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2020 – New Year, New You (Or Dealership)

KPA /
car dealership

Go to the gym more often. Finish one book every month. Learn a new language. With the new year upon us, New Year’s resolutions follow close behind. In our own subjective tests, we have found that most of these resolutions are doomed to fail, but let’s make 2020 an exception and focus on compliance at your dealership!

In our first issue for 2020, we have collected the most prevalent calls we received on hotline over the last year and distilled them into a short, quick hitting article. For the sake of brevity, we will keep the discussion superficial and, as always, our hotline clients are welcome to call and speak to an experienced attorney to discuss any of these issues at length. At KPA, we live and breathe compliance! Six popular issues received on hotline will be discussed: three will be highlighted here and three more will be highlighted in our next issue. If you’ve been a long-time subscriber, then these topics will be by no means novel concepts to you, but they represent the most prevalent types of compliance issues facing dealers recently. The first three are Buyers Guides, CPO vehicles, and price advertising.

Buyers Guides

In January 2018, the Federal Trade Commission (FTC) required dealerships across the country to begin using one of the two new Buyers Guides. Though two years have elapsed since this requirement, dealerships are still a bit confused about how to properly complete a Buyers Guide. Though it may seem like nit-picking over something as seemingly inconsequential as checking a box and completing a form, improper completion of the Buyers Guide (or not providing one altogether) now carries a penalty of $42,530 per violation (let alone opening the door to the potential for consumer lawsuits). This violation can multiply significantly if your staff completes many Buyers Guides incorrectly.

Overview of the Buyers Guide

The FTC has dictated the content of the Buyers Guide down to the standardized wording and font size. The information cannot be modified except for the area under “Systems Covered” and “Duration,” which can be enlarged for more information by printing the Buyers Guide on larger paper. Guidance provided by the FTC allows for an internal stock number to be written to the right of the phrase “WARRANTIES FOR THIS VEHICLE.” Though the Buyers Guides must be printed as prescribed, there is nothing in the laws or the following FTC guidance that prevents the Buyers Guides from being completed by hand.

The Sections of the Buyers Guide

There are two versions of the Buyers Guide: the “As Is – No Dealer Warranty” version and the “Implied Warranties Only” version. Aside from the boxes stating the former, the two versions of the Buyers Guides are virtually identical. This means that if you are providing a dealer warranty, either of the two versions may be used so long as you are correctly checking the “Dealer Warranty” box.

Top Half of Buyers Guide:

Starting from the top and moving down, remember to fully and accurately provide the vehicle’s description. Further, regardless of the version of the Buyers Guide that is used, one of the boxes indicating “As Is-No Dealer Warranty,” “Implied Warranties Only,” or “Dealer Warranty” must be checked. Moving lower on the document, the “Systems Covered” and “Duration” area is used to describe the dealer warranty. As a reminder, this section cannot be used as the dealer warranty document, and a separate warranty document must also be provided to the customer. Generally, the “Systems Covered” and “Duration” section should only be used to describe a dealer warranty, and any manufacturer warranty should generally be disclosed in the “Non Dealer Warranties For This Vehicle” section, which is discussed below.   However,  you can use the section to disclose details about the manufacturer’s warranty coverage for the vehicle  as long as it is properly identified as warranty coverage from the manufacturer.

Bottom Half of Buyers Guide:

The bottom half describes any non-dealer warranties that exist on the used vehicle offered by either the manufacturer or a separate third-party. There are three boxes that are available to explain the warranty:

  • “MANUFACTURER’S WARRANTY STILL APPLIES.” Check this box if the original manufacturer’s new vehicle warranty has not expired.
  • “MANUFACTURER USED VEHICLE WARRANTY APPLIES.” Check this box if it is a “certified” used vehicle and/or covered by a manufacturer’s used vehicle warranty.
  • “OTHER USED VEHICLE WARRANTY APPLIES.” Check this box if the used vehicle is covered by a warranty offered by a third party.

Also, remember to check the “SERVICE CONTRACT” box if one is available for the vehicle.

Reverse Side of the Buyers Guide:

The reverse side of the Buyers Guide must have the dealership’s identifying information and the name and telephone number of the person to contact for complaints. We recommend that you also include the job title, such as “Used Car Manager,” in case that individual leaves the dealership. Additionally, though not required, we recommend that a customer’s signature be provided here to acknowledge receipt of a copy of the Buyers Guide at the close of the sale.

Spanish Buyers Guides

The Spanish language version of the Buyers Guide should also be displayed if a sale is conducted in Spanish. We recommend that if a reasonable number of sales at your dealership are conducted in Spanish, you should also have the Spanish Buyers Guides posted on all your used vehicles.

Which Version Should I Use, the “Implied Warranties Only” or “As Is – No Dealer Warranty”? 

