The Federal Trade Commission (FTC) has enforcement authority over false or misleading advertising and other wrongful activity under the authority of Section 5 of the FTC Act to prevent unfair, deceptive acts and practices (UDAPs). Within the past few years, the FTC has revved up its enforcement of deceptive auto dealer advertising, starting with “Operation Steer Clear” in January 2014 and continuing with “Operation Ruse Control” in March 2015, in which the FTC partnered with 32 law enforcement agencies to bring hundreds of enforcement actions.
The FTC can identify enforcement targets in many different ways. Although the agency does not need to receive consumer complaints to initiate an investigation, complaints sometimes trigger a closer look. In the case of auto dealers, many investigations arise from FTC staffers looking for problematic ads on the Internet.
In this Topic, we discuss laws, regulations, and regulatory enforcement actions concerning marketing and advertising of vehicles and credit products, as well as best practices dealers should follow. Federal and state laws govern the methods and content of advertising and marketing in any medium of communication, both offline and online, including the Internet and social media.
Basics of Deceptive Advertising
A deceptive practice is typically defined as a representation, omission, or other practice that is likely to mislead consumers acting reasonably under the circumstances in a material way. An act is deceptive where (i) a representation, omission, or practice that misleads or is likely to mislead the consumer; (ii) a consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances; and (iii) the misleading representation, omission, or practice is material. A practice can even be deceptive if it is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the FTC may consider established public policies as evidence to be considered with all other evidence.
Deception usually occurs through written or oral promotional messages (often referred to as “representations” or “claims”) but can also occur in other ways. Examples of deceptive practices include, but are not limited to the following:
- Misleading price claims,
- Sales of systematically defective products without adequate disclosures,
- Bait and switch techniques,
- Failure to perform promised services;
- Failure to meet warranty obligations
- If the appearance of the product or the nature of the product itself conveys a misleading message, it can be deceptive. Simply selling a vehicle conveys the message that the vehicle is fit for its intended purpose (driving), even if the seller says nothing about its capabilities.
Advertising, promotional materials and other disclosures should be tailored to the sophistication of the target audience. In considering whether an advertising is deceptive, the FTC considers the entire advertisement, transaction or course of dealing to determine how reasonable consumers would be likely to respond. Many factors may be considered in determining how a reasonable person would respond to a claim or practice. To that end, the FTC may consider:
- How clear is the representation?
- How conspicuous is the qualifying information?
- How important is the omitted information?
- Do other sources of for the omitted information exist?
- How familiar is the public with the product or service (i.e. car or aftermarket product)?
You should consult with your attorney for specific guidance, but the following is a practical guide to help you draft your marketing materials.
Claims Conveyed by the Advertisement
In determining whether an advertisement is deceptive, an advertiser must first understand what messages the ad is likely to convey to reasonable consumers. To do that, the advertiser must consider the advertisement as a whole and the “net impression” it creates. Even if everything stated in the ad is true, it can create an overall message that is deceptive.
Advertisements may convey both express and implied claims. An express claim is one that states a fact directly, while an implied claim is one that literally says one thing but suggests something else. Advertisements often can be subject to multiple interpretations, some of which are true and some not. An advertisement can be deceptive if any one reasonable interpretation is false or misleading, even if other interpretations are accurate, and even if the advertiser didn’t intend for the advertisement to be perceived that way. Note that “reasonable” does not mean sophisticated or highly educated, however.
Materiality of the Claims
Claims that are likely to influence consumers’ decisions about whether to buy a product or service, or about how they use it, are considered material. The FTC often presumes that certain types of claims are material, including express claims and claims about a central feature of the product, the product’s cost, or its safety. Keep in mind though that most claims are likely to be considered material, unless they are “puffery” – claims that are so broad and fanciful that consumers do not take them seriously (for example, “world’s best car”).
Substantiation of the Claims
In addition to claims that are false or misleading, it is deceptive to make a claim about an objective feature of a product or service without having competent and reliable evidence to substantiate the claim at the time it is made. This is the case even if it later turns out that the claim was true. The type and amount of evidence that is necessary depends on the type of claim made. For example, a dealer that wants to advertise that it has the “lowest prices in the county” should survey the prices for the relevant comparison at the other dealerships in that county.
Deception by Omission
An advertisement can be deceptive not just for what it says, but also for what it does not say, that is, if it omits material information that is necessary to dispel a misimpression that the advertiser created. This usually arises in situations where there are significant qualifications, limitations, conditions, or restrictions on an offer. For example, it is deceptive to advertise financing at a particular rate without disclosing (when such is the case) that the rate may adjust upwards. Note that a disclosure is appropriate to qualify a claim, not contradict it. It is deceptive to claim one thing in the headline or text, while saying the opposite in a fine-print footnote. Moreover, a deceptive advertisement cannot be “cured” by providing the truth in a later communication with the consumer.
Making Effective Disclosures
All advertised terms must be “clear and conspicuous.” If a disclosure is not made clearly and conspicuously, it is the equivalent of not making the disclosure at all. The FTC has identified the four P's for making effective disclosures: Prominence, Proximity, Placement, and Presentation.
