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Interstate + Internet = Trouble

Unless you live in a cave, it’s not news that dealers are selling cars over the Internet. When the dealer and the Internet buyer are both residents of the same state, it’s usually the case that the Internet is simply a shopping medium, like a newspaper, and that any resulting transaction takes place at the dealership. From a legal standpoint, that’s pretty vanilla.

When the dealer and the buyer are in different states, a lot of different things are happening. The business models we have seen range from the safest to the more dangerous, from a legal standpoint. The safest are those in which the out-of-state buyer is required to come to the dealership to take delivery of the car and sign the paperwork. The more dangerous are those in which the dealer delivers the car, along with the paperwork for execution, to the buyer’s home state.

These programs are more dangerous because they raise many legal questions that legislatures and courts have hardly touched upon. Lawyers worry about whether the dealer can be sued in the customer’s state, whether the dealer needs a used car or new car dealer license from the customer’s state, whether the law of the dealership’s state or the customer’s state applies to the dealer’s buyers order, and the terms of the sale (for instance, the dealer’s state might permit an as-is sale, while the buyer’s state might prohibit it).

So far, very few courts have addressed Internet interstate sale issues, and most of the cases, so far, have dealt with the first point: Can the dealer be sued in the buyer’s state? The half-dozen or so cases that have addressed the issue are conveniently split in their conclusions, providing ammo for both the buyers and the selling dealers.

We have been warning that courts will eventually address the remaining issues. They have started to do so, albeit in a different consumer industry (payday lending). That’s unfortunate because payday lending is not, shall we say, a particular favorite of state regulators and consumer advocates. Pro-consumer judges don’t care much for payday lenders either (sort of the same way they feel about car dealers). Their opinions are likely to reflect that fact.

So, it came as no real surprise when a federal court recently sided with the Kansas banking commissioner's office in a case against Internet payday lenders. The court ruled that the state has the right to impose consumer protection laws on Internet financing companies. The decision will likely prohibit Internet lenders from operating in Kansas without a license, regardless of whether or not they have an office in the state. That wasn’t the end of the payday lender’s headaches. In a separate proceeding, the Kansas regulators are suing, demanding a $5 million fine and $445,000 in refunded money. Ouch.

What does this have to do with car dealers, you ask?

This lender was peddling money (loans) over the Internet; car dealers sell cars over the Internet. When a court says that the payday lenders are subject to the laws of the states where their borrowers live, you can bet this case is going to be thrown in the face of any car dealer doing interstate Internet business when he tries to argue that he’s engaging in “interstate commerce” and is obligated to comply with only the laws of his home state.

There are ways that car dealers can reduce the legal risk inherent in interstate Internet transactions. If you are a dealer engaging in these activities, be sure you’ve gotten a thorough legal review from your lawyer about how to best bulletproof your program. While you can’t actually be completely “bulletproof,” you can protect your dealership against such legal action by following your trusted lawyer’s advice.

Unless you have an extra $5.5 million burning a hole in your pocket.

Vol 4, Issue 11

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