If car dealers don’t want to work alongside a company, they’ll typically make it known.
This was the case for droves of car dealers when it came to TrueCar in late 2011, and it’s the scenario now with Tesla Motors and even, to an extent, Carfax. That’s why the dealer community’s eyes are fixed on the Federal Trade Commission (FTC). They’re awaiting the outcome of an investigation that began in early September, when the agency sent letters to dealers and firms who spoke out against TrueCar’s business model almost two years earlier.
Dana Frix is an attorney and partner with Chadbourne & Parke LLP in Washington, D.C. He specializes in antitrust claims, and he is assured the FTC must have cause to investigate this topic. Otherwise, he reasons, the agency would allocate its time and budget to other cases.
“They have to prioritize their enforcement activities, and they have to go after something that appears most likely to be a violation,” Frix explains. “The fact that this investigation is occurring now suggests that something has come to the agency’s attention that suggests this was not about mere blogging, but rather there could have been information suggesting that the activities were part of a concerted effort to engage in offending discriminatory conduct.”
TrueCar’s Bumpy Road
In a letter dated Sept. 5, FTC attorney Melissa Westman-Cherry informed Jim Ziegler, dealer trainer, industry firebrand and new Auto Dealer Monthly columnist, of a “non-public investigation to determine whether firms in the retail automobile industry may be engaging in, or may have engaged in” violating the FTC Act “by agreeing to refuse to deal with TrueCar Inc.”
Late 2011 marked the start of a testy relationship between TrueCar and the auto retail industry. Dealers from across the country and state associations brought TrueCar’s practices to the attention of regulators and lawmakers in several states, including California, Colorado, Indiana, Louisiana, Nebraska, Ohio, Oklahoma, Virginia and Wisconsin. In some states, the point of contention was whether TrueCar’s business model violated prohibitions against “bird-dogging.” In others, the company’s advertising practices were called into question. The Colorado Department of Revenue, for instance, alleged that TrueCar was in violation of state advertising rules for failing to include stock numbers of vehicles for sale, expiration dates and all costs associated with the sale, among other issues.
After suffering losses of close to $40 million and more than 2,000 dealer clients (which it later regained) in the first half of 2012, TrueCar Founder and CEO Scott Painter opted to smooth things over with dealers. One of the changes made was the elimination of “dealer cost” in TrueCar’s controversial pricing curve, a figure critics said created an inaccurate reference point for negotiations.
The public scrutiny arguably erupted on Nov. 27, 2011, when Ziegler posted the earliest notable blog entry lashing out at TrueCar. Ziegler maintains it was never his intent to put the company out of business. In a February 2012 post, he wrote, “When I started the TrueCar blogs back on Nov. 27, it was the beginning of a movement. Hard to believe I was able to get thousands of people involved.”
Kelly Automotive Group also received a letter from the FTC about the ongoing investigation, according to a report from Automotive News. Mike Warwick, director of digital marketing for the Massachusetts-based group, told the media outlet he didn’t know why he was personally named in the letter, except that he criticized TrueCar’s business and pricing model on dealer blogs in late 2011 and early 2012. He declined to comment further on the investigation for this article.
The argument that this investigation’s premise is grounded solely on social media rants bashing TrueCar could be a stretch, though. One of the most vocal opponents of the company was and is Phone Ninjas CEO Jerry Thibeau, who in late 2011 posted a series of YouTube videos showing him make bold statements such as, “If a group of mafia bosses had to sit down and talk about ways they could extract money from car dealers, well, TrueCar would be that brainchild.”
Thibeau, however, has yet to receive a letter from the FTC. “I was surprised, because I was pretty vocal [online],” he admits.
Unlike Ziegler and other outspoken critics, Thibeau has not made amends with TrueCar, nor has he changed his stance on the lead-generation site. “The more customers use TrueCar, the more leverage TrueCar has over dealers, and the more money they’re going to expect from them,” he says. “TrueCar is saying they didn’t initiate it, but when you’ve got that much money behind a company … and then they had a little negative publicity recently (related to a new write-off policy the company implemented in September), why would you let that happen again?”
TrueCar’s Painter denies those claims. “At no time did TrueCar ask for this investigation,” he says. “Until we received a letter from the FTC, we were unaware of its existence.” He referred to a statement from the company that reads, in part: “We’ve had no prior contact with the FTC concerning the investigation. … TrueCar values the support of its thousands of dealer partners.”
