Finally, check your ego at the door. While it may be distasteful to let an unreasonable customer “win” when you feel you’ve done nothing wrong, it makes good business sense to take a step back and examine the potential downside. Once an attorney gets involved, your chances of working out the problem directly with the customer diminish greatly. At the end of the day, does it make more sense to give in to the customer and move on with life or dig in your heels and risk a devastating lawsuit?

You Can Train Me Now or You Can Train Me Later

Employee training can cost a lot of money. Not training your employees can cost even more. In lawsuits, courts and regulatory agencies sometimes impose after-the-fact training requirements in addition to large monetary penalties. Consider these actual cases:


A dealership faced a wide range of complaints, including failure to disclose material defects and misrepresenting sales and extended service contract prices, and was ordered to pay $1.5 million in restitution to victims, plus $300,000 to the state Department of Consumer Protection. As part of the settlement, the dealer also agreed to initiate a mandatory education program for all its employees within 60 days of the settlement, instructing employees on state consumer protection laws.

A jury awarded a $14.4 million wrongful death verdict against a dealership that performed a faulty tire repair and failed to take the tire out of service, leading to a rollover crash that killed a couple. As a condition of the post-verdict settlement, the dealer agreed to implement a training program to better train its technicians about safe tire repair practices to improve consumer safety.

The Equal Employment Opportunity Commission (EEOC), entered into a $1.5 million settlement of a sex and age discrimination lawsuit with an auto dealership. Along with the monetary penalty, under a consent decree the dealership must provide current employees with four hours of EEO training annually and new hires must receive such training within ten days of employment.

The EEOC reached a $700,000 settlement of a national origin, religion and racial discrimination lawsuit against another dealership. According to the Consent Decree resolving the case, the dealership is required to hire a presenter approved by the EEOC to provide annual training to all of its managers and supervisory personnel on all aspects of Title VII.

What’s that old expression about closing the barn door after the horses are out?

Is Your Website Provider Watching Your Back?

As I read through dealer websites, I’m often surprised at how many advertising violations I find. You would think that website providers would make sure that this doesn’t occur, right?

You should never assume that the company that creates and maintains your website follows all the laws and regulations governing advertising compliance. State advertising laws vary and the responsibility for compliance lies with the dealership, not the vendor. Here are some examples of what I’ve run into and issues to look for:

• Disclaimers - Website providers sometimes include boilerplate factory disclaimers on inventory pages that identify vehicles by a specific VIN and price, such as:

o “Advertised vehicles are subject to actual dealer availability. Certain vehicles listed may not be available, or may have different prices.”

o “Pricing and availability varies by dealership.”

o “Prices do not include dealer charges, such as advertising, that can vary by manufacturer or region, or costs for selling, preparing, displaying or financing the vehicle.”

o “Images displayed may not be representative of the actual trim level of the vehicle.”

o “Information provided is believed to be accurate but all specifications, pricing and availability must be confirmed in writing (directly) with the dealer to be binding.”

While these types of disclaimers may be appropriate when advertising a model line, they probably shouldn’t be associated with specific vehicles. Advertised vehicles that are identified by VIN are subject to prior sale, but they certainly should not be subject to “different prices”. You should also determine which charges are allowed to be excluded from an advertised price in your state.

• Check to determine if all necessary disclosures are present on your site. For example, “advertised prices exclude tax, government fees, etc.” Again, do not assume that your website provider is utilizing language that is acceptable in your particular state or including all of the required disclosures.

• Be sure that all disclaimers are clearly and conspicuously displayed and not buried away in a difficult-to-find link elsewhere on the site.

• If payments, downpayments or interest rates are advertised, make sure that all of the proper Truth in Lending and state disclosures are included.

• Ensure that lease programs are properly disclosed. Many factory national lease programs contain generic information that may not be sufficient or appropriate in your state.

• Some states require that vehicle history, such as prior rental or demonstrator, is disclosed on vehicle advertisements. Does your website provide a way to include these disclosures?

• Ensure that vehicles are promptly removed from the website after they have been sold. Some sites are linked to the dealer’s DMS and will remove sold units automatically, while others require vehicles to be removed manually. Sold units should always be removed promptly to avoid potential bait and switch advertising claims.

It’s never a bad idea to have your website thoroughly reviewed by a compliance professional. Remember, advertising violations can be easy for regulators to spot and difficult to defend against.