Prominence – A disclosure must be large enough and sufficiently contrasting with the background such that ordinary consumers will notice and read it. The FTC does not state a required or minimum type size for disclosures, but there are state laws that require a minimum of 8- or 10-point type. Depending on the layout of the advertisement and the importance of the information, however, type size larger than 8- or 10-point may be necessary or appropriate. Disclosures should be distinguished from the background of the ad by using a contrasting color, bolding it, and/or putting the disclosure within a border. Asterisks next to qualified terms should be at least 50% the size of the qualified term's print size.
Proximity – Disclosures should be located close to the terms being qualified. A small footnote at the bottom of the page or image is generally not sufficient. Nor is putting the disclosures on another page of a brochure or another screen or page of a website not close to the qualified term or referring consumers to another location entirely to see the material terms (such as “see dealer for details”). In digital advertising, if hyperlinks are used to direct the consumer to the disclosure, they must be prominently displayed and clearly labeled to convey the importance and nature of the information. Information essential for consumers to understand the offer should not be disclosed through a hyperlink.
Placement – The location of the disclosure within the advertisement must be such that ordinary consumers would notice it. Small print asterisks or footnotes, even those next to the qualified term, do not meet this standard. Referring consumers to another document or location, such as “see dealer for details,” is generally unacceptable.
Presentation – Language should be in “plain English.” It should not scroll across media or be of such detail and depth that the average consumer would not likely read or understand it. There should be no distracting elements in the ad that compete for attention with the disclosure. The disclosure should be presented unambiguously and in short phrases. Oral disclosures in radio or audio media must be in a volume and cadence that a reasonable consumer can hear and understand.
Disclosures made in online or social media advertising present some unique challenges. This topic is discussed below.
Deceptive Advertising Examples
The following are a few examples of deceptive advertising by a dealer:
- Marketing a program where the consumer’s outstanding debt on a trade-in vehicle would be paid off, no matter how much the consumer owed, but in reality, the dealer either financed the “negative equity” or required it to be paid off by the customer in cash.
- Failing to disclose that “dealer discounts” and “Internet prices” would require customers to qualify for other discounts that were not generally available (e.g., military member, recent college graduate, etc.) and that even with these other discounts, the consumer would wind up paying a higher price for the vehicle than advertised.
- Advertising biweekly payment plans claiming that the plan would save consumers money on their financing by shortening the duration of the financing and thus lowering total interest paid, but the marketing materials fail to disclose that the fees charged for participating in the program outweigh any potential savings.
In 2016-2017, the FTC announced a series of settlements with auto dealers regarding advertising of used vehicles subject to unaddressed open recalls. In these cases, the FTC asserted that it was deceptive for dealers to advertise that used vehicles offered for sale were subject to a rigorous inspection when that inspection process did not identify and repair open recalls. The FTC argued that “rigorous inspection” claims constituted an implied representation that the vehicles were not subject to any unaddressed recalls. The FTC further claimed that such implied representations were likely to mislead reasonable consumers if the vehicles offered for sale were, in fact, subject to open recalls. These settlements required the dealers to supplement any inspection claims with a clear and conspicuous disclosure that vehicles offered for sale, even those that the dealer inspected, may be subject to an open recall. This disclosure also needed to explain how consumers could determine whether a particular vehicle offered for sale had any unrepaired recalls.
More recently, in 2018, FTC settled a lawsuit, against nine automobile dealers in which they agreed to pay over $3.5 million in redress to consumers allegedly harmed by the dealers because they failed to clearly and conspicuously disclose required information in their advertising and otherwise used deceptive and unfair sales and financing practices, deceptive advertising, and deceptive online reviews.
Dealer Advertising Practices to Avoid
The FTC is aggressively challenging deceptive dealer advertising. Below is a non-exclusive list of “don’ts” that the FTC and others have indicated dealers should avoid:
- Deceptive pricing. This is where the dealer makes misleading statements or omits material information about the price or terms of an offer. It is deceptive to state a price when that price excludes other significant fees and charges, unless the fees and charges are clearly and conspicuously disclosed. For example, a dealer luring prospective buyers onto the lot by advertising vehicles at a specific low price. But the advertised price is valid only after a $5,000 down payment, details of which are buried in a small-font footnote.
- Deceptive teaser payments. This is where the dealer advertises interest rates that are only in effect for a short time, after which they increase substantially. For example, prominently advertising a new vehicle for $99 per month, but failing to disclose that after the first two payments, the payment amount increases to $525 for the remaining 70 months of the financing term.
- Undisclosed Balloon Payments. This is where advertisements state a low monthly payment without clearly and conspicuously disclosing a large "balloon" payment at the end of term. A balloon payment is one that is more than two times the regular periodic payment.
- False “$0 Down” Leases or Sales. Claims that consumers can lease or finance for “$0 down” are a particular area of concern with the FTC. If there are undisclosed fees or other charges due up front associated with the sale or lease (such as an acquisition fee or doc fees), or another requirement such as a particular credit score in order to obtain the no down payment treatment, the FTC may consider a $0 down claim to be deceptive.
