[Federal Register Volume 61, Number 84 (Tuesday, April 30, 1996)]
[Notices]
[Pages 19067-19072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10562]
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FEDERAL TRADE COMMISSION
Request for Comments Concerning Disclosures in the Resale of
Vehicles Repurchased Due to Warranty Defects
AGENCY: Federal Trade Commission.
ACTION: Request for public comments.
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SUMMARY: The Federal Trade Commission (``the Commission'' or ``FTC'')
is requesting public comment and holding a public forum concerning the
practices of motor vehicle manufacturers, their franchised dealers, and
other firms and individuals in the resale of allegedly defective
vehicles previously repurchased from consumers because of warranty
defects. This notice sets forth a statement of the Commission's reasons
for requesting public comment, a list of specific questions and issues
upon which the Commission particularly desires written comment, an
invitation for written comments, and an invitation to participate in
the public forum.
On November 8, 1995, the Consumers for Auto Reliability and Safety
and other consumer groups (``Consumer Coalition'' or ``Petitioners'')
filed a petition in which they requested that the Commission initiate
either a rulemaking proceeding or an enforcement action regarding the
alleged industry practice of reselling vehicles repurchased due to
defects without disclosure of the vehicle's prior history to the
subsequent purchaser. The Commission is publishing this petition
without endorsing or supporting the views expressed therein. The
Commission is seeking public comment and holding a public forum on the
issues raised by the petition and on other related issues.
DATES: Written comments will be accepted until June 28, 1996.
Notification of interest in participating in the public forum also must
be submitted on or before June 28, 1996. The public forum will be held
in Washington, D.C. on July 15, 1996, from 9 a.m. until 5 p.m.
ADDRESSES: Five paper copies of each written comment should be
submitted to the Office of the Secretary, Room 159, Federal Trade
Commission, Sixth Street and Pennsylvania Avenue, N.W., Washington,
D.C. 20580. To encourage prompt and efficient review and dissemination
of the comments to the public, all comments should also be submitted,
if possible, in electronic form, on either a 5\1/4\ or a 3\1/2\ inch
computer disk, with a label on the disk stating the name of the
commenter and the name and version of the word processing program used
to create the document. (Programs based on DOS are preferred. Files
from other operating systems should be submitted in ASCII text format
to be accepted.) Individuals filing comments need not submit multiple
copies or comments in electronic form. Comments should be identified as
``Vehicle Buybacks--Comment. FTC File No. P96 4402.''
Notification of interest in participating in the public forum
should be submitted in writing to Carole I. Danielson, Division of
Marketing Practices, Federal Trade Commission, Sixth and Pennsylvania
Ave., N.W., Washington, D.C. 20580. The public forum will be held at
the Federal Trade Commission, Sixth and Pennsylvania Ave., N.W.,
Washington, D.C. 20580.
FOR FURTHER INFORMATION CONTACT:
Carole I. Danielson (202) 326-3115, Division of Marketing Practices,
Bureau of Consumer Protection, Federal Trade Commission, Washington,
D.C. 20580.
[[Page 19068]]
SUPPLEMENTARY INFORMATION:
Section A. Background
Traditionally, automobile manufacturers have bought back allegedly
defective vehicles from consumers in only the most exceptional
circumstances. Although the Uniform Commercial Code gave buyers a right
to elect other remedies if a product was seriously defective, the
remedy ordinarily available to consumers was limited to repairs, as
expressly provided by the terms of the written warranty. Buybacks were
granted only rarely, and usually on the basis of goodwill. This
situation changed with the advent of state lemon laws. Beginning in
1982, state legislatures began enacting ``lemon laws'' to improve
consumers' remedies for new vehicle problems. These laws give consumers
the right to a replacement or a refund if their new cars cannot be
repaired under warranty. Under these lemon laws, if a specified number
of repair attempts fails to correct a major problem, or if a new car
has been out of service for repair for the same problem for a
cumulative period of thirty days or more within the one year following
delivery of the vehicle, the manufacturer must either replace the car
or refund the full purchase price, less a reasonable allowance for the
consumer's use of the car prior to reporting the defect. All 50 states
and the District of Columbia now have enacted such statutes. Since the
state lemon laws were enacted, consumers can more easily obtain relief
requiring manufacturers to repurchased allegedly defective vehicles.
