CAUTION FLAGS ON “CERTIFIED PRE-OWNED”

THE AUTO MARKET

This was a distressing end of the year for sellers of “certified pre-owned” (CPO) vehicles.  Both a federal Court of Appeals and the Federal Trade Commission slammed CPO “inspections.”  Worse: the language of the opinions indicates that CPO is now in the cross-hairs of the regulators’ interest.

In November 2016, the 9th Circuit Court of Appeals ruled in a case called Gonzalez v. CarMax* that the dealer deceived consumers by claiming that its CPO designation was based on a rigorous inspection of its vehicles.  Then in mid-December, the FTC followed up with a hammer-blow of its own: it determined that used car dealers’ advertisements touting the rigorous inspections performed on CPO cars deceived consumers.  The confluence of “CPO” and “deception” should give dealers pause.

It would be easy to argue neither set of judgments generally applies to sellers of CPO vehicles because of their legal and factual details.  But reading the Court of Appeals’ decision and the FTC’s statement doesn’t support this rosy view.  The language condemning CPO inspections in both announcements is much more expansive than necessary if all that was intended was condemning a narrow violation of the law.

The broad language sounds a lot more like “unfairness” or “deception” than any narrow statutory violation.  The Court of Appeals goes out of its way to note that “merely list[ing] components that have been inspected,” without indicating whether a component passed the inspection, “[leaves] the consumer ignorant as to whether the various components passed the inspection.”  Similarly, the FTC’s statement charged that “the companies’ representations about their inspections … were likely to mislead reasonable consumers into believing that the inspections included repairing open recalls” if the companies didn’t specifically reveal that status of recalls.  Both essentially charged that the CPO designations were self-serving—something that fits neatly within state and federal “UDAP” laws.

Why is the coincidence of the ruling and the statement important?  As I noted above: regulators “telegraph” their punches well before they throw them.  I’d suggest that the coincidence is a “tell.”  In the months and years to come, it’s likely that regulators will be looking more closely at the “Certified Pre-Owned” designation …  particularly CPO designations that appear to be self-serving.

What’s a dealer to do?  Using a third-party CPO certification program like the NIADA’s might be a good start to addressing the regulators’ concerns.  Providing consumers a checklist showing what components passed and what components failed the CPO inspection is another simple and inexpensive fix that seems to remedy the problems pointed out.  Of course, it goes without saying that dealers should preserve records in the deal jacket that show that inspections were actually conducted (i.e. that boxes were not just summarily checked off with a wild swoosh of an employee’s pen) when CPO literature claims they have been.

Of course, there’s no guarantee that these procedures will provide a complete defense to a regulatory enforcement action, or that they will satisfy regulators.  Nor can these suggestions substitute for legal advice based on  an individual dealer’s situation.  But with some simple procedures in place that respond to the Court of Appeal’s and the FTC’s concerns, dealers can feel a lot more comfortable when the regulators come calling.

 

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*Gonzalez v. CarMax Auto Superstores, 2016 U.S. App. LEXIS 18867 (9th Circuit, 2016)

**https://www.ftc.gov/system/files/documents/cases/161216_six_auto_recall_cases_statement_of_the_commission.pdf

 

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