Unfair and Deceptive Acts and Practices Enforcement: Is your Facility at Risk?

Unfair and Unfair and Deceptive Acts Deceptive Acts and Practices and Practices

Enforcement: Is Enforcement: Is your Facility at your Facility at

Risk?Risk?December 3, 2015

Presented by:

Ryan LaneDirector, KPA Sales & Finance Compliance

Jim Radogna Senior Sales & Finance Compliance Specialist

Moderator

Rebecca WardSr. Marketing Content Specialist(303) [email protected]

KPA: KPA: A comprehensive solution for Environmental Health & Safety, HR Management, and Sales & Finance Compliance.

Over 5,200 clients, including 8 out of 10 of the largest dealership groups in the country, count on KPA for Environmental Health & Safety, HR Management and Sales & Finance Compliance programs that save them time and save them money.

Presenter

Ryan LaneDirector, KPA Sales & Finance Compliance(303) [email protected]

Presenter

Jim Radogna Senior Sales & Finance Compliance Specialist(303) [email protected]

Questions

If you have questions during the presentation, please submit them using the “Questions” feature

Questions will be answered at the end of the webinar

Disclaimer

The material provided in this seminar is for informational and educational purposes only. It is intended to give only a general overview of the laws and regulations governing the automotive industry, not to provide legal advice.

KPA LLC is not a law firm and does not dispense legal advice. If you need specific legal advice, you should seek it from a competent professional licensed to practice in your state.

KPA LLC specifically disclaims any personal liability, loss or risk incurred as a consequence of the use, either directly or indirectly, of any information given in this presentation.

What’s the Big Deal About UDAPs?

• UDAPs cover virtually EVERY aspect of your sales and finance operations. Everything from advertising and marketing to consumers, conversations your staff has with customers, conversations managers have with salespeople, how deals are desked, how deals are handed off to finance, how repair estimates are handled – you name it• EVERYONE in the dealership who deals with the public is subject to UDAP statutes and can create liability for the dealership and themselves• UDAPs are extremely broad and provide both for enforcement by the federal and state government and individual actions for damages brought by consumers who are hurt by the practices. • They are a favorite weapon for consumer attorneys that specialize in suing dealers• No customer complaints are necessary and even inadvertent violations are actionable• Interpretation & enforcement constantly evolving

The Players

Consumer Financial Protection Bureau (CFPB)?Federal Trade Commission •The nation’s top consumer cop that directly regulates dealers•Very proactive lately - taking action without customer complaints•But, too many businesses, not enough investigators so chances of getting caught slight •Consent orders typical initial penalty but quick to impose monetary penalties •Provides only FTC enforcement and not private enforcement

State Attorneys General •Active in pursuing claims against dealers •Can impose higher penalties than private actions - $13.5 million recently•More reactive, respond to customer complaints

Plaintiffs’ Attorneys (“Auto Fraud Specialists”)•Actively troll for business•Have a number of tricks up their sleeves to turn little complaints into big problems

Applicable UDAP Statutes

• FTC Act – fraudulent, deceptive and unfair business practices

• State UDAP Statutes - unfair, deceptive, and unconscionable acts (some states have more than one UDAP statute).

• State Rules on Vehicle Advertising• Variety of other statutes (TILA, FCRA, ECOA, odometer

statutes, retail installment sales acts, fed or state RICO) – violation may be per se UDAP violation

• Attorneys love to combine regulations for more remedies and higher fees

Other Alternatives

• Federal law claims (TILA, etc.) can allow federal court jurisdiction. A federal RICO can provide treble damages and attorney fees. A state RICO claim may provide similar remedies or punitive damages• Potential additional counts to a UDAP case are claims of common law fraud, breach of contract, breach of warranty, or unjust enrichment. Common law fraud and other tort remedies are important because they allow a punitive damages claim

Remedies

FTC – Consent orders (typically 20 years), up to $16,000 per day per violation

State:Private:•Actual economic damages•injunctive relief•Rescission•punitive damages•class action•attorney fees and costs•treble damages in some statesAttorney General: injunction, license revocation, appointment of receiver; restitution; civil penalties; costs. The penalties can be enhanced if knowing/willful or the victim is older

Criminal Liability

• It’s a felony to make a knowing and willful misrepresentation to a federally insured financial institution

• Criminal charges have been brought against dealership employees for falsifying credit applications, grossly inflating trade-in values, falsifying down payments, power booking, forgery, and straw purchases

• Other charges for odometer violations, deceptive interstate advertising, and payment packing

Punitive Damages

• Not insurable in many states (except vicarious)• Some states cap amount of punitive damages,

some don’t• Vicarious liability defense can be difficult if the

employer authorized or ratified the conduct or the manner in which the particular task was performed; or empowered the employee, i.e., by making him or her a manager, lack of training, or recklessly hired or retained an employee that was unfit for the particular job.