Most state lemon laws require consumers to notify the manufacturer
of their intention to assert their lemon law rights before exercising
those rights. In addition, most states require the consumer to submit
the dispute to an informal dispute settlement mechanism before pursuing
their lemon law rights in court. This mechanism may be an arbitration
program established or staffed by the state (such as the Florida and
Washington State arbitration programs), offered by the manufacturer
(such as the Ford Consumer Appeals Board or the Chrysler Customer
Arbitration Board), or offered through third-party organizations (such
as the BBB's AUTO LINE or the National Automobile Dealers Association's
AUTOCAP programs). After reviewing the evidence submitted, these
arbitration programs may impose a wide range of remedies, including
requiring the manufacturer or dealer to replace the defective vehicle
or refund the full purchase price.
Some vehicles that have been replaced or bought back (``repurchased
vehicles'' or ``buybacks'') under the state lemon laws are resold to
other consumers as used cars. To protect subsequent buyers,
approximately 36 states and the District of Columbia have enacted
legislation requiring manufacturers and dealers to disclose to
subsequent buyers that a used vehicle was repurchased because it was
found to be defective or to have non-conformities under the state lemon
law. The state laws vary as to how this disclosure is to be made. Some
states require the vehicle's title to be branded; others require that
the consumer be given a disclosure document at the time of sale or that
the disclosure be placed on the vehicle. The state laws also vary
regarding which vehicles are subject to the disclosure requirement.
Some states require disclosure on all buyback vehicles, including those
repurchased under voluntary settlements, while other states require
disclosure on only certain vehicles (e.g., where there was a final
arbitration decision). In addition, some states prohibit reselling a
repurchased vehicle with a serious safety defect within the state.
Despite these state laws, subsequent buyers of repurchased vehicles
may not be receiving the intended disclosures. In a petition dated
November 8, 1995, the Consumer Coalition requested that the FTC either
initiate a rulemaking proceeding or an enforcement action in connection
with the industry practice of allegedly reselling vehicles bought back
because of defects without disclosure to the used car purchaser. The
petitioners allege that auto manufacturers, their dealers and others
are engaged in a pattern of conduct (which the petitioners term ``lemon
laundering'') intended to conceal from used car buyers material
information about the vehicle's safety and quality history. The
petitioners also allege that this pattern of conduct often involves
transporting the repurchased vehicles across state lines to avoid the
operation of state law protections. A copy of the petition is appended
to this Notice as Attachment 1.
Section B. Invitation To Comment
The Commission invites written comments to assist it in
ascertaining the facts necessary to reach a determination on the issues
raised by the petition and on Petitioners' request. Written comments
must be submitted to the Office of the Secretary, Room 159, Federal
Trade Commission, Sixth Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580, on or before June 28, 1996. Comments submitted
will be available for public inspection in accordance with the Freedom
of Information Act (5 U.S.C. 552) and Commission regulations, on normal
business days between the hours of 8:30 a.m. and 5 p.m. at the Public
Reference Section, Room 130, Federal Trade Commission, Sixth Street and
Pennsylvania Avenue, N.W., Washington, D.C. 20580.
Section C. Public Forum
The FTC staff will conduct a Public Forum to discuss the written
comments received in response to the Federal Register notice. The
purpose of the forum is to afford Commission staff and interested
parties a further opportunity to openly discuss and explore issues
raised in the petition and in the comments, and, in particular, to
examine publicly any areas of significant controversy or divergent
opinions that are raised in the written comments. The conference is not
intended to achieve a consensus opinion among participants or between
participants and Commission staff with respect to any issue raised in
the comments. Commission staff will consider the views and suggestions
made during the conference, in conjunction with the written comments,
in formulating its final recommendation to the Commission concerning
what action, if any, to take in response to the petition.
Commission staff will select a limited number of parties, from
among those who submit written comments, to represent the significant
interests affected by the petition. These parties will participate in
an open discussion of the issues, including asking and answering
questions based on their respective comments. In addition, the forum
will be open to the general public. The discussion will be transcribed
and the transcription placed on the public record.
