Why is the FTC Messing With Dealers?

Since the news broke earlier this week about the FTC citing 5 auto dealers for deceptive advertising, I’ve been asked a number of questions by folks in the industry. Here’s my take on the situation:

What’s the big deal about advertising that the dealership will pay off a trade-in no matter what the customer owes? It’s a true statement.

The problem is not so much what the ads say, but what they don’t say. As far as regulators are concerned, if an ad doesn’t explicitly state that any negative equity will be added to the loan balance, it’s deceptive. While it may seem obvious to us that the customer is responsible for negative equity, some consumers (and lawmakers) apparently think that these advertisements imply that the dealer will buy the trade for the amount the customer owes, regardless of its real value.

Some basic principles that regulatory agencies consider are 1) advertising is considered deceptive if the advertisement has a “tendency or capacity to mislead the public”; 2) if an ad is deemed deceptive, an advertiser has liability regardless of whether there was intent to deceive and; 3) statements susceptible to both a misleading and a truthful interpretation will likely be construed to be deceptive.

We always fully disclose negative equity on our contracts and leases, why isn’t that good enough?

If regulators feel that the first contact with a consumer is secured by deception, a violation may occur even though the true facts are made known to the buyer before he or she enters into a purchase or lease. Since statements and representations in advertisements are evaluated based on their tendency to deceive, no actual harm to consumers need occur for there to be a violation.

Dealers have been using this type of advertising for years – did the FTC recently change the rules?

No, these types of incomplete statements about paying off trade-ins have been considered deceptive for a long time by both federal and state regulators, so this is nothing new. Bear in mind that the fact that others were, or are, engaged in like practices is not considered a defense.

As to why the Feds decided to take action against dealers now - your guess is as good as mine. The FTC has been threatening to step up enforcement against dealers for the last year or so, but to be honest; I’ve been a bit skeptical. The Feds have traditionally gone after bigger fish and left car dealers to state regulators. So, while this action may just be a flash in the pan, it can also be a major game changer.

How do we avoid this happening to us? I mean, if the regulators decide to go on a witch hunt, they’re going to get you one way or another.

I disagree. Again, the violations the FTC cited are not new or surprising to anyone who understands advertising regulations. If you have ever read or listened to my ramblings in the past you know that I have a tendency to harp on two issues - Education and Due Diligence.  Please forgive me for once again repeating myself, but this is important:

Protect yourself by doing the following:

·         Ensure that any member of your staff involved with advertising is properly trained in all applicable regulations.

·         Never assume that your ad agencies or vendors know, or are following, the rules. If you write the check, you’re responsible.

·         If you’re not sure, don’t guess! Have your advertisements reviewed, and edited if necessary, by someone knowledge before publication (this should done for all of your advertising including websites, YouTube, social media, etc.). It may cost a few bucks, but it’s a small price to pay.

Is Your Dealership Guilty of the Ostrich Syndrome?

As most everyone knows, ignorance of the law is no excuse. Yet, it’s clear that some dealers really have no idea if their staff is knowledgeable enough to follow the maze of rules and regulations that govern their organizations. Indeed, there sometimes seems to be a tendency for folks to bury their heads in the sand and hope for the best. If this is the case in your dealership, you may want to ask yourself if it really makes sense to put the business and reputation that you have worked years to build at risk by acting like an ostrich.


It should come as no surprise that government watchdogs and consumer attorneys have clearly been ratcheting up their assault on the auto industry. Dealers are more and more frequently the targets of lawsuits, enforcement actions, and of course, the associated negative publicity. Even inadvertent violations of the rules can be shockingly costly.

Are you truly comfortable with the level of compliance in your dealership? Do you feel that your staff is properly trained and accountable for their business practices? Are you comfortable with the last set of eyes you have reviewing your paperwork? What do you think the result would be if you were forced to defend yourself in court?