- Hidden rates. Claims of a low APR when the rate changes over time, or when most consumers won’t qualify for that rate, can be deceptive unless these facts are clearly and conspicuously disclosed. For example, advertising a “0% APR for 60 months” promotion when the rate only applies if customers bought a new car for up to a certain dollar amount.
- Bogus Promotions or Sweepstakes. Dealers should not use so-called promotions or sweepstakes that are not genuine to bring customers to the showroom. FTC and state laws also require extensive disclosures in advertising contests or sweepstakes. This is discussed in more detail below. An example is when a dealer mails out scratch-off sweepstakes cards to promote car sales, where every card scratched off indicates that the consumer is a winner, yet no one is awarded a prize.
Critically, Regulation Z and Regulation M set forth specific requirements concerning advertising credit. For additional information see below.
TILA and Regulation Z, which apply to closed-end credit transactions, and the Consumer Leasing Act and Regulation M, which apply to consumer leases, all contain advertising requirements relating to credit terms. Under both Regulation M and Regulation Z, all disclosures must be made clearly and conspicuously. Further, Regulation Z permits creditors to state only those terms that actually are or will be arranged or offered by the creditor. If an advertisement states a rate of finance charge, it must state the rate as an “annual percentage rate,” using that term.
Regulation M states that an advertisement for a consumer lease may state that a specific lease of property at specific amounts or terms is available only if the lessor usually and customarily leases or will lease the property at those amounts or terms.
Advertising the following “triggering terms” about closed-end credit requires additional disclosures:
- Down payment;
- Number of payments or period of repayment;
- Payment amount; or
- The amount of any finance charge in a credit sale.
If any of these terms are used, the advertisement must include the following terms:
- The down payment;
- Terms of repayment which reflect the repayment obligations over the full loan term, including any balloon payment; and
- The “annual percentage rate” or “APR” and whether the rate is subject to increase.
Similarly, for consumer leasing, if a lessor includes the following terms in an advertisement, they are considered “triggering terms”:
- Any lease payment; or
- The capitalized cost reduction or other payment due prior to or at lease signing (or that no payment is required), or by delivery if delivery occurs after consummation.
If the advertisement includes any of these triggering terms, then the advertisement must also include the following disclosures:
- A specific reference that the advertised transaction is a lease;
- The total amount due at lease signing or by delivery if delivery occurs after consummation;
- The number, amounts, and due dates or periods of scheduled payments;
- Whether a security deposit is required; and
- A statement that an extra charge may be imposed at the end of the lease term where the lessee’s liability (if any) is based on the difference between the residual value and its realized value at the end of the lease term.
Additionally, if an advertisement for a lease provides a percentage rate in an advertisement, the rate may not be more prominent than any of the required consummation disclosures (with the exception of the notice stating that “this percentage may not measure the overall cost of financing this lease” required to accompany the rate), and the lessor may not use the term “annual percentage rate,” “annual lease rate,” or equivalent term.
There are different rules for open-end credit. Both Regulation Z and Regulation M contain special rules for catalog and electronic advertisements, as well as television and radio advertisements.
You should consult with your local attorney to ensure that your advertisements comply with applicable law.
State Laws and Regulations
State laws on unfair and deceptive acts and practices are often even stricter than Section 5 of the FTC Act and many State Attorneys General have guidelines for vehicle advertising in their state in both traditional and online media.
You should check with your attorney to make certain you comply with applicable state laws and rules.
You can also “prescreen” a list of leads or even a single lead under the Fair Credit Reporting Act (FCRA). Prescreening is governed by the FCRA and involves giving a credit bureau a list of credit criteria for the credit bureau to produce a list of consumers meeting the criteria. (Under the “prescreen of one” model, the credit bureau applies the credit criteria to a single consumer and indicates whether or not the consumer meets them.) FCRA requires dealers to make a “firm offer of credit” to these consumers, which the creditor is obligated to honor, provided the consumers continue to meet the prescreen criteria and meet any additional post-screen credit criteria as well as provide any required collateral. FCRA requires specific “clear and conspicuous” disclosures that must be included in the prescreen mailing, including conspicuously disclosing to the consumer how to opt out of further prescreening. The CFPB has issued a FCRA rule regulating the content and format of these disclosures, and the rule includes models that offer a compliance safe harbor. Dealers should apply the models for the most reliable approach to compliance with these disclosure requirements.
Prescreening differs from preapproval inquiries in that a consumer who meets the prescreen criteria must receive a firm offer of credit. Additionally, prescreening is generally initiated by the creditor whereas preapprovals are generally initiated by the consumer. Persons who do not pass the prescreen criteria do not need to receive adverse action notices unless they otherwise affirmatively apply for credit and are declined.