Assuming that you are not providing a dealer warranty, if you decide to disclose a manufacturer (original or used) or third-party warranty on the vehicle, then we recommend using the “Implied Warranties Only” version, and checking the corresponding box.

If you do not disclose any manufacturer or third-party warranty and are not providing a dealer warranty, then the “As Is – No Dealer Warranty” version should be used (and the box checked).

As discussed above, if a dealer warranty is provided, either version of the Buyers Guide can technically be used so long as you check the “Dealer Warranty” box and appropriately fill in that section.

California law also prohibits selling or advertising for sale a vehicle as “certified” on an as-is basis. The “As Is” version should not be used on CPO vehicles that do not have a dealer warranty (and the “Implied Warranties Only” version should be used instead).

In September 2017, the FTC has published an FAQ shortly after the new Buyers Guides came into effect that provides answers to questions it has heard regarding compliance with the revised Rule. Many of you may find it useful. Please find the link to this article here.

Certified Pre-Owned Vehicles

For some time now, consumer attorneys have really been targeting certified pre-owned (CPO) vehicles, specifically focusing on the certification process and procedures and related documents.  Therefore, it does not come as much of a shock to us that CPOs would lead the list of most prevalent hotline calls for 2019.

The term “certified,” or other similar language, implies that a used vehicle has been certified to meet the terms of a used vehicle certification program. For most dealers, this typically means that the vehicle has been certified under the manufacturer’s used vehicle certification program. The Car Buyer’s Bill of Rights in California places a bevy of requirements on dealers in order to advertise and sell these vehicles. Below are a few of the hot button CPO topics that popped up over and over again in 2019.

Vehicles that Cannot be Certified

California law provides that certain vehicles are explicitly disqualified from being sold as CPO vehicles.   These vehicles include any of those:

  • The dealer knew or should know that the odometer reading is incorrect;
  • The dealer knew or should know was a prior lemon law buyback;
  • That have a branded title such as a lemon law buyback, salvage, junk, flood, or the like;
  • The dealer knew or should know sustained frame damage; or
  • That have sustained impact, fire, or flood damage that substantially impairs the use or safety of the vehicle even after repair.

[Vehicle Code § 11713.18(a)]

Now, remember, these are statutory requirements and do not include additional requirements that may be imposed under a specific manufacturer’s CPO guidelines. If a vehicle does not meet the additional requirements, it also cannot be certified under that manufacturer’s used vehicle certification program.

Inspection Report Requirement

As many of you know, prior to the sale of a CPO vehicle, dealers are also required to provide customers with a “completed inspection report indicating all the components inspected.” [Vehicle Code § 11713.18(a)(6)]. The word that I would like to emphasize here is “completed.” I have seen deal files with incomplete inspection reports (commonly referred to as the CPO checklist) far more often than perhaps one would expect. And remember, if there is an incomplete CPO checklist, a dealer cannot even advertise the vehicle for sale as a CPO. Incomplete inspection reports have also been the basis of many lawsuits recently. We believe it because following a checklist seems routine, so the repair technician who may miss things in their haste.

Here are a few tips regarding the CPO checklist:

  • Ensure that a corresponding box for each checkpoint on the checklist is individually addressed.  In other words, do not draw a continuous straight line down through all the boxes, but rather individually address a box with a checkmark.
  • If any item has not passed inspection, confirm that the item was repaired or replaced prior to certification of the vehicle.
  • Make sure that the checklist has all the required signatures. Remember that a checklist with a missing signature is not a completed checklist.

As Is Sales Prohibition and Buyers Guide Completion

Dealers who sell CPO vehicles cannot sell them “as is” and cannot disclaim any warranties of merchantability on the vehicle. [Vehicle Code § 11713.18(a)(7) and (8)]. Therefore, you must ensure that all advertisements, sales documents, and the like do not include any references to “as is,” or similar language, to indicate any disclaimer of warranties. Furthermore, sales staff should be carefully trained not to make any of these disclaiming statements during the sales process of a CPO vehicle.

Regarding sales documents for CPO vehicles, possibly the one most often discussed is the Buyers Guide. For a factory CPO vehicle, we recommend that dealers either separately provide a dealer warranty or use the “Implied Warranties Only” version of the Buyers Guide. Further, should you decide to disclose the non-dealer warranties for the vehicle, you should check the box indicating that the “Manufacturer’s Used Vehicle Warranty Applies.” If there is also a remaining balance of the original manufacturer’s new vehicle warranty on the CPO vehicle, you can check the box indicating “Manufacturer’s Warranty Still Applies” as well. [16 CFR § 455.2(b)(2)(v)].

Price Advertising:

Though price advertising for goods is seemingly straightforward, dealers have always been confused about how it should properly be done. And rightfully so, as there are laws in the books that deal specifically with price advertising for new and used vehicles!