To the extent possible, Commission staff will select parties to
represent the following interests: Auto manufacturers, new and/or used
auto dealers, operators of auto auctions, consumer groups, Federal,
State and local law enforcement and regulatory authorities; and any
other interests that Commission staff may identify and deem appropriate
for representation.
Parties who represent the above-referenced interests will be
selected on the basis of the following criteria:
1. The party submits a written comment during the 60-day comment
period.
2. The party notifies Commission staff of its interest by June 28,
1996.
[[Page 19069]]
3. The party's participation would promote a balance of interests
being represented at the forum.
4. The party's participation would promote the consideration and
discussion of a variety of issues raised in the petition.
5. The party has expertise in activities affected by the petition.
6. The number of parties selected will not be so large as to
inhibit effective discussion among them.
The forum will be held on July 15, 1996. Parties interested in
participating in the forum must notify Commission staff by June 28,
1996. Prior to the forum, parties selected will be provided with copies
of the comments received in response to this notice.
Section D. Issues for Comment
The Commission seeks comments on various issues raised by the
petition. Without limiting the scope of the issues it seeks comments
on, the Commission is particularly interested in receiving comments on
the questions that follow. Responses to these questions should be
itemized according to the numbered questions below, to which they
correspond. In responding to these questions, include detailed, factual
supporting information whenever possible.
1. How many vehicles are repurchased each year by manufacturers?
How many vehicles are repurchased each year by dealers? What is the
disposition of these vehicles? How many are resold to consumers? How
many are resold within the same state? How many are transported to
another state and resold. What happens to those not resold?
2. How many of the repurchased vehicles are successfully repaired
after they are bought back? Are there studies showing whether
subsequent purchasers of these repurchased vehicles encounter a
frequency of repair that is greater than, equal to, or less than that
of purchasers of non-repurchased used cars of like models and model
years?
3. At what stage should a car be considered a buyback for the
purposes of imposing a disclosure requirement? Should any car that is
taken back by the manufacturer at any stage in a dispute over alleged
defects be considered a buyback? If not, under what circumstances
should a vehicle be considered a buyback? Should only those vehicles in
which there has been an impairment of value be considered a buyback? If
so, how should ``impairment in value'' or any similar limiting term be
defined? Since manufacturer buybacks are only one segment of the
buyback market, how can defective vehicles bought back by the dealer
and/or traded in by consumers be identified?
4. If ``buybacks'' are defined to include those repurchased prior
to the initiation of arbitration or litigation, would disclosure laws
cause a chilling effect on manufacturers' willingness to make such
``goodwill'' repurchases? On the other hand, would disclosure laws that
only cover cars that were the subject of a formal arbitration or
litigation proceeding lead manufacturers to buy back more vehicles
under the heading of ``goodwill'' in order to avoid the disclosure
requirement?
5. How long should a vehicle be considered a``buyback''?
Permanently? Until successfully repaired? Some other time period? How
can it be determined whether a vehicle has been successfully repaired
prior to reselling it?
6. What are the current practices of auto manufacturers, auction
companies, and dealers regarding disclosure of the fact that a vehicle
is a buyback to subsequent purchasers? What types of disclosures are
given? Are these disclosure methods effective? Are consumers receiving
the disclosures? Who is responsible for ensuring that disclosures are
made to the consumer? Are the disclosures specific enough to identify
or reveal the vehicle's previous history and the repairs performed?
What are the costs and/or benefits of these disclosure methods to
manufacturers? To auction companies? To dealers? To consumers? To other
parties?
7. What methods are or would be most effective in getting
information about a vehicle's history and prior repairs to consumers
before they buy the vehicle? Title branding? Disclosure documents to be
given to consumers? Other methods? If disclosure laws are the most
effective method, then what type of disclosure requirement should be
imposed? What are the costs and/or benefits of these various methods?
8. What methods have been adopted by the various States to ensure
that subsequent purchasers are advised that vehicles are buybacks? How
effective have these methods been? What have been the costs and
benefits of these State requirements to manufacturers? To auction
companies? To dealers? To consumers? To the States?
9. If disclosure or title branding laws are or would be most
effective, how should any such disclosure or title branding rules be
enforced? By FTC regulation? By model State law? By a national databank
of VIN numbers? By other means?