A Wrinkle on Prescreening: “Trigger Leads”
Trigger leads are products created and sold by credit bureaus. Recall from Topic 3 that a consumer provides his or her consent to have his or her credit report pulled as part of the loan application process. When the credit report is pulled during the loan application process other competing lenders are notified that the consumer is shopping for credit. The credit bureaus do not communicate the consumer’s name and contact information (usually a cell phone number) to the prescreen client until another auto dealer pulls the customer’s credit report. In other words, one creditor’s inquiry to a credit bureau regarding a consumer “triggers” the bureau to provide prescreened lead information about that consumer to a competing creditor. At that point, the prescreen/“trigger lead” client (typically a lender or another auto dealer in partnership with the lender) will call the customer on the customer’s cell phone and attempt to induce them away from the original dealership that pulled the credit report. That inducement must be a valid firm offer of credit under FCRA because the trigger lead process is a form of prescreening. Often, the client will offer this inducement by claiming to offer better purchase or financing terms on the vehicle or aftermarket products. Some customers literally have been called on their cell phones while still in the original dealer’s F&I office.
There is some general uncertainty as to the propriety of the trigger lead process in the context of indirect auto finance under federal and state law. The FTC has stated that the practice can be beneficial to consumers because it can help them more easily identify other terms and loan offers. Although the FTC’s guidance was issued in the mortgage context, it reasonably follows that the agency would look favorably on the practice in the auto lending context. While there have been efforts to ban trigger leads legislatively, no effort has yet been successful as of the date of this publishing.
To be sure, dealers should consult with legal counsel before participating in a trigger lead campaign.
Dealers can use their websites to market credit terms and prequalify customers even before taking a full credit application. Whether a prequalification is treated as merely an inquiry or a credit application depends on what you communicate to the consumer. Please note that the distinction between inquiries and applications in the prequalification context is complicated and fact-specific.
A consumer can securely provide personal information (e.g., name, address, birth date, Social Security number) over a secure webpage (an https page or by using encrypted data transfer) and give consent allowing the dealer to access their credit report, including their credit score, for prequalification purposes.
If a dealer responds by indicating the types of credit programs offered for which the consumer may qualify and indicatse how the consumer can submit a complete credit application, the prequalification process could be treated as an inquiry which could subsequently trigger risk-based pricing or adverse action notice requirements. You can also communicate to the consumer that your dealership has many credit programs available and that you need additional information from the consumer to be able to prequalify them for one of the programs. Either way, suggest that the consumer come to the dealership or call your Internet sales manager.
If the dealer responds that there are no programs for which the consumer can qualify, then the dealer may be considered as having made a credit decision instead of treating it as an inquiry. In that case, the dealer would be required to send the consumer an adverse action notice. If you respond with information that indicates the consumer qualifies for specific financing, you have also made a credit decision and must provide the Risk-Based Pricing Notice or alternative Credit Score Disclosure Notice.
Dealers should work with legal counsel to ensure that their communications with consumers in the prequalification process do not inadvertently cross over from an inquiry into a credit application.
Sweepstakes or “games of chance” present additional challenges and are regulated principally by state laws and the FTC. To minimize risk of a state law violation, sweepstakes must generally contain one of the following elements: a prize, an element of chance, and the giving of a consideration to enter. The easiest element to eliminate is the giving of a consideration to enter. To do this, a sweepstakes must give consumers the right to enter without making a purchase (such as by mailing in a postcard). For example, running a sweepstakes open only to consumers who purchased or leased vehicles. Some states require bonding for certain consumer sweepstakes.
Promotions for sweepstakes must clearly disclose the rules (for example, the method of entry, eligibility, method of determining the winner, prizes, and odds of winning). The promotion should also state that no purchase is necessary to enter and that making a purchase will not improve chances of winning a prize. The sweepstakes provider must provide a notification system that allows consumers to have their names removed within 60 days from the mailing lists of that provider. In addition, the provider must report to the IRS the amount of prizes received by certain winners.
Dealers that use prize promotions should consider seeking advice from an attorney familiar with the laws of the states where the sweepstakes will be conducted or with the appropriate government agencies in those states. The laws can be complex.
Online (“Digital”) Advertising
The use of digital media to promote businesses and their products is increasing at a rapid rate, and federal and state law enforcement agencies have responded accordingly. The most important thing to know is that the same basic compliance rules that apply to other forms of advertising also apply to digital advertisements. For example, representations must be true and substantiated and must include clear and conspicuous disclosures when necessary to dispel any misleading impression created by the ad.
The different characteristics of the Internet and the devices used to access it can create unique compliance concerns and making effective disclosures can be especially challenging in online media, as the user experience can vary widely depending on the consumer and type of device. As in other media, online disclosures must be prominent and proximate to the claims or terms they are qualifying. But, this can be very difficult to do on a mobile device with a small screen. In March 2013, the FTC issued an update to its Dot Com Disclosures Guide to making effective online disclosures. The FTC emphasized that consumer protection laws apply equally to all advertising, regardless of the medium used, and include digital and social media. Disclosures required to avoid deception or otherwise comply with the law must be presented in a clear and conspicuous manner, and space constraints do not relieve the advertiser of this obligation.
In terms of prominence and placement, advertisers should be creative in using color, size, and graphics to make the disclosure more readily noticeable. Material disclosures should not be buried in long paragraphs of scrolling text, in the website’s “terms and conditions,” or in footnotes. They should be on the same screen as the claim they are qualifying and should be as close to the claim as possible. Generic statements such as “see below” are insufficient, especially if the consumer must scroll to see it. In some cases, it may be acceptable to use hyperlinks to take the reader to a separate page containing the disclosure, but only if the link itself is clear and prominent, takes the reader directly to the disclosure, and is labeled to explain the nature of the information and its importance (such as, “Click here to learn more about options you can purchase.”). But hyperlinks cannot be used to communicate disclosures that are “an integral part of the claim.” For example, disclosures about added fees and costs that consumers must pay to purchase the product should really be in close proximity to the price claims, and not on a separate screen or page.