As they say, “You don’t know what you don’t know”. So, why not take the time to find out by performing a risk assessment? Compliance audits are a vital step in protecting dealerships from legal claims. They can be performed by either knowledgeable dealership staff or by an outside party. At worst, we’re talking about an investment of a few thousand dollars that can potentially save millions. Kind of a no-brainer, isn’t it? Here are some benefits of compliance audits:

Identify training needs – Many dealers, general managers and finance directors are well-versed in automotive legal issues. On the other hand, many other dealer employees have little or no background or training in compliance. They may simply rely on doing things “the way they’ve always been done”. There’s a lot to know about dealership compliance nowadays and a lot of people who must know it. Staff members that negotiate with customers, present prices and payments, make representations and promises or create advertisements may represent the greatest risk of noncompliance in the dealership. Think about all the people involved in those activities on a daily basis – sales managers, closers, used car managers, sales consultants, service advisors, internet department and BDC personnel – you name it. And, of course, there is always employee turnover to contend with. Audit results will help minimize confusion about potential legal issues and identify areas where more training is needed.

Accountability – Employers often don’t know the intimate details of every transaction that takes place in their dealership. It’s possible that some employees believe that “questionable behavior” may benefit the dealership (or themselves) financially or that the behavior is the industry standard and therefore acceptable. Employees may be hesitant to break old habits that have served them well in the past. Trusting that all staff members do the right thing every time can be very risky. Regular audits will help to ensure that employees are following proper procedures, and will reinforce the message that the company policies are the real deal and the organization will not tolerate noncompliance.

Protection from liability – Compliance audits, along with formal policies and training, are vital parts of a good faith attempt at operating a compliant organization. The FTC has specifically stated that this may limit potential liability and will be considered in any prosecution. According to FTC commentary, “The Commission agrees that the establishment of appropriate procedures would warrant consideration in its decision as to whether law enforcement action would be an appropriate use of agency resources. The Commission is not aware of any instance in which an enforcement action was brought against a company for the actions of a single ‘rogue’ employee who violated established company policy that adequately covered the conduct in question.”

Here are some examples of violations that are frequently uncovered during compliance audits:

• Forms and documents that are out-of-date or missing

• Contracts and leases that are improperly completed

• Evidence of potential unfair and deceptive acts and practices (UDAP) claims such as payment packing, price-gouging, “yo-yo” financing, undisclosed vehicle history, or hidden finance charges

• Deferred down payments or negative equity not properly disclosed

• Backdated re-written contracts

• Missing Risk Based Pricing notices (or credit score disclosure), Adverse Action notices, OFAC reports, privacy policies or cash reporting forms

• Fees or additions not properly disclosed on contracts or leases

• Evidence of falsified information on credit applications, power booking, straw purchases, or forged documents

• Information Safeguards and Red Flag policies not in place or not followed properly

• Advertising regulations not being adhered to

Burying your head in the sand and hoping for the best is simply not a sensible business strategy in this day and age. With every customer interaction, with every car sold or serviced, your dealership and its long-term growth are at risk without absolute adherence to state and federal laws. An investment in compliance programs and training will help protect your assets, your employees, your customers and your good name.

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.

Have You Read Your Website Privacy Policy Lately?

Dealerships typically collect a great deal of personal information from their website visitors through contact forms, online credit applications, etc. What many businesses don’t realize is how vitally important it is to properly handle any Personally Identifiable Information (PII) collected from consumers through their sites.
So what’s the big deal about privacy policies? Our website provider takes care of that, right?
Not necessarily. In researching dealer websites recently, we looked at a random sample of privacy policies on 12 dealer sites from around the country. What we found was…interesting:

·         2 dealers had no privacy policy link on their sites (both were in states where it’s required by law)

·         1 dealer had only the website provider’s privacy policy published on its site (won’t do the dealer much good if there’s a legal claim against them)

·         2 dealers had only the manufacturers’ policies published on their sites (same as above)

·         1 dealer had a privacy policy with another company’s name on it (need to make sure you customize those templates!)

·         3 dealers had the same policy that they hand out to consumers who apply for credit at the store (NOT the same thing as an online privacy policy)

·         2 dealers had identical boilerplate policies provided by their website provider – not a problem, unless the policies don’t truly reflect the dealers’ actual processes. For instance, the policies state: “Subscribers to our e-mail services (or any other feature/service found on our Web site) will not receive unsolicited e-mail messages from us”. If the dealers decide to launch an email marketing campaign to these website visitors (which is legal as long as they adhere to CAN-SPAM regulations), they could be in danger of violating their own policies. Federal and state regulators can take action against companies that fail to comply with their own privacy policies or otherwise misrepresent their information management practices. And of course, there is the real possibility of substantial private lawsuits.