Prior to the government shutdown, Mitchell J. Katz, a spokesperson for the FTC, commented only that he “can’t say anything about this matter. It’s entirely nonpublic.”
It is unclear why the investigation is underway now, considering that roughly a year has passed since TrueCar altered its business model to comply with each state’s laws and largely mended its relationship with car dealers.
Frix points out that it is not unusual for the FTC to investigate an issue for as long as two or even four years following a specific incident that impacts the marketplace. The FTC’s main concerns in regards to competition, Frix says, are first to protect any company that did suffer anticompetitive violations, then to protect the marketplace structure. “You can think of the FTC as sending a message to the marketplace, and that’s really what the bigger effect of their enforcement activities generally are,” he says. [PAGEBREAK]
A Fine Line
Because several state dealer associations played key roles in successfully persuading legislators to examine TrueCar, a big question is whether the state groups are liable for any harm TrueCar suffered. Not necessarily, Frix says.
“A statement which is true would not be offending conduct,” he notes. “There is a broad freedom to petition the U.S. government under our Constitution, and efforts to cause the legislature to take certain behaviors are generally immune from laws against anticompetitive practices.”
In an act of caution, though, Brian Maas, president of the California New Car Dealers Association, says the organization was prepared early on to dodge an appearance of anticompetitive practices. In fact, the CNCDA retained an outside attorney and issued a bulletin on Jan. 9, 2012. It warned dealer members against organizing an effort to boycott a company that could be construed as a refusal to deal.
“We were very clear we’re not urging anything; we’re just letting folks know what the law said to somebody they may be doing business with,” Maas says, adding that he is aware of only one car dealer in the organization who claimed to receive a letter from the FTC.
No dealer associations have publicly reported to be under investigation by the FTC, and that includes the main dealer body, the National Automobile Dealers Association. In an e-mail to Auto Dealer Monthly, officials wrote, in part, “We have no reason to believe that NADA is a target of the investigation. The NADA will, of course, cooperate with any investigation.”
The NADA has likely wised up about anticompetitive practices given what transpired in 1995. That’s when the U.S. Department of Justice (DOJ) charged the NADA with antitrust violations. Court records show the agency alleged the association’s officers and directors conspired on several levels when they “agreed to orchestrate a group boycott in an attempt to coerce automobile manufacturers to decrease the discounts offered to large volume buyers and to eliminate consumer rebates; agreed to urge its dealer members to maintain new vehicle inventories at levels equal to 15 to 30 days’ supply; solicited and obtained agreements from member dealers not to engage in invoice advertising and agreed to urge its members not to do business with automobile brokers.”
The charges stemmed from an “Open Letter to All Dealers,” authored in September 1989 by the NADA president, endorsed by its executive committee and board of directors, published in its official trade journal and distributed to members of the press and major auto manufacturers. As the DOJ pointed out at the time, “The NADA’s members include about 84 percent of the franchised new auto and truck dealers in this country. Together, they sold about $375 billion of products and services in 1993.”
The case was resolved by a consent decree. The NADA agreed to end the campaign and set up an antitrust compliance program. The final judgment specifies, though, that the NADA is clear to “engage in collective action to procure government action, such as lobbying activities, when those actions are immune from antitrust challenge.”
Without the protection afforded by the DOJ’s decision, the NADA may have been less willing to go toe-to-toe with another opponent: Tesla Motors. This year, the association and its members were vocal and active in opposing Tesla’s direct-to-consumer sales model. Under Frix’s theory, though, dealer associations’ lobbying of lawmakers shouldn’t result in any anticompetitive violations — in most cases.
“There are exceptions, although those exceptions are rare,” Frix explains. “If, for instance, you have a group of dealers that said the problem with a market development such as Tesla or TrueCar is that it simply will hurt our margins, and therefore we have to stomp them out even though their product is a good one. That indeed could rise to the level of violating the laws of the United States.
“But a trade association or a group of companies that said, ‘We believe that what these companies are doing is clearly violating the law,’ and then seeking to get either the courts or the legislature to recognize that fact, would largely not be violative of our laws. It can be a fine line sometimes.”
For the better part of 2013, dealer associations in various states — including Massachusetts, Minnesota, North Carolina, New York, Virginia and Texas — rallied against the California automaker over its retail model. The ongoing fight centers on policies that would prohibit Tesla from operating under its current retail strategy, which primarily places the sales process online and eliminates the traditional dealer showroom and franchise system.