Any elements of the ad that detract from the effective communication of a disclosure should be removed or altered. Pop-up disclosures typically do not comply because many consumers block pop ups. A disclosure should be made in the same manner as the claim it qualifies and may need to be included each time the claim is presented. The content of the disclosures should be clear, simple, and straightforward. The test for whether a disclosure is effective is the extent to which consumers can actually read, perceive, and understand it. Rapidly scrolling pages of text are likely to fail the test for acceptability.
For example, the FTC issued a complaint against an online lender this year in connection with its lack of prominent fee disclosures regarding fees, because the company used methods such as pop ups, scrolling and fine print to qualify the nature of the fees. The FTC’s complaint asserted that the fee disclosures were not clear and conspicuous and that this constituted a deceptive act or practice.
In addition to the challenges posed by making disclosures on electronic devices, the FTC has identified two other major issues with online and social media advertising:
- Native Advertising (“sponsored content”). Promotional messages that blur the lines between advertising and content are common on the Internet but may be deceptive. The FTC has issued an enforcement policy statement on “deceptively formatted advertisements,” defined as promotional messages that are integrated into and indistinguishable from non-promotional content, such as news, featured articles, or product reviews. The policy statement states that advertising and promotional messages that are not readily identifiable as such are deceptive, because they are likely to mislead consumers into believing the messages are independent and impartial. In these situations, the advertiser must clearly and conspicuously disclose that the embedded message is an advertisement, for example by putting the phrase “PAID ADVERTISEMENT” at the top of the message.
- Deceptive Endorsements. Promotional communications that include purported endorsements or testimonials from experts or consumers who have some connection with the advertiser are deceptive absent a clear and conspicuous disclosure of the nature of the connection. For example, if the endorser has received compensation or free products from the advertiser, those facts must be disclosed. The FTC’s Guidelines on Endorsements and Testimonials are described in more detail below.
- Online Influencers. The FTC brought its first enforcement action against individual online influencers for failure to disclose material connections with the companies that they promoted. This appears to be an area of emerging interest for the FTC.
Social Media Advertising
Social media sites offer dealers a new way to connect with consumers through consumers’ principal means of staying in touch with friends, colleagues, and companies with whom they share an interest or have a relationship. But, increasingly, advertisers are using social media to disseminate commercial messages, and government regulators are actively monitoring social media to look for deceptive practices. The suggestions for advertising practices described above, including those described as part of the FTC’s “Dot Com Disclosures” guide, should be reviewed to help advertisers make effective online disclosures.
Advertisers on social media must make sure that (1) their claims are truthful and substantiated, (2) all required disclosures are clear and conspicuous, and (3) advertising content is clearly distinguished from non-commercial content. Several of the FTC’s deceptive advertising cases have addressed social media advertisements. The ads came to the FTC’s attention as a result of FTC staffers searching the Internet and finding the ads on sites such as YouTube.
Any dealership that plans to launch a social media presence, or whose employees have access to and use such sites, should adopt a Social Media Policy. The Policy should place reasonable limits on employees’ use of social media in a way that can be tied to the dealership.
FTC Endorsement and Testimonial Guidelines
In 2009, the FTC issued revised guidelines on the use of endorsements and testimonials in advertising. The guidelines include the following:
- There are several kinds of endorsers, including experts providing their expert opinions about the advertised product, consumers relating their experiences with the product (commonly referred to as “testimonials”), and organizations that may grant some sort of certification or approval. On the other hand, individuals who are merely spokespersons and are not purporting to provide their own opinions or experiences are not covered by the Guidelines. Nor are bloggers or others who go on review websites and provide their opinions, so long as they are not connected in any way with the advertiser.
- Endorsements must reflect the honest opinions, beliefs, or experiences of the endorser. Any claims made by the endorser beyond this must be true and substantiated. In other words, if the claim would have been deceptive if made directly by the advertiser, it is deceptive when made by the endorser.
- Endorsements may not be presented out of context or reworded in a way that distorts the endorser’s opinions or experiences. If the endorser is presented as a user of the product, he or she must have actually used it.
- The experiences related in consumer testimonials must reflect the typical, or representative, experience of consumers generally. If they do not, the advertiser must clearly and conspicuously disclose what the typical experience is. A disclosure like “results not typical” or “results may vary” is not sufficient.
- If there is a material connection between the endorser and the advertiser that might affect the weight or credibility of the endorsement, that connection must be disclosed clearly and conspicuously. A material connection could include the payment of compensation or providing free products to the endorser, for example, an endorser who touts her experiences with the product on a social networking site in exchange for free product or payment of money.