Are UDAP Penalties Insurable?

Maybe not…

Dealer group denied coverage for lawsuit in which employees failed to disclose that the price of an etch product was included in the amount of financing they obtained and that employees told purchasers and lessees that they had to purchase etch in order to obtain financing. The court stated “fraudulent misrepresentations and nondisclosures were done intentionally with the full knowledge of and at the direction of the principals of the dealer as a 'pattern and practice' of doing business."

Common Liability Policy exclusions:• Intentional wrongful acts• Gaining of any profit or advantage to which you are not legally entitled• Claims arising out of false advertising or misrepresentation in advertising• Unfair or deceptive business practices, or violations of any consumer protection laws• Claims against you that are brought by or on behalf of any federal, state or local

government agency • Claims arising out of the same wrongful act or series of continuous, repeated or related

wrongful acts, alleging the same or similar facts

Key Features of UDAP Statutes

• Failure to disclose material facts may be deceptive. Mere silence can be a UDAP violation• Most courts hold that the Parol Evidence Rule does not apply to UDAP claims• UDAP claims can be founded on oral misrepresentations, the failure to disclose, misleading pictures, and ambiguous statements that are technically accurate, but deceptive as interpreted by the consumer. • A dealer’s oral misrepresentations may violate a UDAP statute even if they are subsequently corrected by a written disclosure statement.•. In many cases, the consumer need not prove the seller’s intent or knowledge.• The seller’s good faith is no defense. • UDAP claims can be brought even if the car is sold “as is”• Ambiguous statements, half-truths, and literally true statements can be actionable• A merger clause or a contract provision that “no agreement between salesman and customer [is] binding on the company” or otherwise disclaiming oral representations does not defeat a UDAP action based on a salesman’s misrepresentations

Key Features of UDAP Statutes

• A violation of an FTC rule or a state or federal statute meant to protect the public may be a per se UDAP violation• A seller’s good faith efforts do not prevent a practice from being deceptive under the FTC Act. For example, it is not a defense that the seller acted in good faith upon the advice of counsel• Where there is a statutory defense for “bona fide error,” this defense applies only to clerical errors, such as typographical errors or mistakes in computing numbers, not to a seller’s other unintentional misrepresentations• Often an advertisement or statement itself is sufficient proof of its deceptive nature• It is no defense to a deception claim under the FTC Act that the challenged practice is engaged in throughout an industry or is “customary” business conduct• Even if proper disclosures are made in writing, if a sales presentation effectively obscures the meaning of those disclosures, the total representation is deceptive• A practice is deceptive even if subsequently clarified. Point of sale disclosure is not sufficient to clarify deceptive media advertising

UDAP Examples

• Making false statements or failing to disclose a material facts to a consumer • Oral promises made to the customer that the dealer fails to deliver upon. • Adding the cost of an F&I product to a consumer’s purchase agreement or lease without first obtaining the

consumer’s express consent to purchase the product.• Informing or suggesting to a consumer that the price of any F&I product is included in the price of the motor

vehicle, when it is, in fact, not.• Payment Packing• Misleading statements about APR• Misleading a consumer about the amount of incentives available • Yo-yo financing • Informing or suggesting to a consumer that the sale or lease of a vehicle subject to credit approval is a final

or completed transaction.• Informing a buyer that financing for the car will not be approved unless the buyer purchases a service

contract, insurance or other products• Informing or suggesting to a consumer that purchase of an F&I product will increase the likelihood that the

consumer will be approved or that financing will be approved on more favorable terms to the consumer.• Leading a consumer to believe that he or she is purchasing a vehicle when it is in fact a lease.• Failing to disclose dealer-added accessories on advertised vehicles. 

More UDAP Examples

• Leading a consumer to believe that the dealer will be assuming all liability under the lease of a trade-in vehicle, when the dealer intends to only make the final lease payments and assume no other liability, such as excess wear and tear or over-mileage.