10. Uniformity in the disclosure and labeling of repurchased
vehicles might resolve the problem of interstate shipment of vehicles
to avoid individual state requirements. What are the costs and/or
benefits of diverse State requirements versus those of uniformity?
Would a uniform national standard be an effective method to get buyback
information to subsequent purchasers? What would be the costs and/or
benefits of a national standard?
List of Subjects
Used cars, Warranties, Trade practices.
By direction of the Commission.
Donald S. Clark,
Secretary.
Attachment I
Consumers for Auto Reliability and Safety
Advancing Auto Reliability and Safety Since 1979
November 8, 1995
Donald S. Clark, Secretary,
Federal Trade Commission, 6th & Pennsylvania Ave., NW., Washington,
DC 20580
Re: Petition for Investigation of ``Lemon'' Motor Vehicle Resale
Practices
Dear Secretary: Petitioners submit this petition to the Federal
Trade Commission (hereinafter, ``FTC'', or ``Commission''),
requesting an investigation of certain practices of new motor
vehicle manufacturers, their franchised dealers, and others in the
resale of defective vehicles. Petitioners request that the
Commission initiate either rulemaking proceedings or an enforcement
program under Section 5 of the FTC Act,\1\ to stop the industry
practice of reselling ``lemon'' cars without disclosure to the used
car purchaser.
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\1\ 15 U.S.C. Sec. 45.
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Petitioners contend that these practices are deceptive and
unfair, and that they are carried out in knowing disregard of the
laws and policies of many states that regulate the resale of
vehicles which have been deemed ``lemons.''
Over the last several years, investigations conducted by state
law enforcement officials and by reporters for national news bureaus
have uncovered a pattern of conduct in the resale of defective
vehicles, conduct which is intended to conceal from used car buyers
material information about the vehicle's safety and quality history.
These practices evidence a pattern of deception that substantially
injures consumers, passing on to the second retail purchaser the
very losses that lemon laws were designed to prevent. Often these
practices involve the transport of vehicles across state lines to
avoid the operation of state law protections.
Petitioners consider this practice, known as ``lemon
laundering,'' to be an unfair and deceptive trade practice under
Section 5 of the FTC Act. Because the practices necessitate the use
of interstate commerce to subvert the operation and purpose of state
laws designed to protect used car buyers, Commission action is both
appropriate and necessary.
[[Page 19070]]
Background
No consumer product generates more consumer complaints, or more
economic injury, than the automobile. The National Association of
Attorneys General's nationwide survey of consumer complaints,
released in April, 1994, listed automobile-related complaints at the
top.\2\ This finding is echoed by the survey report issued by the
Consumer Federation of America and the National Association of
Consumer Agency Administrators \3\: no doubt the FTC's experience
confirms the accuracy of this finding.
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\2\ ``Top 10 Consumer Complaint List'', National Ass'n of
Attorneys General, Washington, DC, April, 1994.
\3\ ``Fourth Annual Survey of Consumer Protection Agencies,''
National Ass'n. of Consumer Agency Administrators and Consumer
Federation of America, Washington, DC, October, 1995.
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In 1991, the National Association of Attorneys General (NAAG)
adopted a resolution calling for mandatory disclosures in the resale
of ``lemon'' vehicles. NAAG's statement reads, in part, as follows:
``At least 50,000 vehicles with serious safety defects or non-
conformities are repurchased by manufacturers or dealers annually
through arbitration, litigation or through settlements as a result
of the various state lemon laws, representing a potential $750
million loss.
``Many of those vehicles are subsequently resold at auction or
by used car dealers and thus recycled back into the marketplace,
back onto the streets, and back into repair shops.
``Many states do not have adequate legal protection for the
unwitting consumer purchasers of lemon law `buyback' vehicles.'' \4\
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\4\ NAAG Resolution, ``Mandatory Disclosures in the Resale of
Lemon Vehicles'', adopted at Winter Meeting, Ft. Lauderdale, FL,
December, 1991.
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Even with statutory protections in some states, the practices
continue to be widespread, in large part due to the ease with which
vehicles can be moved to or through states with weak or no
protections for used car buyers. This enables sellers to remove the
``lemon'' label from the used car transaction. It is this particular
practice which constitutes ``lemon laundering.''
The national scope of the problem is brought into clearer focus
when the safety implications are considered. Many new car ``lemons''
resold in the used car market have severe safety defects, which were
not addressed by safety recalls. Undoubtedly these unsafe used car
``lemons'' contribute to the enormous economic and human toll
exacted by motor vehicle crashes. It is well documented that motor
vehicle crashes are the leading killer of Americans under the age of
35, and the leading cause of head injuries, epilepsy, quadriplegia,
paraplegia, and facial injuries, as well as a significant cause of
blindness.
It is petitioners' contention that consumers purchasing used
cars are entitled to full, clear and timely disclosure of the status
of vehicles deemed ``lemons,'' if not under state laws then under
the Uniform Commercial Code provisions against unconscionability,
under Section 5 of the FTC Act, and as a matter of public policy.
Federal and State ``Lemon'' Laws Primarily Protect New Car Buyers
After the passage in 1976 of The Magnuson-Moss Warranty Act with
its Federal private right of action for products covered by a
``full'' warranty,\5\ all 50 states and the District of Columbia
enacted new car ``lemon laws'' to protect new car buyers. Typically
these statutes denominate a vehicle as a ``lemon'' by the number of
times a repair is attempted without success, or by the period of
time a vehicle is out of service for warranty repairs. The statutes
generally create a private cause of action with remedies of
replacement or refund of the purchase price, incidental costs, and,
in many states, attorney fees. Many state laws encourage settlements
through state-sponsored or state-certified arbitration.
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\5\ 15 U.S.C. Sec. 2310.
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The measure of success of these laws and programs is their
widespread use: The Center for Auto Safety estimates that over
50,000 vehicles are repurchased annually by manufacturers as a
result of arbitration decisions or legal settlements.\6\ Thus,
substantial economic losses to many new car buyers are prevented by
the ``lemon'' laws.
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\6\ Center for Auto Safety letter to NAAG, May 1, 1995.
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In the wake of the success of these state laws is the secondary
harm to consumer buyers in the used car market. Petitioners see
continuing consumer injury to used car buyers who have no way to
distinguish between ordinary used cars and those that have had
defects that the manufacturer was unwilling or unable to repair,
defects which are so severe as to warrant their repurchase under
state laws.
Manufacturers and dealers frequently mislead consumers by
characterizing defective ``lemon'' vehicle buybacks as ``goodwill''
or ``customer satisfaction'' repurchases, particularly when the
repurchase is made as settlement to a potential or actual lawsuit.
The National Association of Attorneys General Working Group on
Resold Lemons examined this issue and concluded that vehicles
repurchased through such voluntary agreements should be designated
as ``Defective Vehicle Buybacks,'' just as are all adjudicated
``lemons.'' The group's report goes on to note that, otherwise,
``If voluntary buybacks were not included in this definition,
manufacturers would be able to avoid the disclosure requirements by
entering into voluntary agreements with consumers to buy back or
replace those vehicles which are most seriously defective and would
most likely be adjudicated as lemons. Subsequent consumer purchasers
would then have no knowledge of the `lemon' history of these
vehicles.
``Some manufacturers may argue that the use of the phrase
`Defective Vehicle Buyback' is not fair or accurate because vehicles
are also bought back on a `goodwill' basis which are not defective.
The Working Group is not convinced that vehicles which are free from
any alleged defects are routinely repurchased by manufacturers and
dealers. If there are goodwill repurchases, the numbers are not
significant.'' NAAG Working Group Report Summary, November 1, 1990.
It is important to understand the typical distribution channels
for new car ``lemon buybacks,'' as they are known. State laws
require that the manufacturer who gives the warranty. and not the
dealer, repurchase the car. As noted above, many ``lemon buybacks''
are disguished by the manufacturer and dealer, working in concert,
who arrange for the transaction to appear as a trade-in or, as they
are known in the industry, ``trade assists.'' When manufacturers do
repurchase vehicles as prescribed in the ``lemon laws'', they
reintroduce the vehicle into the used car wholesale market typically
through ``closed'' auctions, where only franchised dealers for that
same make of vehicle are invited. The vehicle may be sold on the
used car lot of the dealer purchaser at auction, or the title may
change hands several times before being resold to the public.
