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Advertising, Marketing & Promotions Alert >> New York Attorney General Is Latest Regulator to Challenge the Auto Industry

September 17, 2015

On the heels of recent high-profile enforcement actions by both the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) against the automobile industry, the New York Attorney General (NYAG) has now zeroed in on the industry as well.

Over this past summer, NY AG Eric Schneiderman settled numerous allegations of deceptive practices with more than 25 automobile dealerships throughout the state, requiring the dealerships to collectively pay over $14 million in restitution and penalties. And Schneiderman has indicated that his office intends to continue monitoring New York auto dealers and will bring more enforcement actions as necessary.

Background
In March 2015, as part of Operation Ruse Control, a nationwide and cross-border crackdown on automotive dealer sales practices, the FTC announced settlements totaling more than $2.6 million. These settlements were with a number of automobile dealerships and an automatic payment company involving alleged fraudulent vehicle purchase add-ons and deceptive advertising (click here for more information).

Furthermore, the CFPB brought an action against an auto loan company for what it characterized as “aggressive debt collection tactics” against service members, including allegations that the company used a combination of illegal threats and deceptive claims to collect debts. Following these actions, the NYAG then also made headlines at the expense of the auto industry.

Paragon Dealerships Allegations
The NYAG contended that three jointly-owned auto dealerships unlawfully sold credit repair and identity theft prevention services, along with other “after sale” items, to 15,000 consumers – items that in some cases added more than $2,000 in “hidden costs and fees” onto the sale or lease price of a single vehicle.

The complaint asserted that between 2010 and 2014, the dealerships employed a number of deceptive sales tactics, either by charging consumers for credit repair services and other “after sale” items without their knowledge, or by misrepresenting that the services were free. According to the NYAG, beginning in at least March 2010, the dealerships entered into an arrangement with Credit Forget, Inc. (CFI) – a New York company that sold credit repair and identity theft prevention services to car dealerships – to sell CFI’s credit repair and identify theft protection services to their customers as part of the sale or lease of a vehicle.

The NYAG contended that every time the dealers charged a consumer for these services, they violated state and federal laws banning upfront fees for these services. (In a separate action, the NYAG recently obtained a consent order that shut down CFI.) The NYAG also asserted that the three dealers added on charges for other after-sale items, such as tire protection and LoJack, without clearly disclosing the price they were charging the customer for these items. The costs of these items often were bundled into the vehicle’s sale price and not separately itemized.

In addition, the NYAG contended that the dealerships failed to provide required disclosures, such as a consumer’s rights to cancel the credit repair services contract. In addition, the dealerships sometimes negotiated purchase and lease terms with consumers in Spanish and then only provided contracts and documents in English, even though the law requires that when the terms of an installment agreement are negotiated in a language other than English, the seller must provide documents translated in that language.

Atlantic Automotive Group Allegations
According to the NYAG, the network of 22 automobile dealerships across Long Island defrauded consumers through a pattern of publishing false or misleading advertisements and promotional offers.

Specifically, the NYAG alleged that the auto dealers regularly sent ads through the mail that contained various misleading promotional offerings, including scratch-off and pull-tab card games indicating that consumers could win prizes such as cash, flat screen televisions, or free vehicles. “Winning” cards were ones that contained three like symbols, however, these cards did not specify what valuable prize had been won. To get this information and claim their prize, the consumers were required to visit the dealership. According to the NYAG, once the consumers got to the dealership with their “winning” cards, most learned that they had not won any prize at all.

The NYAG further claimed that many dealer ads also promoted deceptive sale and lease prices because the prices advertised included discounts or rebates that were not available to most consumers and therefore did not represent the actual sale or lease price of the vehicles advertised. Moreover, to the extent the ads contained any legal disclaimers clarifying these offers, the NYAG took the position that the disclosures did not cure the inherent deception because they were either made in tiny footnotes at the bottom of the advertisements, failed to clearly and conspicuously provide certain required disclosures, or in many cases, contradicted or materially modified the principal message of the ad.

In addition to misleading advertising, the NYAG alleged that dealers engaged in fraudulent business practices by charging purchasers unauthorized fees for vehicle maintenance plans that they had not requested. The NYAG also claimed that the dealers effectively nullified the discount offers that were actually available to consumers by increasing the retail sales price of the vehicles.

Settlement Terms
Under this summer’s settlements, the Paragon Dealerships agreed to pay $13.5 million in restitution to consumers and $325,000 in penalties, fees, and costs to New York State, and the Atlantic Automotive Group agreed to pay $310,000 in restitution and penalties to consumers and to New York State.

In addition, both settlements prohibit the dealers from, amongst other things:

  • Selling, offering to sell, or marketing credit repair and identity theft services in connection with the sale or lease of a vehicle;
  • Selling, offering for sale, or providing to consumers any after-sale product or service unless, prior to the sale, certain material terms, including price, are disclosed verbally and in writing;
  • Misrepresenting the price of the vehicle in final lease or sale contracts;
  • Negotiating any terms of a sale or lease with a consumer in a language other than English without providing a translation of certain material documents in the language in which the terms were negotiated before the consumer signs these documents; and
  • Failing to provide consumers with sales or lease agreements that clearly and conspicuously itemize each after-sale product or service and its price.

On the Horizon
The FTC and the CFPB have indicated that they have a continuing interest in the auto industry. It is clear that NY AG Schneiderman – who may have political aspirations reaching beyond his current office – does too.

The NYAG has made it known that it does not intend to stop with these settlements, and that it is “continuing to investigate other New York auto dealers that sold or sell after-sale services.”

Bottom Line

Regulators have clearly put the automobile industry on notice about the need for clear and conspicuous disclosure of material terms in their marketing materials and sales documents. The industry should brace for more regulatory attention, with potentially very significant penalties, while considering what steps to take to protect against future regulatory actions. In particular, auto dealers should ensure they are clearly disclosing and communicating components of a lease agreement or sales contract, the price of a vehicle, and the material terms of any after-sale product or service.