Other Advertising Guidelines
The FTC has published additional advertising guidelines that often apply to dealers. One example concerns the use of the word “free” in advertising. The FTC prohibits use of the word “free” in describing a product if that product is sold with another product or service as to which the price is arrived at through bargaining. FTC guidelines also warn that it is deceptive to advertise a discount unless the price is less than the regular price of the product. For example, an advertiser cannot raise the regular price of a product and then advertise a discount on that inflated price. Statements such as “repossession sale,” “fleet liquidation,” “end-of-lease sale,” or other unusual sale circumstances must be true in fact. If a vehicle is advertised at “factory invoice” or the like, the terms must represent the dealer’s ultimate total vehicle cost, including any holdbacks or manufacturer incentives. Advertisements for a particular product need to include a disclosure if there are limited quantities of that product available. And advertisers should not engage in “bait and switch” advertising.
State Advertising Laws and Regulations
Almost all states have laws specifically prohibiting misleading advertising. The state standards summarized in this section are for example purposes only. This section does not provide a comprehensive review of all state laws regulating advertising. An example of a relevant regulatory scheme is Florida, which prohibits any statement known or which could have been ascertained to be untrue or misleading and which was made with the intent or purpose of selling goods or services. Mississippi lists a series of phrases that are deemed to be untrue including “everybody financed,” “no credit rejected,” “name your own monthly payments,” and a statement that no other dealer gives a greater allowance for trade-ins.
A number of state laws give consumers a right to sue for misleading advertising and specifically provides that a consumer can recover attorney’s fees and punitive damages. Other states specifically prohibit using any unexplained abbreviations in dealer advertising that are not commonly understood and lists FTB, A/R, TOP, POF, and DOC as examples.
The advertising requirements for dealers are different in each state. The Attorney General and state Motor Vehicle Department websites are two good resources to find rules and regulations concerning what activities are permissible and impermissible for auto dealer advertising. Attorney General websites usually publicize enforcement actions brought against auto dealers for deceptive trade practices, including deceptive advertising. Many State Attorney General offices publish specific guidelines for auto dealer advertising in that state as well.
For example, many states prohibit a dealer from selling a vehicle at a price higher than an advertised price even if the consumer has not seen the advertisement. In some states, this rule will not apply if the advertisement provides clearly and conspicuously that the consumer must bring in or at least mention the advertisement to get the advertised price. A number of states also have laws governing advertising of rebates. There are states that require a disclaimer that dealer participation may affect consumer cost when a dealer must contribute to the cost of an incentive in order to participate in a manufacturer or distributor incentive.
You should check all your advertising against your state guidelines as well as the FTC’s rules and guidelines. In the present environment of aggressive enforcement, it is a best practice to have your local attorney review all advertising.
Important Laws and Regulations
FTC Used Car Rule
The FTC Used Car Rule, which was amended in 2016 (the “Rule”), requires auto dealers to prominently post a “Buyer’s Guide” in plain view on all used vehicles before they are offered for sale. The Rule defines a “used car” as any car that has been driven more than necessary to move it or for road testing prior to delivery to a consumer. This would include many “demo” models used for customer test drives. The Buyer’s Guide must disclose whether the vehicle is being sold “as is” or with a warranty. State law governs the legal requirements for disclaiming warranties and will determine whether a dealer must use the “As Is – No Dealer Warranty” or “Implied Warranties Only” version of the Buyer’s Guide. If the vehicle is sold with a written warranty, the Buyer’s Guide must state the general terms of the warranty, including whether it is full or limited; the duration of the coverage; the specific systems covered (engine, transmission, etc.); a list of parts or systems not covered if necessary for clarity (e.g., a battery); what percentage of repair costs the dealer will pay under the warranty; an explanation of how the customer gets warranty service; and whom to see about complaints.
The Buyer’s Guide must also tell consumers that (1) oral promises are difficult to enforce and that consumers should get all promises in writing, (2) the major mechanical and electrical systems on the car that are covered by the warranty, (3) the major problem areas that consumers should look for, and that they should ask to have the car inspected by an independent mechanic before they buy, and (4) they should obtain a vehicle history report and check for open recalls at the government website, safercar.gov. If a used car transaction is negotiated in Spanish, the dealer must post a Spanish language Buyer’s Guide. In addition, the English version of the Guide must advise Spanish speakers, in Spanish, to ask for the Spanish version. The Buyer’s Guide becomes part of the sales contract and the disclosures cannot be contradicted orally or in writing. In addition to the Buyer’s Guide, the dealer must provide a separate warranty document unless the dealer is not selling the used vehicle with its own warranty. The Buyer’s Guide is not a warranty document. The Buyer’s Guide also includes a non-dealer warranties section for a dealer to disclose whether the original manufacturer’s warranty, manufacturer’s used vehicle warranty, or other used vehicle warranty applies. A dealer may also disclose whether a service contract is available to purchase in this section.
The FTC is actively monitoring dealers’ compliance with the Used Car Rule. In 2018, the FTC, working jointly with 12 partner agencies in seven states, conducted the first compliance sweep of car dealerships since the Rule was amended. Following the sweep, the FTC notified the inspected dealerships of the inspection results and indicated that dealerships not displaying the revised Buyers Guide can expect follow-up inspections to ensure that they have brought themselves into compliance.