Most recently, the CNCDA asked the California Department of Motor Vehicles (DMV) to investigate Tesla’s advertising practices and how it presents pricing and disclosures to its online customer base.
In a letter written by Jonathan Morrison, legal counsel for the CNCDA, the trade group prods the DMV to “restore balance to the market by ensuring Tesla conforms to all applicable legal requirements.”
Tesla, the CNCDA argues, fails to provide legitimate disclosures on its website and deceives customers by advertising the “potential availability” of incentives, gas savings and tax savings. “This scheme is most blatantly demonstrated by the general ‘$580 per month after gas savings’ advertisement found on several of its internal web pages,” the letter to the state DMV reads.
The CNCDA acknowledges that “while California law does not affect Tesla’s ability to both manufacture and directly sell new vehicles to California’s consumers, Tesla must abide by the advertising rules that apply to all dealers.”
The DMV did not respond for comment.
The CNCDA’s actions follow a year of standoffs with the electric-vehicle maker. Through both litigation and legislation, various states fought to block Tesla’s retail model from operating within their borders.
In response, Tesla tried to organize a campaign of its own, and it took the fight to the White House. The electric carmaker collected 100,000 signatures from citizens asking that Tesla Motors be allowed to sell directly to consumers in all 50 states. The White House has yet to respond.
Tesla officials have consistently declined to comment on the ongoing litigation, but the company’s feelings about being shunned by the industry were made clear in a companywide letter sent by CEO Elon Musk in April. In it, the executive asked associates to protest a Senate bill seeking to stop Tesla from operating in Texas.
The text of the letter was shared on Forbes.com and reads, in part, “It is crazy that Texas, which prides itself on individual freedom, has the most restrictive laws in the country protecting the big auto dealer groups from competition. If the people of Texas knew how bad this was, they would be up in arms, because they are getting ripped off by the auto dealers as a result (not saying they are all bad — there [are] a few good ones, but many are extremely heinous).”
Game of Monopoly
Carfax is another company taking fire from dealers. In April, a group of 121 dealers banded together to file a lawsuit that claims Carfax has a monopoly on the industry. The plaintiff count quickly surged to about 424 dealerships in a matter of four months, and the estimated damages sprang from $50 million to about $150 million.
It is unclear whether Carfax has suffered any financial harm from the negative publicity. The Wall Street Journal did report that the case stalled the sale of Carfax’s parent company, R. H. Polk & Co., which was ultimately sold in June to IHS Inc. for $1.4 billion. Carfax officials declined to comment on the litigation or to say if there is any link to the FTC’s TrueCar investigation, though spokesperson Larry Gamache told Auto Dealer Monthly the company has reached out to Ziegler in an effort to resolve his criticisms, but said “he has refused to talk with us.”
News of the lawsuit was spread by a combination of media outlets and the new “word of mouth”: social media. Critical comments on both sides of the fence can be read on LinkedIn, Facebook and automotive blogs such as Ziegler’s.
Right to Blog
Since news broke in mid-September of the FTC’s investigation into possible collusion against TrueCar, many automotive professionals have been left to wonder whether their opinionated posts could leave them liable. Brian Pasch, CEO of digital marketing firm PCG Consulting, penned a blog on DrivingSales.com on Sept. 16. It asked: “Is the Golden Age of Automotive Blogging Over?”
In response to Pasch’s inquiry, Joe Turner, regional sales manager of Local Search Group, offered this take: “Many dealers will be fearful of posting how they really feel. This could be compounded by recent news reports about the [National Security Agency] and the IRS [Internal Revenue Service]. Then there is the legal counsel that almost every dealership or group has that will be advising dealer principals to restrict their employee’s access to such sites.”
While Frix advises dealers to act carefully, he knows the FTC is limited in how far it can crack down on Americans’ freedom of speech.
“It is sometimes possible to do things two different ways, and one way is defensible and one way is indefensible,” he says. “Car dealers need to act with caution where concerted effort is involved. Just because something is about speech does not mean it is necessarily immune from concerns that that speech was designed to and did achieve an anticompetitive effect.”
But with that said, he adds: “Right now, Americans are very concerned about protecting their speech rights, and that is something Americans have always been vigilant about. You can expect [the FTC] to be careful not to cross a line where it appears that what they are doing is seeking to punish just speech. It seems unlikely that the agency would allow that perception to exist.”