On the used car lot of a franchised dealer, the car will be
shown alongside other late model, low mileage cars. These may be
recent trade-ins, or cars returned to the dealer after a period of
use as a daily rental, salesperson's demonstrator, manufacturer
executive vehicle, or dealer ``loaner'' car. There is nothing in the
appearance of lemon buybacks that would make them identifiable to
the used car buyer.
To address the ``downstream'' problem of the resale of
``lemons'', thirty six states and the District of Columbia have
enacted disclosure laws. These take various forms, but can include
requirements for one or more of the following disclosures: an on-
vehicle sticker; a special form that must be acknowledged by the
used car buyer at the time of purchase; or a ``branding'' of the
vehicle title. Five states forbid the resale in that state of lemons
found to have had serious safety defects. The effect of these
various state laws, though, is to create a great incentive for
manufacturers and dealers to move the cars out of the state in which
they are determined to be ``lemons'' and into a non-disclosure
state, or at least into another state where dealers find the
disclosures non-threatening, (i.e., ineffective in warning
buyers).\7\
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\7\ Disclosure forms required in some states are presented at
the time of sale, along with a raft of other forms to sign, and are
easily overlooked. Disclosures on the vehicle title may not be seen
at all by the used car purchaser financing the purchase, as the
title goes directly to the finance company.
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The practice of moving ``lemon buybacks'' to other states is
extensive. Public accounts of a State of Florida investigation still
underway shows that about 60 percent of buybacks in the state are
resold in other states.\8\ Documentation of buybacks by the Lemon
Law Administrator for the State of Washington shows that over a 5
year period, 324 of the 452 buybacks, or 71 percent, were next
titled in another state, mostly in Oregon and Utah, but also as far
away as North Carolina, Virginia, and New Jersey.\9\
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\8\ ``Do You Own a Lemon?'', Palm Beach Post, June 18, 1995, 1A.
(The Florida AG's office declines comment on this account as its
investigation is pending.)
\9\ Letter from Paul N. Corning, Lemon Law Administrator, State
of Washington, October 27, 1995.
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[[Page 19071]]
The used car buyer of a ``laundered'' lemon not only pays too
much for the car due to the deceptive non-disclosure of the car's
history, but that buyer also enjoys few of the legal protections
that work for new car buyers. Many state lemon laws do not apply at
all; others offer only some of the protections accorded new car
buyers. Even so, it is not clear there is any practical way for the
used car buyer to look back into the vehicle's history and to
discover the deception, unless the consumer could somehow gain
access to state motor vehicle records in the state of original sale.
Moreover, even if a used car buyer were to later discover the
deception in the sale of their vehicle without the state-mandated
disclosure, their remedies are rarely equivalent to those accorded
the new car ``lemon'' buyer. Individual actions for fraud under
state law are difficult to sustain, absent statutory provisions for
special remedies and attorneys fees recovery. Faced with the high
cost of waging suit for fraud or deception, the aggrieved used car
buyer is more likely to resell or trade in the car at a substantial
loss. While understandable, this only passes the problem on to the
next used car buyer.
``Lemon Laundering'' Imposes an Economic Injury on the Used Car Buyer
The model intended by the state lemon laws is that the new car
buyer is made whole by recovering the original value of the bargain,
either through a refund or replacement with a new vehicle, plus the
costs associated with enforcing the right. Under the model, these
costs are returned to the manufacturer, where they should be borne.
(The costs are not a penalty, but an incentive to manufacturers to
produce fewer lemons, and to provide good warranty service to
correct defects as they arise.) The manufacturer's costs, then, are
the difference between the refunded original retail price of the
car, and the depreciated price paid for the vehicle at auction. One
would reasonably expect the auction price to reflect the fact that
the ``lemon'' disclosure will depress the vehicle's resale value on
the used car lot--that is, if the label does in fact appear there.
``Lemon laundering'' allows the manufacturer to avoid this rather
significant portion of these costs, thus undermining the market-
perfecting incentives on which the lemon laws are premised.