The Used Car Rule applies in all states except for a few states that have enacted their own state law provisions, such as Maine and Wisconsin, that require notices with additional disclosures for used car sales.
Magnuson-Moss Warranty Act (MMWA)
This is a federal law that requires manufacturers and sellers to disclose information about warranties given with the sale of a product. A warranty is a statement or representation, express or implied, about the character or quality of the goods sold. Express warranties result from statements or affirmations made about a product that the buyer relies upon in deciding to purchase. The MMWA covers written express warranties. Implied warranties derive from state law and automatically attach to the vehicle from the sale, such as an implied warranty of merchantability, which is a promise the vehicle will perform in a manner fit for its usual and ordinary purposes.
The MMWA requires any written warranty to be clearly and conspicuously labeled as “full” or “limited” and be described in a single, easy-to-read document and to state any qualifications to the warranty (such as the consumer performing scheduled maintenance) with the full warranty terms available. At minimum, the document must describe who is making the warranty; when the warranty begins and ends; what is covered and what is not; what the warrantor will do if there is a problem; and how the consumer can obtain warranty service. It must also indicate that the consumer may have additional rights under state law and contain the following specific disclosures: “This warranty gives you specific legal rights, and you may also have other rights which vary from state to state. Some states do not allow limitations on how long an implied warranty lasts, so the above limitation may not apply to you.” If a dealer sells the customer its own service contract within 90 days of the vehicle sale (as opposed to the consumer purchasing a service contract from a third party), the dealer cannot disclaim any implied warranties, but the duration of implied warranties can be limited under certain circumstances.
A common misconception concerns the concept of a warranty versus an “extended warranty” or service contract. For a new car, a warranty is included in the vehicle price and it provides the customer a right from the manufacturer to obtain certain repair services that must be adequately described under MMWA. Manufacturer warranties do not cover aftermarket products such as dealer-added equipment. Some vehicle manufacturers permit transfer of unexpired warranties to subsequent purchasers, and state laws restrict or limit any charges that can be imposed for doing so. Used car dealers can also provide warranties for the vehicles they sell, but a dealer cannot charge a customer for a warranty; it must be included in the cost of the vehicle. If the customer pays separately for additional coverage or an “extended warranty,” that is a “service contract.”
An “extended warranty” is somewhat of a misnomer. Any product that provides for repair or servicing of the vehicle after the original manufacturer’s (or seller’s) warranty expires and for which the customer pays an additional charge is generally deemed to be a “service contract,” not a warranty. Service contracts can be sold directly by the dealer or by a third party. They do not extend the manufacturer’s warranty obligation but give the consumer a contractual right against the seller of the service contract in the event of a breakdown or service need. Under MMWA and state law, a consumer’s legal rights and remedies will be different for warranties and service contracts.
Some states require implied warranties in any vehicle sale. Other states permit “as is” sales of used cars. Used car warranties and the availability of a manufacturer’s warranty must be disclosed in the Used Car Buyer’s Guide discussed earlier in this Topic.
In 2015, President Obama signed the E-Warranty Act which does away with a requirement that has been on the books since passage of the Magnuson-Moss Warranty Act of 1975, which compelled manufacturers to include warranty terms on a single printed document on or within packaging of products costing more than $15. The E-Warranty Act now permits, but does not compel, manufacturers to avoid the requirement by directing consumers to their websites to find the terms and conditions of their consumer warranties. Pursuant to the FTC’s rules implementing the E-Warranty Act, which took effect October 17, 2016, if a warrantor or seller opts to post warranty terms electronically, the warrantor or seller must: (1) provide consumers the Internet address of the website where the warranty terms can be reviewed; (2) provide a non-Internet based method, such as a phone number or mailing address, for consumers to request the warranty terms; upon request, the warrantor must provide the warranty terms promptly and free of charge; (3) ensure that all required warranty terms are posted in a clear and conspicuous manner and that any limitation on implied warranties appears in close proximity to the location where the text of the warranty terms begin; and (4) ensure that warranty terms remain accessible to the consumer on the warrantor’s website.
FTC Warranty Rules
Two additional FTC rules, the Consumer Product Warranty Rule (Warranty Rule) and the Rule Governing Pre-Sale Availability of Written Warranty Terms (Pre-Sale Availability Rule), specify language for warranties, require that warranties be displayed in close proximity to the vehicle, and the full warranty terms be made available to consumers upon request before they buy. State laws, such as the California and Minnesota Car Buyer’s Bill of Rights, provide minimum requirements for dealers to be able to use the term “certified” (or any similar term) in connection with a used car sale, and require other warranty and used car disclosures as well.
