IF YOU THINK YOU SELL CARS OVER THE INTERNET, THINK AGAIN!

By: Keith E. Whann
Whann & Associates, LLC

One of the hottest topics in the motor vehicle industry is a motor vehicle dealer selling vehicles over the Internet. Various publications even give awards for it. While dealers are certainly using the Internet more in their day-to-day dealership operations, what is actually occurring online warrants a closer look. I recently had the opportunity to participate as a panelist on an Information Technology Panel along with Representatives from AutoTrader.com, E Bay Motors and Cars.com. The questions from the dealers in attendance demonstrated the widespread confusion that surrounds Internet use by a dealership. My fellow panelists had a variety of ideas and helpful strategies regarding the Internet; occasionally even differing in their positions on an issue. The entire panel spoke with a unanimous voice, however, on one subject: Dealers do not sell vehicles over the Internet.

Whenever we talk about the activity of a motor vehicle dealership, it is important to remember that motor vehicle dealerships and their salespeople are licensed under State Laws. Virtually every State Motor Vehicle Code prohibits motor vehicle dealers from selling, displaying or offering for sale motor vehicles at any place other than a licensed location. Dealers are also generally prohibited from paying commission or compensation to any person other than a licensed salesperson employed by the dealership.

Beyond motor vehicle dealer licensing issues, the paperwork involved in the transaction raises a whole host of other issues. Although the “E-Signature” provisions in the Electronic Signature in Global and National Commerce Act (ESIGN) became effective on October 1, 2000 making it possible to sign agreements with digital signatures or electronic codes that have the same legal effect as an ink on paper signature, motor vehicle dealerships are not able to provide all of the documentation to complete a motor vehicle transaction electronically.

Where and when the documents are signed, and in some cases where the vehicle is delivered, can have a significant impact on the law governing the transaction and has been the subject of ongoing dispute. Most State Unfair and Deceptive Acts and Practices (UDAP) Statutes also require that all material statements made to a customer and any agreements of the parties be reduced to writing and integrated into a written purchase agreement signed by both the purchaser and seller. Similarly, State Retail Installment Sales Acts mandate that every written installment contract evidencing the retail sale of a motor vehicle contain all material statements, terms and conditions of the transaction. Consumers must be provided with a full, itemized list of costs involved in the transaction; terms of delivery and payment; information about restrictions, limitations or conditions of the purchase; warranties and guarantees; cancellation or refund polices; and whether after-sale service is available, not to mention including all State and Federally mandated disclosures. In the typical motor vehicle transaction, a motor vehicle dealership uses in excess of a dozen separate documents to complete a sales transaction.

Federal Agencies, as well as State Regulators, have made it clear that their Rules and Regulations apply to Internet transactions. The Federal Trade Commission (FTC), for instance, enforces 46 Federal Laws, many of which apply to the motor vehicle industry and were developed long before “dot com” became a household phrase. The FTC has declared that its Rules and Regulations cover Internet advertising, marketing and sales and it has become very active and aggressive in taking enforcement action against companies conducting business via the Internet.

Some Laws enforced by the FTC, such as the Federal Truth in Lending and Leasing Acts, establish mandatory disclosure requirements for advertisers of credit terms. The Acts are similar in nature to the extent that they list certain “triggering terms” which create an obligation on the advertiser to make additional mandated disclosures in the advertisement. The disclosures are designed to insure that consumers are provided with sufficient information to make an informed decision when weighing the options of obtaining an item by cash, credit or through a leasing arrangement. Similarly, if a dealership advertises that a motor vehicle is sold with a warranty or other form of guarantee, the Magnuson-Moss Warranty Act and Pre-Sale Availability of Warranties Rule mandate that the dealership clearly disclose any conditions or limitations on the guarantee or warranty and make copies of any warranties available to consumers before the sale.

