UNFAIR AND DECEPTIVE ACTS & UNFAIR AND DECEPTIVE ACTS & PRACTICESPRACTICES

Protecting Your Dealership From Government Enforcement Protecting Your Dealership From Government Enforcement and Private Lawsuitsand Private Lawsuits

Presented by:

Jim Radogna Senior Sales & Finance

Compliance Specialist

Presenter

Jim Radogna Senior Sales & Finance Compliance Specialist(303) 228-8770jradogna@kpaonline.com

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, finance and fixed 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 government to stop the practices 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

Unfair Acts

• An act that causes or is likely to cause injury to consumers, cannot be reasonably avoided by consumers and is not outweighed by countervailing benefits to consumers or to competition

• An act that is immoral, unethical, oppressive, unscrupulous, or offends public policy

• Unfairness, for purposes of state UDAP statutes is not limited to traditional notions of deception or fraud, but encompasses other types of wrongful business conduct

• A defendant may violate a UDAP prohibition of unfair practices without making any misrepresentations. As a result, it is not necessary to show intent to deceive.

• Conduct can be unfair even though it is permitted by statute or common law principles

Deceptive Acts

•A representation, omission, or practice that misleads or is likely to mislead the consumer•Actionable if a consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances and is material.•Deception is a broader, more flexible standard of actionable merchant misconduct than the traditional tort of common law fraud.

Unconscionable Acts

• The absence of good faith, honesty in fact, and observance of fair dealing

• Taking advantage of a consumer’s lack of knowledge, ability, experience, or capacity to a grossly unfair degree (e.g. seniors, credit-challenged or inability to understand English)

• A seller’s good faith or bona fide error does not necessarily defeat an unconscionability claim.

Examples:• Selling a car for a higher-than-advertised price to a buyer who had not

seen the advertisement.• Gross disparity between the value received and the consideration paid.

(Etch products & credit repair are focused on by regulators)

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 – particularly in Illinois•Can impose higher penalties than private actions•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• Illinois Consumer Fraud and Deceptive Business

Practices Act (dealer provisions unconstitutional)• Illinois Uniform Deceptive Trade Practices Act (injunction)• Illinois Rules on Vehicle Advertising• Indiana Deceptive Consumer Sales Act• 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

Illinois:Private - Actual economic damages, injunctive relief, punitive damages, class action, attorney fees and costsAttorney General - injunction, revoke license, receiver; restitution; $50,000 civil penalty ($50,000 per violation if intent to defraud shown); costs; forfeiture or suspension of any authority for person to do business in the state. The penalty can be enhanced by $10,000 if the victim is olderIndiana:Private - Actual economic damages up to $500 ($1,000 if willful), injunctive relief, rescission, punitive damages, attorney fees and costs, treble damages if the victim is older. Class action specifically authorizedAttorney General - injunction; restitution; appointment of receiver, rescission; $5,000 + costs per knowing violation, $15,000 plus costs per violation of injunction

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 Illinois or Indiana (except vicarious)

• Capped at $50,000 or treble damages in Indiana, no cap in Illinois

• Vicarious liability can be found 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

• UDAPs provide a flexible, evolving standard as to improper merchant conduct. • 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• Oral Claims inconsistent with written sales documents may not be actionable under a contract theory, but are under a UDAP theory• 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

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 merchant’s good faith does not excuse technical noncompliance• A seller’s lack of awareness of a UDAP regulation is no defense• To show deception under the FTC Act, intent, knowledge of wrongdoing, actual reliance or damage, and even actual deception are unnecessary. All that is required is proof that a practice has a tendency or capacity to deceive even a significant minority of consumers• Common law fraud often must be proven by clear, convincing evidence, the UDAP standard is likely to be just a preponderance of the evidence• Even innocent misrepresentations are actionable under UDAP statutes• The Illinois UDAP statute specifically requires that there be an intent that the prohibited act be relied upon but only in the case of omissions• 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

Key Features of UDAP Statutes

• Some courts find agents or sellers are not liable for failing to disclose facts they do not know. But if a seller elects to make an affirmative representation, it will be liable for a UDAP violation if that representation turns out to be untrue or deceptive, even in a situation where affirmative disclosure is not required and even if the seller had no actual knowledge of the falsity• 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• Unilaterally crediting the consumer’s account with the amount the consumer has sought in a lawsuit does not moot a UDAP claim, nor does a defendant’s offer to refund the consumer’s money after suit has been filed, without offering to pay attorney fees recoverable under the UDAP statute• The Federal Trade Commission can order a company to cease and desist a practice without finding that consumers were actually deceived• Often an advertisement or statement itself is sufficient proof of its deceptive nature