- If you conduct direct marketing, periodically scrub your target lists for persons who have excluded themselves from the means of communication you intend to use (telemarketing, faxes, and email). You should keep a separate list of consumers who opt out of telemarketing, faxes, and email and be careful before using an auto dialer or prerecorded message to obtain the appropriate consents from the party you are calling or texting. This consent must include specific disclosures and comply with specific content requirements. Adequately scrub telemarketing lists of phone numbers against the FTC’s National Do Not Call Registry, your state’s Do-Not-Call list and your dealership’s list of persons who have asked not to be called. The Data & Marketing Association (www.the-dma.org) also maintains “do not contact” lists that you should scrub your lists against. If you are telemarketing, get assurances from vendors on having obtained customer consents and exclusions of persons listed on federal and state Do-Not-Call lists, then double-check against Do-Not-Call lists, as well as your own dealership’s list of customers who have asked not to be called. The class action liability potential under the TCPA makes this a critical area for you to be compliant. Also, note that many State Attorneys General and Motor Vehicle Departments have their own rules or guidelines for advertising motor vehicles.
- Advertisers must ensure that any express or implied claims made in their advertisements are truthful and substantiated. Remember that every statement in an ad can be literally true, but if its net impression is misleading, the ad is deceptive. Be able to prove the truth of every statement made or implied in your advertising and consider your advertising’s net impression. For example, if you are advertising sales of repossessed or off-lease vehicles, be prepared to show that substantially all of the vehicles meet those criteria. If your ad says, “factory authorized,” be prepared to produce the written “factory authorization” that supports that statement. Be wary of advertisements promising credit to subprime borrowers (e.g., “bankruptcy not a problem”).
- Don’t stack rebates to advertise the price of a vehicle. Rebates that are available to the general public can be itemized as deductions from the MSRP. You can show additional conditional rebates separately from the vehicle pricing and those should be itemized along with a clear and conspicuous explanation of the qualifications for each. Note that state laws also govern the advertising of rebates such as the California and Nevada laws referenced above. If an advertisement would mislead consumers in the absence of additional information, the disclosure of that information must be "clear and conspicuous." Advertisers should apply the four P’s of effective disclosures – prominence, presentation, placement, and proximity – as a starting point. The FTC has stated if a disclosure is not made clearly and conspicuously, it is the equivalent of not making the disclosure at all. Avoid putting required disclosures in “mouse type” or in a color that blends into the background or in pop-ups on websites. Use plain English and don’t use abbreviations not commonly understood by the public. Fast-talking TV or radio disclaimers are also problematic. The CFPB specifically has cited fast-talking telemarketers as part of a deceptive selling process.
- If you use an advertising agency, try to get the agency to indemnify you if the ads it produces lead to litigation or an FTC or Attorney General action. It is a best practice to have your attorney review all your advertising before publication.
- Use caution in promoting your products in digital media. Remember that advertising online must be considered from the perspective of all devices that will be used to view it, including cell phones and tablets. Make sure any disclosures are clear and conspicuous on any type of device used by consumers. In addition, make sure you disclose any material connections between you and an endorser of your product, including if the endorser is receiving monetary or other compensation.
- Adopt a social media policy in accordance with the guidelines described above and in consultation with your attorney or compliance professional. Make sure that your social media policy protects against improper disclosure of company or consumer information but does not inhibit the employee.
- The FTC’s website, www.ftc.gov, and State Attorney General websites provide a great deal of information on auto dealer advertising guidelines. Checking those websites to see recent enforcement proceedings involving auto dealer advertising can also be helpful.
- Understand the state law concerning a dealer’s ability to disclaim warranties. Make sure it is clear in the service contracts you sell whether you have “entered into” the service contract, in which event you cannot disclaim implied warranties under the Magnuson-Moss Warranty Act (MMWA) discussed in Topic 7: The FTC: Marketing and Advertising Vehicles, and Credit Terms. Service contracts and insurance contracts to cover the obligations can be structured in a number of different ways, each of which has different tax and liability issues. Two examples are “retro” policies and “reinsurance” policies. In “retro” policies, a portion of the customer premiums is sent by the dealer to an insurer who deposits it into an account to pay claims. When contracts expire or at predetermined times, the dealer receives a portion of the earned premiums. In reinsurance policy programs, the dealer sends a fixed amount to an insurance company who in turn cedes the amount to a reinsurance company that may be affiliated with the dealer. The insurer offsets claims payments against sums paid to the reinsurance company. When National Warranty went bankrupt, reinsurance companies were deemed to own the reserves, which remained available for customer claims. Retro accounts were considered part of National Warranty’s bankruptcy estate and not available to satisfy consumer claims. State insurance laws also contain requirements for insurance and reinsurance for service contracts. Review how your service contracts are structured and insured with your lawyer and accountant.
FTC Guidance on Advertising Consumer Leases https://www.ftc.gov/tips-advice/business-center/guidance/advertising-consumer-leases
A consumer compliance handbook published by the Federal Reserve Board to promote compliance with Section 5 of the FTC Act which prohibits unfair and deceptive acts and practices:
FTC Guidelines for Small Business Advertising:
FTC Guidelines for Advertising and Marketing on the Internet:
A Dealer’s Guide to the Used Car Rule:
Answering Dealers’ Questions About the Revised Used Car Rule:
Information about the Self-Regulatory Program for Online Behavioral Advertising and the Advertising Icon:
A Businessperson’s Guide to Federal Warranty Laws, including the MMWA:
A Good Summary of Guidelines for Advertising:
A Businessperson’s Guide to Federal Warranty Laws, including the MMWA:
How to Write a Social Media Policy: