Safeguarding Your Dealership from Unwanted
Liability:
The Impact of State Unfair and Deceptive Acts and Practices (UDAP)
Statues
By
Keith E. Whann
The motor vehicle industry is one of the most heavily regulated industries
in America today. Motor vehicle dealers are faced with many of the
same legal challenges that affect other American businesses, but they also
face a host of other laws specific to the motor vehicle industry.
While the impact of most of these other areas of law on a business are
relatively straightforward, some of them can produce unique situations and
problems for a dealership when applied to a motor vehicle transaction.
Virtually
all states have enacted statutes or laws which regulate the conduct of
suppliers (businesses such as motor vehicle dealerships) who engage in
consumer transactions (a transaction involving a sale of goods or services
to an individual for purposes that are primarily personal, family or for
household use). These statutes are commonly referred to as
“UDAP” statutes because they are designed to protect consumers against
unfair and deceptive business acts and practices.
While
UDAP statutes vary somewhat from state to state, certain consistencies
exist throughout them. These statutes typically set forth non-exclusive
lists of specific acts which constitute unfair and deceptive sales acts or
practices. In addition, UDAP statutes generally provide authority to
the State Attorney General or another state regulatory body to promulgate
rules, commonly referred to as “administrative rules.” The
administrative rules often include additional unfair, deceptive or
unconscionable conduct which will constitute violations of the statute.
The UDAP statutes also may include a number of enforcement mechanisms.
The enforcement mechanisms often provide the Attorney General or other
regulatory body with the right to conduct an investigation, obtain a
temporary restraining order and/or preliminary injunction, recover
consumer restitution, and the right to seek the imposition of substantial
civil penalties.
Many
states have also established a mechanism whereby local court decisions are
used to define violations of the UDAP statute. If the court
determines that a specific action constitutes an unfair, deceptive, or
unconscionable act or practice and the decision is placed in a regulatory
agency’s public inspection file, the decision has traditionally been
given the same weight as an administrative rule. The distinction
between a statutory violation and a violation of a rule or case decision
in a state’s public inspection file is important to recognize because
the remedies available to a consumer will vary depending upon the
violation. When a statutory violation occurs, most UDAP statutes
allow a successful consumer to either recover actual or consequential
damages or rescind the transaction. In cases involving a violation
of a rule or Public Inspection File case decision, however, a successful
consumer also is usually entitled to some form of minimum and/or treble
damages and often can recover attorney’s fees.
At
first blush, most suppliers are left with the impression that UDAP
statutes only protect the interests of consumers. Upon closer
examination, the typical UDAP statute contains language which, when
utilized properly by a dealer, can provide a number of valuable defenses
to a consumer action. For instance, one common defense is the
failure by the consumer to bring an action for rescission of the
transaction within a reasonable time or before a substantial change has
occurred in the motor vehicle which was the subject of the transaction.
An additional defense that merits special attention is the bona fide error
defense.
The
bona fide error defense is applicable when a supplier is able to show that
it maintains procedures reasonably adopted to avoid an error and,
notwithstanding those procedures, an error occurs. The importance of
being able to establish the bona fide error defense is that the
consumer’s remedies are typically limited to actual damages or
rescission of the transaction. The consumer’s right to recover
statutory damages and/or attorneys’ fees is eliminated. The
elimination of these two components frequently takes the consumer’s
lawyer who is no longer able to recover his fees out of the equation and
puts the supplier in the more favorable position of dealing directly with
the consumer. An added bonus of maintaining dealership policies and
procedures necessary to raise the bona fide error defense is that the
dealership also has the ability to more easily ward off class action
lawsuits wherein the claim is for negligent and/or fraudulent practices.
These lawsuits have become increasingly more popular with plaintiff’s
attorneys in both Buy Here-Pay Here and special finance transactions.
To
raise a bona fide error defense the dealership must maintain procedures
reasonably designed to prevent errors from occurring. The procedures
should involve two components: sales practices and forms compliance.
Many dealerships take the time to develop sales and training procedures
and frequently incorporate them into their management and salesperson
training programs, and a few even reduce them to writing. Although
the development of sales training procedures is the harder of the two
components, this is not where the dealership encounters the most
difficulty. Ironically, the area that creates the biggest legal
challenge for most dealerships is their forms. Forms compliance is
often overlooked or it is delegated to third parties who are not
knowledgeable about the motor vehicle industry or about the vast number of
frequently changing laws and regulations with which dealers are required
to comply.
Over
the last few years alone, we have seen amendments to Federal Regulation Z
(Truth in Lending), Federal Regulation M (Truth in Leasing), the Fair Debt
Collection Practices Act, the Fair Credit Reporting Act, and various state
consumer protection statutes. In addition, hundreds of case
decisions addressing a wide range of issues from the sale of service
contracts and gap products to various topics which directly impact Buy
Here-Pay Here, and special finance motor vehicle sales have been rendered
in motor vehicle litigation. As a result, almost every form in the
average new or used motor vehicle dealership has been impacted, either in
the form’s content or how it is completed.
In
fact, the new trend in handling consumer motor vehicle litigation cases in
many parts of the country is not for the consumer’s lawyer to focus on
what the consumer alleges his or her problem is with their motor vehicle
transaction, but instead to go for what has become known as the “quick
kill.” The consumer’s lawyer carefully scrutinizes the
dealership’s paperwork looking for a violation (or violations) of law
which might provide the basis to successfully rescind the transaction.
Often, when multiple compliance issues exist in a dealership’s
paperwork, the case is turned into a class action lawsuit and the
dealership finds itself in a very expensive and time consuming no-win
situation. While it is difficult in today’s motor vehicle industry
to “bulletproof” forms and eliminate all mistakes in their completion
and use, an annual forms review can and does help protect the dealership
from unwanted consumer litigation, while at the same time helping to
ensure that the dealership can raise and establish an effective bona fide
error defense should litigation occur.
If the dealership has not put
in place appropriate procedures, or has not recently made revisions to its
forms and considered issues impacting the typical form’s completion and
use, the dealership will encounter difficulty attempting to successfully
raise the bona fide error defense. A dealership is hard pressed to
argue that its “system” is reasonably designed to prevent errors from
occurring when errors exist in each and every transaction. It
should be noted that the bona fide error defense is not unique to state
UDAP statutes. Various federal statutes, such as the Fair Debt
Collection Practices Act and the Fair Credit Reporting Act also contain
similar defenses which can be used by motor vehicle dealers in defending
an action for an alleged consumer law violation. |
