On March 13, the Federal Trade Commission sent “warning letters” to 97 dealer groups (groups, not locations) highlighting advertising practices that allegedly constitute deceptive trade practices under Section 5(a) of the FTC Act.
In broad terms, adding charges, such as dealer fees and delivery charges, to the advertised price later in the transaction (usually at the document-signing phase) can now lead to substantial fines and injunctive relief. How vehicles are advertised and, therefore, sold, is about to change forever.
Let’s unpack what happened, and what it means.
The Backstory
The FTC’s recent enforcement activity regarding price transparency did not begin with the warning letters it sent to those dealer groups on Friday the 13th. Rather, that event was consistent with enforcement actions directed at other markets since the second Trump administration began.
Ticket resellers, hotels, healthcare providers, and grocery delivery services have all been warned to enhance their price transparency and have largely complied. For example, hotels used to advertise room rates and then add a “resort fee” later in the transaction. That practice has largely ceased, and resort fees, if any, must be included in the advertised price. Excluding such fees is now defined as a deceptive trade practice.
Because this interpretation of what constitutes deceptive pricing has been established in other market verticals, it is highly unlikely that this issue will just “go away” in the retail automotive industry. Dealers are on notice that certain practices are now fair game for FTC enforcement, generally in cooperation with state attorneys general. Not soon. Now.
As if to prove this point, the FTC highlighted its recent enforcement action against a Washington, D.C.-area dealer group. The FTC assessed a $3.1 million fine and required $75 million in refunds against the Lindsay Auto Group, a case in which many of the sins alleged in the warning letters were alleged. Clearly, the FTC means business.
Deceptive Advertising Practices
The FTC has specifically defined the following six practices as deceptive and therefore actionable:
1. Advertising a price that does not reflect all required fees. In a nutshell, this means the advertised price (the most prominent price in any advertisement) must include all charges a consumer must pay to purchase or lease a vehicle; government taxes and fees are the only allowable exclusions. This means the advertised price must include:
· Dealer fee
· Doc fee
· Destination charges
· Reconditioning/certified preowned charges
2. Advertising a price that reflects rebates or discounts not available to all consumers. The only rebates that may be deducted from an advertised price are those available to all consumers. Rebates with qualifications (veteran, OEM employee/retiree, loyalty, etc.) may be listed separately, with the qualifications clearly and conspicuously stated.
3. Advertising a price that fails to take into account the amount of an additional required down payment. The advertised price must be the price any consumer can pay to take delivery. Period. Footnoting “Assumes $10,000 cash down payment or trade equity” is prohibited.
4. Conditioning the advertised price on consumers using dealer financing. While dealers remain free to negotiate prices for any legitimate reason, including finance source, the higher price without that consideration is the price that must be advertised. Prices for a vehicle can go below the advertised price, but they may not be higher.
5. Requiring consumers to buy additional items not reflected in the advertised price. In practice, this prohibition seems aimed at the practice of preloading products in the transaction but not including the cost of those products in the advertised price. This is not to say dealers cannot include products in the transaction, such as alarms systems. But if it’s in the deal, it must be in the advertised price.
Saying the preloaded product is optional does not change the requirement. If a customer must opt out, that means the product is already in the deal and therefore must be in the advertised price.
If the product is opt-in (more common with addendum stickers), the addendum package cost could be excluded from the advertised price but only if the addendum is clearly optional. If the cost of product, whether preloaded or in an addendum, is included in the amount financed basis for the first pencil, then it should be included in the advertised price. And whenever product is included in the price-quoting process (i.e., before a menu presentation in F&I), the disclosure that it is optional must be clearly and conspicuously displayed on the payment quote and customer consent indicated.
6. Advertising unavailable or nonexistent vehicles. The FTC wants to prevent dealers from advertising nonexistent or previously sold vehicles as a means of driving traffic or engaging in “bait and switch” practices. But there is a fine line between such deceptive practices and the realities of inventory management.
The FTC has conceded that there will be a time lag between when a vehicle is sold and when it comes off the dealership website. Clearly, this update should happen as quickly as possible, but an overnight refresh of the website is probably reasonable. On the other hand, a recent case involved a dealer being penalized for not deleting a high-demand car from its website for over two weeks. Quicker is better, and always without intent to mislead.
Another issue the FTC addressed is vehicles in transit. The safest practice is to advertise only vehicles on the lot, but a dealer may advertise such vehicles if they are clearly marked as “in transit” with an estimated delivery date. Such statements must be demonstrably true when made, as OEMs can reallocate inventory in transit. If a vehicle is no longer on its way to the dealership, that vehicle should be deleted from the dealership’s advertising platforms as soon as possible.
Other Laws
The FTC has taken pains to say that just because it is currently focusing on price transparency, it is not ignoring other established advertising laws. Specifically, the advertising regulations in the Truth In Lending Act/Regulation Z concerning finance transactions, and the Consumer Leasing Act/Regulation M concerning lease transactions are still in effect and subject to enforcement.
Preemption
Preemption is the legal doctrine that, when state and federal law conflict on the same subject matter, federal law trumps, or preempts, state law to the extent of the conflict.
In its April 17 webinar with representatives of the FTC, the National Automobile Dealers Association identified four classes of states based on how they treat dealer fees in their advertised prices. Those classes are:
- Silent on the issue
- Specifically require inclusion of dealer fees in advertised prices
- Allow separate disclosure of dealer fees
- Require exclusion of dealer fees from advertised prices and separate disclosure
The FTC made it clear that federal preemption is in play here, but that there is no true conflict with the first three classes of state treatment of dealer fees. That last class – believed to cover only one state (“Documentary Fee” in Texas) – is truly preempted.
Christopher Mufferige, director of the FTC Bureau of Consumer Protection and the man who signed the March 13 warning letters, said that the FTC’s interpretation will prevail in all states, and that if the Class iv state of Texas “gives any push-back,” that dealers should “let the FTC know.”
Looking Ahead
The FTC has said that it will be publishing a Frequently Asked Questions document in the near term to address questions it has not yet publicly answered. In addition, NADA has indicated it is revising and expanding its 2015 Dealer Guide to Federal Advertising Requirements, with publication expected sometime this summer. In short, further clarification is on the way.
On March 13, the FTC warned 97 dealer groups that their advertising practices would no longer be tolerated. In the time since, the whole industry has been warned and must change its ways or face the consequences.