·         1 dealer had a nicely-written, personalized policy (good job!)

While posting a privacy policy on your website is not yet required by federal law, it looks like it will be soon. There are several bills pending in Congress that address online privacy, such as the Commercial Privacy Bill of Rights Act of 2011, and full disclosure tends to be a common element. Some states already have laws on the books mandating online privacy policies. For instance, if you’re collecting personal information from any California residents, state law requires you to conspicuously post a privacy policy on the site and strictly comply with its provisions.

The internet can be a dangerous place when it comes to privacy. Do yourself and your customers a favor by establishing best practices for handling consumer privacy. The first step is to review your company’s privacy policy and ensure that you have a clear understanding of its contents and that it reflects your dealership’s actual practices. The next step is to make sure that it’s published on your website. Finally, review the policy with your employees and vendors to ascertain their understanding. This will help minimize (or hopefully eliminate) breaches due to unfamiliarity on the part of individuals acting on your behalf.

The Hidden Danger of Text Message Marketing

Keeping the lawyers at bay used to be a whole lot easier for dealerships. Unfortunately, new technology brings new challenges. A recent high-profile lawsuit involves a large dealer group named in a class-action lawsuit for allegedly failing to honor a text message opt-out request. The suit, launched by a former employee, is seeking damages of at least $500 for each violation. While this may seem like yet another frivolous lawsuit by a disgruntled former employee, the potential for liability to this dealer group is substantial. Several recent text message cases have resulted in multi-million dollar settlements. For instance:

Twentieth Century Fox - $16 million class-action settlement ($200/ phone number)

Simon & Schuster - $10 million class-action settlement ($175/ phone number)

Timberland Company - $7 million class-action settlement ($150/ phone number)

Text (SMS) marketing is subject to a number of federal and state restrictions and the rules are extremely confusing. These regulations can be much more difficult to deal with than telemarketing or email regulations - primarily because many consumers are charged for text messages and the government feels that they should be afforded additional protection against unwanted solicitations. In many cases, the consumer must opt-in (give express permission) before you can legally send them a text message, even if you have an existing relationship with them.

Here are some things you should know before launching a text marketing campaign:

1. You can’t send a commercial text message (solicitation) to a phone number that’s on the national “Do Not Call” (DNC) list (subject to the “established business relationship” and other provisions of the national DNC rules).

2. You can’t send a commercial text message to a phone number that is on your company-specific DNC list.

3. You can’t send any text message whatsoever to a cell phone number – including sales pitches, service reminders, and communications with current customers - using an “automated dialer system” unless you have the consumer’s prior express consent. This may include computers used to send automated text messages (yours or your vendors).

4. In some instances, a text message may also be considered an email and must comply with all of the standard CAN-SPAM requirements (contains your physical mailing address, cost-free opt-out mechanism, etc.). A text message will be considered an email if is sent to an email address – that is, if it has an internet domain name after the "@" symbol (for example: sending a message from your computer to a mobile carrier, such as 10digitmobilenumber@txt.att.net).

5. The CAN-SPAM Act also prohibits sending commercial e-mail messages to wireless devices without prior permission. So, no commercial text message that is deemed to be an email may be sent to a wireless device without express prior authorization. Merely having an "established business relationship" with the recipient is not enough.

Confused yet? Here are some suggestions to help protect yourself against legal challenges:

• Consult your company-specific DNC list before sending a text message.

• Consult the national DNC list and consider whether your messages are based on an "established business relationship," which may provide an exception from the national DNC compliance.

• Determine whether your delivery meets the CAN-SPAM Act’s "email" definition, and if so, whether you have complied with the CAN-SPAM disclosure and opt-out requirements.

• Put a process in place to ensure that all opt-out requests are honored quickly and permanently.

• Develop an employee policy regarding text messaging and educate your staff on proper procedures.

• Appoint an in-house compliance coordinator to monitor text messaging by both employees and vendors.

• Consider instituting a policy of ALWAYS obtaining recipients’ express prior authorization before sending text messages, regardless of the circumstances or method of delivery.