Key Features of UDAP Statutes

• To prove that a claim is mere puffing, the seller will have to show that the exaggerated claim is harmless, purely fanciful, or a spoof, calculated to amuse and with no capacity to deceive• A claim is not puffing where the claim promises a specific act, or where the claim’s truth or falsity can be determined• 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• Circumstantial evidence is sufficient to give rise to an inference or presumption of reliance. Reliance may be established simply by the fact that an individual purchased a product• Illinois cases define a fact as material when the plaintiff would have acted differently had he or she been aware of the information• Literally true statements can be deceptive - A practice is deceptive if the overall net impression of the representation, not just the specific explicit claim, is deceptive• A statement or omission may convey more than one reasonable meaning, and if one of those meanings is deceptive, it violates UDAP statutes

Key Features of UDAP Statutes

• According to federal courts interpreting the FTC Act, representations are deceptive if necessary qualifications are not made, if material facts are not disclosed, or if these disclosures or qualifications are too inconspicuous• Even if proper disclosures are made in writing, if a sales presentation effectively obscures the meaning of those disclosures, the total representation is deceptive• The public is not under any duty to make a reasonable inquiry into undisclosed aspects of an advertisement• A “pure omission”—the seller’s silence with no explicit or implied meaning to that silence—is not “deceptive,” but it may be “unfair”• Non-disclosure is deceptive if it involves a material fact. An omission is considered material if a significant number of unsophisticated consumers would attach importance to the information in deciding on a course of action• A practice is deceptive even if subsequently clarified. Point of sale disclosure is not sufficient to clarify deceptive media advertising

Key Features of UDAP Statutes

• 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• High-pressure sales tactics are considered unfair trade practices. Examples include intimidation, coercion, personal disparagement, emphasizing social difficulties, refusing to let customers leave until they sign contracts, using relays of salesmen until the consumer succumbs, preventing consumers from taking the time to consider a decision and its consequences• Often the correct disclosure to which the seller points can be shown to have been untimely. Disclosure of important missing information just as the contract is being signed does not prevent the previous failure to disclose from being deceptive

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 (21 days in Illinois)• 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• Vulnerable consumers are often specially considered (elderly, etc.)• 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

Plaintiffs’ Attorneys Playbooks

 

How Do Plaintiffs’ Attorneys Think?

 

“Let the Liar Beware”

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

How Do Plaintiffs’ Attorneys Develop Cases?

• Request all original drafts, copies, and electronically stored data in every medium. Depose the individual technician who runs the dealership’s computer system.

• Request copies of titles, reassignment forms, powers of attorney, and/or odometer statements, recap sheets, credit applications (both written and electronic), payroll records, F&I transaction videos

• Request training records and written policies• Prevail upon an investigator state official with investigatory authority to make an

unannounced visit to the dealership. The investigator can then pull the consumer’s file before the dealership has a chance to sanitize it during the course of a private litigation.

• Gather information about a dealer and its business practices through public records at the licensing agency, law enforcement and consumer agencies - ask for all complaints, preliminary investigations, completed investigative reports, citations and fines, regulatory and administrative actions, injunctions, judgments, and license suspension or revocation actions.

• Check every court, including small claims court, for cases involving the dealer, the principal, and even high-level managers.

• Seek out disgruntled former employees.

How Do Plaintiffs’ Attorneys Develop Cases?

• Seek out information from competitors.• Prior owners and auctions can be a good witnesses about a vehicle’s mechanical or

accident history.• Tape recording a conversation between the consumer and the dealer is a way to

substantiate the consumer’s version of the events (Illinois and Indiana are both one-party consent states).

• Depose multiple dealer employees – seek out the least sophisticated in knowing what to hide or how to hide it.

• Obtain permission from the client to report the deceptive practices to a government agency.

• Determine if a class action is a practical way to pursue a case even if an individual case is not feasible

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

More Questions?

Email Jim Radogna

jradogna@kpaonline.com