FTC Starts the Engine on Car Sales Fees and Advertising Rulemaking, but Other Rulemaking Faces Major Questions

Venable LLP

Venable LLP

The FTC is off to the races with another proposed rulemaking. On June 23, the FTC, by a 4-1 vote, issued a notice of proposed rulemaking (NPR) to combat what it perceives as “junk fees” and “bait-and-switch advertising tactics” in the auto sales industry. Congress gave the FTC the authority to write rules governing the retail sale of automobiles, using APA rulemaking and not the more cumbersome Magnuson Moss rulemaking that the FTC normally must follow in consumer protection rulemakings. This authority is no small matter, as on June 30, the Supreme Court issued its decision in West Virginia v. EPA, which will make rulemakings by the FTC and other government agencies more challenging.

The FTC’s proposed rule would prohibit certain misrepresentations, require certain disclosures, prohibit certain “add-ons,” and require more thorough recordkeeping. First, among a whole host of potential misrepresentations, the proposed rule includes prohibiting misrepresenting regarding vehicle costs; terms of purchasing, financing, or leasing; and the availability of vehicles at an advertised price.

Second, the proposed rule requires dealers to disclose the offering price clearly and conspicuously in any advertisement or any communication with a customer. Dealers must also disclose optional “add-on” products or services online and whether an add-on is not required for purchase.

Third, the proposed rule prohibits dealers from charging for add-ons that provide no benefit, are undisclosed, or are not selected. These include add-on products such as nitrogen-filled tires or duplicative warranty coverage. Add-ons must be itemized, and a dealer cannot charge for them without express, informed consent.

Finally, the proposed rule requires dealers to keep copies of all materially different marketing materials, purchase orders, and consumer complaints. 

The NPR triggers a 60-day period during which the FTC seeks public comment on the proposed measures. The FTC specifically seeks comment on the substantive scope of the propose rule, including its definitions and any cost benefits to the proposed rule.

Commissioners Khan, Phillips, Slaughter, and Bedoya tout this rulemaking process as building on decades of studying auto sales and financing, allowing the FTC to bring enforcement actions for civil penalties and consumer redress. Conversely, Commissioner Wilson dissented from proceeding with rulemaking, asserting that the propose rule may not be narrowly tailored enough to prevent unintentionally negative consequences. Commissioner Wilson points to the cumbersome rulemaking process and regulatory framework that have historically led to the inability to keep up with technology, markets, and industry. This is consistent with Commissioner Wilson’s past warning of abuse of the rulemaking process.

Because the FTC is proceeding under Section 553 of the Administrative Procedure Act (APA), it does not need to demonstrate the conduct’s prevalence as it would under Section 18 of the FTC Act (“Mag-Moss Rulemaking”) or follow the other cumbersome Mag-Moss procedures.

The timing of the FTC’s announcement was ironic, as a week later the Supreme Court struck down another agency’s broad regulatory scheme. In West Virginia v. EPA, by a 6-3 vote, the Supreme Court held that the EPA exceeded its congressional authority under Section 7411 of the Clean Air Act when it devised emissions caps in the Clean Power Plan. The Court reasoned that the EPA’s approach violated the “major questions” doctrine—that is, Congress must expressly authorize “decisions of vast economic and political significance[,]” and broad regulatory power will not simply be inferred. What this decision means for much of the FTC’s rulemaking plans remains to be seen, but foes of the FTC rulemaking are undoubtedly encouraged by the Supreme Court’s decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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