• Always consult knowledgeable legal counsel before launching a text marketing campaign.

• If you use an outside vendor to administer your text marketing campaigns, NEVER assume that they know all the rules and regulations - run it by your legal team first. If you’re writing the check, you’re responsible.

I know - it’s mind-boggling how difficult it can be to deal with these regulations. But just remember - it only takes one consumer (or one employee) to get the legal ball rolling, and it’s certainly not difficult to find a lawyer who’s ready, willing, and able to sue a car dealer.

Is That IPad Giveaway Legal?

Sweepstakes, contests, and giveaways have become increasingly popular among dealerships. These promotions can be a great way to get word out about your company, increase your social media presence and develop leads. However, entry into a poorly considered sweepstakes or contest can be a trap for the unwary dealer. These promotions are governed by a variety of federal and state laws as well as social networking sites’ terms of service. The FTC receives thousands of complaints from consumers each year regarding the abuse of contest promotions. Failure to follow pertinent statutes and regulations regarding promotions can lead to government inquiries, civil enforcement actions, adverse publicity, and even criminal penalties.

Following is a basic overview of the guidelines for running lawful promotions, but you should always consult knowledgeable legal counsel before starting a campaign. And remember, it’s dangerous to assume that outsourcing responsibility for the promotion to a marketing firm or other service provider will result in a legal compliance. Understanding the rules and running your promotions by your legal team can guard against potential problems and may help shield the dealership from liability.

So, what’s the difference between a contest, sweepstakes and lottery? A "contest" offers prospective participants the opportunity to receive or compete for gifts or prizes on the basis of skill or skill and chance, and which is conditioned wholly or partly on the payment of some value. A "sweepstakes" is any procedure for distributing anything of value by chance (e.g., a drawing). The main differences between a sweepstakes and a contest are that the contest participants must use at least some skill to win the prize and may pay some value to participate in the contest while sweepstakes participants win solely by chance and are not required to pay value.

To avoid classification as a lottery, which is generally illegal unless run by the state, a sweepstakes promotion must not require an entrant to pay or promise to pay value for the chance to win the prize. This is known as consideration. The most easily identified or typical form of consideration is a requirement of a purchase or payment to enter the sweepstakes. However, in some states consideration may also be found to exist when an entrant must exert substantial effort or time to participate in the promotion. For example, completing a simple entry form or “liking” a page may not be considered steps that involve consideration, but requiring an entrant to fill out a lengthy marketing questionnaire might constitute substantial effort. These determinations vary from state to state, so it’s advisable to get a legal opinion.

The operator of the sweepstakes must treat entries that are not accompanied by orders the same as entries that are accompanied by orders. In other words, someone who purchased a car cannot be more likely to win a prize then someone who didn’t.

Each state has a different set of laws governing promotions, and some states require that sweepstakes offering prizes over a certain value to be registered. This amount can be as low as $500 (Rhode Island). Attention to the rules in all jurisdictions where the promotion will be available is essential.

Many states have passed specific laws or regulations that identify information that must be disclosed to potential entrants. Generally, such disclosures contain a “no purchase necessary” statement, an explanation of entry procedures, the identity of the company conducting the promotion, eligibility requirements, prizes and their estimated value, method of determining a winner, the odds of winning, the beginning and ending dates of the contest, and where a winners list may be obtained. These disclosures must be clear and conspicuous (and that doesn’t mean “see dealer for details”).

To conduct a promotion through a social networking site, a company should comply with the particular site’s terms. For example, Facebook has very specific criteria for running promotions: http://www.facebook.com/promotions_guidelines.php.

So, go ahead and give away that IPad - just be sure to dot your ‘I’s and cross your ‘T’s.

Be Careful When Using Social Media in Hiring Decisions

It’s no secret that auto dealerships have frequently been forced to defend themselves against discrimination claims by employees and agencies such as the Equal Employment Opportunity Commission. As a result, many dealers have instituted comprehensive human resources programs to avoid potential problems. However, new technology brings new challenges.

As the use of social media grows, more and more dealerships are using the internet to screen potential employees. Many managers tasked with hiring find these sites to be particularly helpful because they perceive that this information reflects a more accurate representation of the applicant beyond the interview. This influx of information regarding applicants would seem to be a great way to vet their ability to "fit in" with a company.