Note: The discussion here will involve only prices as they relate to advertising and not disclosures. For a lengthy discussion about advertising disclosures, please refer to the article called “Are Your Advertising Disclosures ‘Clear and Conspicuous’?” in the February 2018 issue of Transmission.

Manufacturer’s Suggested Retail Price (on its own) IS NOT an Advertised Price

A display of the MSRP on a new vehicle, without anything else, is not considered an advertised price. A letter sent to the Assembly Journal from then California Senator Jackie Speier in 2001 states that “the MSRP is nothing more than the manufacturer’s suggested retail price and is not reflective of a dealer’s asking price or a dealer’s advertised price.” However, if it is used as a benchmark for determining the specific asking price, or if there is an inference that a new vehicle will be sold at the MSRP, the MSRP then becomes the advertised price and must be honored. Only use the MSRP of a vehicle in advertisements for new vehicles. A plaintiff’s attorney can make a strong case that the MSRP used in an advertisement for a used vehicle is misleading because the MSRP is based on a new vehicle, and does not take into account mileage, wear and tear, and the like.

Supplemental Price Sticker

The supplemental price sticker is an optional price advertisement (though we always recommended it to avoid assumptive sales practices). Remember that all accessories itemized on the supplemental price sticker should be pre-installed on the vehicle and fully operational as it sits in the showroom. Anything that requires activation in order to be used, such as a car alarm, should not be itemized, but rather negotiated in finance. If the total MSRP and separately priced items do not equal the dealer’s asking price, the increased difference in price must be marked specifically as “added mark-up.” This is statutorily defined, and the dealer cannot call it anything else.

Dealer Must Sell at Lowest Advertised Price

Dealers have a duty to sell the vehicle at or below the advertised total price regardless of whether or not the customer has actual knowledge of the advertised total price. What does this mean? A customer comes into your dealership and wants to buy the red sports car in the window. That same vehicle is currently advertised online with a total price that is $5,000 lower than what is posted in the showroom, but the customer never saw it. The dealer must sell the vehicle to the customer for the discounted price as long as the online advertisement has not expired (this is why expiration dates on advertisements are so important!).

All Ads Should be Displayed in Showroom

California law requires that every advertisement, regardless of medium (newspaper, radio, television, internet), must be clearly and conspicuously displayed in the showroom for as long as the vehicle remains unsold and the advertisement has not expired. The display should be updated as often as the advertisements themselves. We understand that this law may be onerous for most dealers to abide by given that advertisements are placed (and expire) and vehicles are sold frequently. One way would be to provide a computer terminal for any consumer to easily access and post a sign that directs consumers to the terminal to view current advertisements. Note: Please be sure to provide reasonable accommodations for persons who are computer illiterate or disabled.

Error in Price?

Occasionally, an advertisement goes out with an incorrect price. A customer sees what he believes to be a smoking deal, so he comes down to the dealership with a checkbook in hand and demands to purchase the vehicle at the advertised price. The dealer tells him that there was an honest mistake in the advertisement and that the vehicle’s price was erroneously discounted by 30%. The customer firmly states that the advertisement is unexpired and demands the vehicle. What do you do?

Such a similar situation occurred in 1999 where a customer (an attorney specializing in contracts) demanded to purchase a 1995 Jaguar for $25,995 after seeing an ad for it only to have the dealer make a counteroffer of $37,016. The customer sued the dealer to purchase the vehicle at the advertised price. Though a legal contract was formed between the two parties at the erroneous price, the California Supreme Court ruled that “Plaintiff should not be permitted to take advantage of the defendant’s honest mistake that resulted in an unfair, one-sided contract.” Due to the honest mistake and “unconscionable” effect the contract would have had on the dealer, grounds for rescission of the contract existed.

Even though the dealer won that time, don’t think that an error in price will automatically be overlooked and the real price reinstated. The court warned that if evidence of bad faith were presented, the outcome would have been different. Also, the dealer prevailed on the unconscionability aspect of the contract, given that the correct price and erroneous price had a difference of 32%. “Defendant would lose more than $9,000 of its original investment in the automobile. Plaintiff, on the other hand, would obtain a $12,000 windfall if the contract were enforced, simply because he traveled to the dealership and stated that he was prepared to pay the advertised price.” Donovan v. RRL Corp. (2001) 26 Cal. 4th 261. The court did not explicitly state any hard numbers as to what amount would rise to the level of unconscionability, so dealers should be aware that a mistake in a lesser amount would not give the dealer the same rescission rights. In any event, dealers should review each ad before they go out and if errors are found, a retraction needs to be requested and published immediately.

Questions?

If you have any questions regarding this issue, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or hotline@autoadvisory.com.

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