Other Laws, like the FTC Act, are broader and prohibit any “unfair or deceptive acts or practices,” much like State UDAP Statutes. Pursuant to both the FTC Act and State Advertising Laws, for instance, all material limitations and/or exclusions must be disclosed in clear and conspicuous language that is in close proximity to the offer. In addition, material disclosures should be easily legible, leave no reasonable probability of being misunderstood or create an erroneous impression concerning any aspect of the transaction. A fine-print disclosure or disclaimer buried in the body of text or on a separate page on a website are not likely to be effective. An advertisement is also likely to be considered misleading if relevant information is left out or if it implies something that is not true.

Besides advertising and marketing the availability of motor vehicles online, perhaps the next most popular use of the Internet among motor vehicle dealers is to attempt to determine the creditworthiness of potential customers. The Fair Credit Reporting Act (FCRA) permits dealers to obtain credit applications via the Internet, provided that there is a permissible purpose to do so or the dealership has express permission from the consumer. Although there are a number of permissible purposes listed under the FCRA, generally speaking, the three purposes that apply when a consumer is financing the purchase of a motor vehicle include: Whenever the consumer gives permission in writing; whenever credit is extended in response to an application for credit submitted by the consumer; and when there is a legitimate business need in connection with a business transaction that is initiated by the consumer. The first two purposes are self-explanatory. If a dealership or financing source has the consumer’s written permission to obtain a credit report, or if the consumer has executed an application for the extension of credit, the user has complied with the FCRA. The third purpose is more complicated because the user must determine whether it has a “legitimate business need” and whether the consumer has “initiated” the transaction. In 1998, the FTC opined on this issue and stated that a consumer merely asking questions about vehicle availability or a price is not necessarily indicating intent to purchase a vehicle from that particular dealership. Accordingly, if the consumer were simply comparison-shopping or inquiring about a vehicle online, the dealership would have to obtain express permission from the consumer prior to obtaining a credit report.

The Federal Privacy Laws have added to the challenges motor vehicle dealers face. The Internet provides unprecedented opportunities for the collection and sharing of information from and about consumers and many have reported having strong concerns about the security and confidentiality of their personal information when engaging in online transactions. The FTC strongly encourages companies to implement four fair information practices: Giving consumers notice of a website’s information practices; offering consumers a choice as to how their personally identifying information is used; providing consumers with access to the information collected about them; and ensuring the security of the information collected. Motor vehicle dealers across the country use websites to collect information about customers and fail to disclose that fact in their privacy notices. In many cases, dealers have also neglected to implement appropriate procedures for providing the Privacy Notices themselves or for safeguarding the information collected as required by the Gramm-Leach-Bliley Act and the FTC’s Privacy and Safeguards Rules.

Dealers may also attempt to accept vehicle deposits online. Under State UDAP Statutes, anytime a deposit or partial payment is accepted by a dealership in connection with a consumer transaction, the dealership is generally obligated to provide a description of the goods and a statement as to whether the deposit is refundable and under what conditions. In some States, even more detailed information is required, such as the cash selling price of the vehicle, the amount of allowance on any trade-in, the time during which the option to complete the transaction is binding, and any additional costs that may be imposed on the consumer, such as delivery charges.

Many dealers begin engaging in e-commerce activity without an understanding of the potential legal and regulatory ramifications that exist. They have constructed websites focusing on their design and how quickly they operate, without considering how the screens will look if Federal and State Regulators review them. Additionally, these websites are often being constructed by individuals who are unfamiliar with the numerous and very specific laws that impact a motor vehicle transaction. Remember, while technology allows a motor vehicle dealership to take an order and accept a deposit to hold a vehicle online, use of the Internet to actually sell a vehicle stops there! Whether you are currently conducting business over the Internet, or are contemplating doing so, it would be wise to spend some time to think through the issues raised herein. Unfortunately, many dealers are finding out that their dealership’s website is just like their paperwork - If the dealership doesn’t review it, a consumer attorney or regulator will.

The information contained herein has been provided by Keith E. Whann of the Law Firm of Whann Associates, LLC, and is for general information purposes only. You should contact legal counsel for specific application.