While social media may allow employers to learn vast amounts of information about job applicants, hiring managers who even casually use these tools to gather information about a prospective employee could expose the dealership to legal risks. Given the real possibility for inappropriate and illegal uses in the hiring context, organizations need to carefully consider how, if at all, they utilize the sites when screening candidates.


Discrimination Claims - When a job candidate is the subject of a social media search there’s a possibility that the search will reveal information that would be off limits in an interview, such as age or marital status. Hiring managers should be very careful in using private information people are posting publicly to make hiring decisions. An employer's availing themselves of such information could pave the way for allegations of discrimination if the employee or applicant believes that the employer used such information to make an adverse employment decision. A risk may be created that that this protected class information actually is being considered or, even if it is not, putting your organization in the position of having to defend a claim knowing that this information existed on the sites you visited. Risk factors include:

■ Information regarding age, race, religion, sex, disability, or other protected characteristics, such as pregnancy, illness or disability. For example, a person’s Facebook page may disclose their religion. Once an employer knows that information, the fact that the employer knew the potential employee’s religion can be used in an employment discrimination suit.

■ Checking social media or the Internet only on applicants of a certain race or gender.

■ Searching on all applicants, but using the same information differently against one particular type of applicants. For example, if all of your applicants had pictures of themselves of drinking alcohol in public, but you viewed that fact more negatively against females, that could be considered discrimination.

■ Rejecting an applicant based on conduct protected by lawful off-duty conduct laws.

■ Rejecting an applicant because of his or her political activities may violate state constitutional law.

To avoid these legal obstacles, you may decide that it's better to not even collect that information, so you can say that you didn't have access to it. Another procedure would be to have someone other than a hiring manager or decision maker in human resources conduct an online background check of job applicants. The individual who does the online check should avoid sharing with decision makers any personal information about a job candidate that’s not relevant to the hiring decision. This individual should be properly trained to avoid improper access and to screen out information that can’t be lawfully considered in the decision-making process. Having a firewall between the hiring manager and social media information about job applicants makes it difficult for a plaintiff subsequently to contend that the hiring manager discriminated against him or her based on a legally protected characteristic.

Invasion of privacy claims by potential employees - Generally, a potential employee will have a tough time asserting this claim because you need a “reasonable expectation of privacy” and a lot of people keep their social media profiles open to the public. However, it’s clear that if the applicant is using the highest privacy settings and the employer somehow gets past all these barriers, the claim is stronger.

A point to consider is how the hiring manager will obtain access to the candidate's page. Many social media users have some degree of privacy established in their settings. As a result, access to the candidate's page may require "friending" the applicant and the applicant accepting the request. Not a good idea.

Using an outside agency to screen applicants – If an employer uses a third party to conduct searches on job candidates the federal Fair Credit Reporting Act and applicable state law on background checks likely will apply. The Fair Credit Reporting Act governs "employment background checks for the purposes of hiring" and applies if "an employer uses a third-party screening company to prepare the check." Thus, if an employer is using an outside resource to view social networking sites and provide information, the applicant must be informed of the investigation, given an opportunity to consent, and notified if the report is used to make an adverse decision. It’s important to ensure that any company you use to perform background checks follows the correct procedures, and that your employment applications contain the proper notifications.

Best practices for the use of social media in hiring decisions:

1. Develop a policy on whether or not the hiring manager will search the internet or social media sites in hiring.

2. If you decide to use social media in hiring, do the searches on applicants consistently and in a uniform manner.

3. Make sure candidates are notified, in writing, about the companies use of social media to gather information, e.g., on job applications.

4. Ensure that employment decisions are made based on lawful, verified information. Don’t allow factors to be considered that have no relevancy to job performance, such as race, age, or sexual orientation. They’re all protected statuses by law and using them as criteria for hiring is discriminatory.

5. Follow best practices in identifying a legitimate, nondiscriminatory reason for the hiring decision with the documentation supporting the decision.

6. Prohibit “friending” a potential employee to learn things about them that the general public doesn’t have access to.

7. Discourage supervisors from being social media friends with their direct reports.