The economic loss can only be avoided by the used car buyer care
who sees an effective ``lemon'' label, and who can then secure a
reduced price or negotiate for warranty or service contract
protection against a reoccurrence of the ``lemon'' problem. When the
label is removed (or effectively concealed), the apparent value of
the vehicle is increased, and the vehicle can be resold as if that
car never had any severe safety or quality defects. Since the
manufacturer and the dealer at the wholesale auction both implicitly
understand that ``laundering'' the label is possible (perhaps with
only the cost of moving the car to another state), the manufacturer
can realize nearly the full wholesale price. Even where the
manufacturer complies with a state disclosure law, the temptation of
a dealer to ``launder'' the lemon disclosure is great--when resold
in a non-disclosure state at a higher price, the dealer realizes an
extra profit in the transaction. In either case, with or without
manufacturer collusion, the loss is shifted to the consumer used car
buyer.
The warranty that comes with the used vehicle will likely be of
little value--the seller will be sure to offer only a very
restrictive warranty or, as the Commission found in the course of
its Rulemaking,\10\ the vehicle may be sold ``as is,'' or with a
warranty that requires substantial and unlimited buyer co-payments
for repairs (so-called ``50-50 warranties,'' wherein 50 per cent of
the repair costs, as computed by the seller, are assessed to the
buyer).
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\10\ See Statement of Basis and Purpose, Trade Regulation Rule,
Sale of Used Motor Vehicles, 49 Fed. Reg. 45696-45700 (1984).
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The Commission Can Augment State Protections for Used Car Buyers,
Without Preempting Them
The Commission's jurisdiction over used car sales is self-
evident.\11\ The remaining question, then, is why the FTC should
enter this area when some states have addressed the problem through
disclosure laws. The commission should act for the same reasons the
Commission acts in so many areas touched on by state consumer
protection laws: certain aspects of the problem can only be
addressed by a Federal action, because state laws can be defeated by
moving the transaction out of the jurisdiction, and because varying
state standards allow a type of ``forum-shopping'' that defeats
statutory protections.
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\11\ Id., at 45703. The Commission's authority derives from its
general Section 5 authority, as well as a specific grant of power to
regulate used car sales by rulemaking in Title I of the Magnuson-
Moss Act, 15 U.S.C. 2309(b).
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In the used car market, vehicles move about the wholesale market
through a web of brokers, auctions, and even through multi-state
chain franchisees. This interstate nature of the market enable
``lemon laundering'' to persist even though the practice is
circumscribed in some states.
Petitioners believe that Federal protections fashioned by the
Commission can supplement and complement state laws, and need not
preempt them.
There are several areas of potential action by the Commission.
One would be a re-examination of the Used Motor Vehicle Trade
Regulation Rule (``TRR''), with the possible addition of a
disclosure on the Federal window sticker that would recognize the
``lemon'' label from any jurisdiction. Alternatively, we believe an
FTC investigation, in conjunction with knowledgeable state
officials, will uncover the methods by which manufacturers in
concert with dealers and auction firms ``launder'' lemon disclosures
through transactions whose primary purpose is to defeat the
protections of state disclosure laws. This practice should be
declared an unfair or deceptive trade practice through litigation.
Commission cases against dealers and dealer chains are a valuable
tool for enforcement and a strong deterrent; the Commission's own
enforcement ``sweeps'' of use car dealers for TRR violations are an
effective example of Federal enforcement, one that should be applied
to lemon laundering practices. Petitioners are confident the
Commission can fashion a non-burdensome disclosure and record-
keeping scheme that will put an end to the practice.
There is Ample Precedent for FTC Intervention in Matters That are
Partly Addressed Under State Law, but Where the Remedies are
Insufficient To Protect Consumers
Considerable Commission precedent exists for FTC action here.
Petitioners note that the Commission historically has actively
engaged issues which have been partly, but not altogether
successfully, addressed by state consumer protection laws.
Petitioners refer to the Commission to its actions against
automobile manufacturers in the so-called ``secret warranty''
cases,\12\ where disclosure schemes were erected to make sure that
vehicle owners received from manufacturers material information
regarding non-safety defects and warranty extensions. Once
disclosed, the information enabled consumers to protect themselves
in two ways. In some cases, consumers were able to prevent damage to
their cars by seeking early repairs. In others, they were able to
have the costs of repair borne under manufacturer extend warranty
policies, which before the Commission's orders had been closely
guarded and allowed by the manufacturers in only selective cases.
The Section 5 theory relied upon by the Commission in those actions
applies equally to the matter at hand.