• Hidden Finance Charges • Failure to properly disclose negative equity• “Power Booking” • “Straw Purchase” • Engaging in false or misleading advertising, either orally or by way of media.• Selling a vehicle for more than the advertised price• “Price-Gouging” or overcharging for finance and insurance products. • Failure to disclose known vehicle history such as rental, salvage, lemon law buyback, etc.• Misrepresenting a vehicle’s damage history• Breach of warranty claims • Representing that vehicles are new when they are in fact, used. • Representing that a vehicle is of a particular standard, quality, or grade when it is not.• Falsifying Credit Information• Obtaining a credit bureau without proper authorization. • Altering documents without the knowledge and permission of all parties.• Forging documents.

More UDAP Examples

• Adding charges above advertised or agreed to prices • “Five-finger close”• Failure to give Adverse action Notices• Including a down payment on the loan documents, but never recovering this down payment from the

consumer• Making a side loan to the consumer to pay for the down payment• Failure to pay off trade-ins in a timely fashion• Lowering the Trade-In’s Agreed-Upon Price • Failure to give the buyer a copy of the contract or provide a contract with blank spaces• Failure to allow a customer the to leave with an unsigned copy of the retail installment contract• Obtaining the consumer’s signature on a contract which does not accurately reflect the agreement • Altering the sales or loan documents after consummation• interfering with the buyer’s right to read the contract before signing• Misrepresent the nature or import of documents being signed• Selling a service contract without disclosing any additional fees that will be imposed if the consumer

makes a claim under the contract – for example, an inspection fee to determine if the repairs are covered under the contract.

• Failure to disclose that a dealer fee is optional or misrepresenting that a fee is required by law• Adding a fee after the final price has been negotiated

More UDAP Examples

• Posting false testimonials or online reviews• Advertising vehicles with the intent not to sell them as advertised• Misrepresenting a vehicle’s list price • Improper vehicle repossession• Failure to substantiate claims made• Refusing to abide by an advertised promise to match competitors’ prices • Deceptive quality claims as to used cars• Disparage the merchandise, services, or business of another by false or misleading representations• Falsely representing that offers are for a limited time only (for example, you must sign today)• Failure to comply with offered or implied warranties• Subsequently disclaim an oral warranty with an “as is” contract• Fail to disclose that a vehicle has no warranty or to represent that the vehicle comes with a warranty

when it does not• Negotiating a deposit check after promising not to do so• Failing to credit a down payment to a sales contract• Disclosing private information to a nonaffiliated third party without giving the consumer an

opportunity to opt out of the disclosure• Misrepresentations that a price is low, competitive, or at book level when its not

More UDAP Examples

• Failure to safeguard customer information from wrongful access or use• Misrepresenting the number of prior owners of a vehicle• Fail to make available, prior to sale, the terms of any written warranty offered with the sale• Failure to provide proper notice when a retail transaction is conducted in a language other than

English• Failing to return a trade-in, or selling the trade-in, before the deal is consummated, or where dealer

cancels the sale• Violation of FTC rules, including the Used Car Rule • Attempting to coerce the consumer into accepting less favorable contract terms after committing to

the original terms

How Do Plaintiffs’ Attorneys Develop Cases?

• No matter what the customer’s initial complaint is (usually dissatisfaction with vehicle), the attorney will comb through all sale documents and sue using every law and legal theory that seems to fit, including technical violations

• Their primary goal is to show violations as being willful, a systematic and organized pattern of deceptive practices, or racketeering (RICO) to rack up the big $$$ - punitive damages, class action

• Whatever type of problem the consumer client first discusses, the attorneys explore potential UDAP violations in all aspects of the transaction—advertising, sales presentations, consummation of the sale, credit terms, and the seller’s performance (Santander)

• Plaintiffs’ attorneys are very savvy at coaching clients and analyzing paperwork (e.g. write-ups) to win the “he said she said” battle

Best Practices to Avoid UDAP Traps

• Train ALL employees who deal with the public on compliance including fixed ops

• Have Policies/Codes of Ethics in place• Hold staff accountable through audits• Good Faith Effort at Compliance• Institute a complaint resolution process• Utilize Arbitration Agreements – not bulletproof

but helpful. Also be aware that arbitration can backfire ($335k, 1.3 million YouTube views)

Questions and Answers

Contact Information

The recorded webinar and presentation slides will be emailed to you today including your local representative’s contact information.

www.kpaonline.com