Federal Court Will Hear Auto Dealers' Challenge to New FTC Regulations

By Gabriel Herman

On Oct. 7, the 5th Circuit Court of Appeals will hear arguments in a case that could significantly reshape how auto dealerships operate.

The National Automobile Dealers Association is arguing that the Federal Trade Commission overstepped its authority when it issued a set of regulations known as the CARS Rule (Combating Auto Retail Scams).

If allowed to take effect, the CARS Rule will have far-reaching implications on dealership nationwide. It would impose a variety of new compliance requirements for the sale, financing and leasing of new and used motor vehicles. At the core of the case, NADA contends the FTC’s regulations would impose unnecessary costs and operational burdens on an already highly regulated industry. ?

The FTC’s Arguments

The FTC asserts that the CARS Rule seeks to curb deceptive practices in the car sales process, which the agency claims remain widespread despite existing laws. According to the FTC, the rule is designed to address common consumer complaints about bait-and-switch tactics, hidden fees, and so-called “junk” add-ons that consumers claim provide little to no value.

Key provisions of the CARS Rule include:

• Misrepresentation Prohibitions: Dealers are prohibited from making false statements about vehicle pricing, financing, rebates, or ?vehicle availability.
• Mandatory Disclosures: Dealers must clearly disclose vehicle pricing, the optional nature of add-ons, and the total cost of payments.
• Ban on Non-Beneficial Add-ons: Dealers are prohibited from charging consumers for products or services that provide no clear benefit.
• Informed Consent for Charges: Dealers must obtain explicit consent from consumers before charging for add-ons.

The FTC argues that these provisions will increase transparency in vehicle transactions and protect consumers from unfair practices.

NADA Challenge: Unnecessary, Redundant Regulation

NADA’s lawyers argue that the new regulations will unnecessarily increase costs for dealerships without improving consumer protections. In its brief, NADA argues that many of the practices the CARS Rule seeks to address are already illegal under existing federal and state laws, rendering the new requirements redundant and burdensome.

The FTC also failed to follow its own procedural rules, NADA contends. Specifically, NADA asserts that the FTC was required to issue an Advance Notice of Proposed Rulemaking (ANPRM), which would have allowed for more comprehensive input from stakeholders.

Legal Arguments and Implications

The case hinges on three key legal arguments:

1. Procedural Violations: NADA contends that the FTC acted unlawfully by failing to formally seek public comment before issuing a final rule. The FTC counters that it had the authority to bypass this step and points to extensive stakeholder engagement during the rulemaking process.
2. Cost-Benefit Analysis: NADA challenges the FTC’s cost-benefit analysis, claiming that the agency underestimated the compliance costs for dealerships and overestimated the potential benefits to consumers. In response, the FTC insists that its analysis is sound and, under Section 22 of the FTC Act, judicial review of the analysis is barred.
3. Regulatory Overreach: NADA argues that the FTC overreached by issuing a rule targeting practices that are already illegal. The FTC, in response, claims that deceptive practices remain a problem and that the CARS Act is necessary to protect consumers.

If the rule is upheld, auto dealerships will face significant changes to their operations, particularly in terms of compliance with the new disclosure and recordkeeping requirements when selling, financing and leasing new and used motor vehicles.

Dealerships will need to ensure that they provide clear and upfront pricing information, obtain explicit consumer consent for add-ons, and eliminate products that provide no tangible benefit to consumers. While larger dealerships may have the resources to adapt more easily, smaller operations may face significant challenges in absorbing these new costs.

Conclusion

However it rules, the 5th Circuit’s decision will directly impact auto dealerships. If the court approves the CARS Rule, the regulatory burden on dealerships will be significantly greater. Fox Rothschild is closely monitoring this litigation and will keep you informed of any important developments.

In the meantime, if you have questions about how this case might affect your dealership or how to prepare for potential changes, contact Gabriel B. Herman at [email protected] or 215.444.7338 or your regular Fox attorney.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.