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\12\ Ford Motor Co., 96 F.T.C. 362 (1980); General Motors Corp.,
102 F.T.C. 1741 (1983).
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Petitioners also cite the Commission's actions against Paccar,
Inc. and other large truck manufacturers to remedy the harmful
effects of deception in vehicle sales.\13\ In the order entered in
Paccar and companion cases, the Commission ended a practice of truck
manufacturers who, at the end of a ``model year,'' applied to state
titling authorities (where not prohibited by state policies) to
redesignate the title of unsold vehicles to show a new, updated
model year. This had the effect of avoiding the drop in sale value
of older unsold trucks on dealer lots when the new model year units
are also for sale. The Commission took the position that the
practice was deceptive. This closely parallels the situation in
lemon laundering: critical information is concealed (model year, or
lemon status) from the buyer, leading the buyer to make inaccurate
assumptions about the value of the vehicle. Petitioners hasten to
point out that here, too, the Commission's action was taken despite
the fact that some states had addressed the problem.
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\13\ 94 F.T.C. 263 (1974) (see also companion cases at pp. 236-
289). Petitioners note that the beneficiaries of the Commission's
actions here were primarily large industrial and truck freight
firms.
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Most relevant to the lemon laundering practice is the
Commission's reasoning in Peacock Buick.\14\ There the Commission
found it to be deceptive for a car dealer to offer cars for sale as
``new'' alongside other unquestionably new cars, absent some
explicit disclosure, when in fact the cars had been previously used
and in some cases
[[Page 19072]]
damaged and repaired. The Commission's decision notes in part,
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\14\ 86 F.T.C. 1532 (1975), aff'd 553 F.2nd 97 (4th Cir., 1977).
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``Even in the absence of affirmative misrepresentation, it is
misleading for the seller of late model used cars to fail to reveal
the particularized uses to which they have been put * * * When a
later model car is sold at close to list price * * * the assumption
likely to be made by some purchasers is that, absent disclosure to
the contrary, such car has not previously been used in a way that
might substantially impair its value.'', at 1557-8. ``Absent a clear
and early disclosure of the prior use of a late model car, deception
can result from the setting in which a sale is made and the
expectations of the buyer * * *'' at 1555.
The facts in the typical ``lemon laundering'' situation clearly
conform to the Commission's Policy Statement on Deception.\15\ The
misrepresentation in question is committed by omission; it is likely
to mislead consumers acting reasonably under the circumstances; and
it is material, in that it is important, it is likely to affect the
consumer's choice of a product, and its omission is likely to cause
the consumer to suffer injury.
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\15\ Letter to Hon. John Dingell, October 14, 1983; incorporated
in the Commission's decision in Cliffdale Associates, 103 F.T.C. 110
(1984).
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Summary
The practice of ``lemon laundering'' presents a compelling case
for deception and consumer injury. The type of deception evidenced
by the practice is similar to that addressed in Commission
precedents, and conforms to the Commission's stated Policy on
Deception. The problem demands a remedy from the Commission, with
its expertise in fashioning effective consumer disclosures.
Petitioners are confident the Commission can fashion a remedy,
through rulemaking or enforcement proceedings, that will preserve
state laws protections and will bring effective consumer protection
to all used car buyers.
Petitioners stand ready to assist the Commission to develop the
factual record of these practices and to fashion appropriate
remedies.
Respectfully submitted,
Lawrence Kanter,
Counsel.
The following organizations join as Co-petitioners in this
matter:
Consumers for Auto Reliability & Safety, Sacramento, CA
Consumer Federation of America, Washington, DC
U.S. Public Interest Research Group, Washington, DC
Consumer Action, San Francisco, CA
New York Public Interest Research Group, New York, NY
Florida Public Interest Research Group, Tallahassee, FL
Oregon State Public Interest Research Group, Portland, OR
Center for Auto Safety, Washington, DC
Public Citizen, Washington, DC
Virginia Citizens Consumer Council, Yorktown, VA
California Public Interest Research Group, Los Angeles, CA
Connecticut Public Interest Research Group, Hartford, CT
Massachusetts Public Interest Research Group, Boston, MA
[FR Doc. 96-10562 Filed 4-29-96; 8:45 am]
BILLING CODE 6750-01-M
