If you’ve been paying attention to the news, you know that the Federal Trade Commission has been flexing its enforcement muscles lately. A number of dealers received civil investigative demands (CID) from the FTC last year. Apparently, the regulator was concerned about representations in dealer advertisements, and five dealers got stung.
To quote this magazine’s March 15 report on the matter: “The FTC charged that the ads, which ran on the dealers’ websites and on sites such as YouTube.com, deceived consumers into thinking they would no longer be responsible for paying off the loan balance on their trade-in, even if it exceeded the trade-in’s value. Instead, the dealers rolled the negative equity into the consumer’s new-vehicle loan or, in the case of one dealer, required consumers to pay it out of pocket.”
The FTC alleged that this practice violated Section 5 of the FTC Act, which gives the agency authority to prosecute unfair and deceptive practices. Those of you who have been paying attention over the last year know that this is the exact kind of practice Congress intended the FTC to use its new rulemaking powers to regulate. And the actions the FTC took against those five dealers are a perfect way for the agency to get a feel for how it should use its new authority.
As I’ve often told clients, you want to have your house in order as much as possible when the FTC comes knocking. For each of these five dealers, additional chargers were imposed, including the advertising provisions found in the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA). While the facts in each case and the settlement terms differ a bit, the gist is as follows:
The dealers are prohibited from misrepresenting that they will pay the remaining loan balance on a consumer’s trade-in vehicle such that the consumer will have no obligation for any amount of that loan. They also are prohibited from misrepresenting any other material fact relating to the financing or leasing of a motor vehicle.
The dealers must make clear and conspicuous TILA and CLA disclosures when advertising certain credit and lease terms.
The dealers must keep copies of relevant advertisements and materials substantiating claims made in the advertisements.
The dealers must notify the FTC regarding changes in corporate structure that might affect compliance obligations under the order, and must file compliance reports with the FTC.
The dealers must do all of the above for the next 20 years.
I’ve had the opportunity to review a lot of advertising over the years. Many times the advertisements were written by internal staff who didn’t have a full grasp of federal and state advertising laws. Some advertisements were fine; others, not so much. The good news is my client knew enough to reach out for assistance to make sure no lines were crossed.
Lest you think I’m trolling for business, I’m not. The point I’m making here is that there is a fine line between “puffery” and deceptive advertising. Puffery is, by definition, a misrepresentation, but it is neither material nor deceptive. An example would be a salesperson telling customers that a new Ferrari will make them look 20 years younger.
Deceptive advertising, on the other hand, is advertising that is likely to mislead a consumer acting reasonably under the circumstances about a material fact. It can be a misrepresentation or an omission. In the case of the five dealers, it appears they omitted a material fact — specifically, that the negative equity was rolled over into new financing. Without question, telling customers you will pay off their old loan if they buy a new car without explaining that the balance will be included in the new contract as negative equity is an omission that rises to the level of deception.
Sales and marketing folks like to push the envelope, but you can make sure they don’t go too far by simply having someone on staff who understands advertising laws and can apply them to your ads. And I can say with certainty that it would not be deceptive for me to say that an hour or two of an attorney’s time would cost far less than what those five dealers will be paying over the next 20 years.
Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. E-mail him at michael.benoit@bobit.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.
