Mind your vendor contracts and disclosures in social media

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“There’s an app for that.” It’s true. There’s a mobile app for nearly anything these days. Mobile apps allow dealers to push out sales and service promotions, remind customers of service appointments, showcase new and used vehicle inventory with photos and video, post vehicle history reports, do background checks on employees, check compliance with wage and hour laws, integrate with social media and even integrate with inventory management and service scheduling systems. At last year’s NADA Convention in Las Vegas, I recall Google reporting that something like a third of car sales are generated online. Long gone are the days when car buyers make purchasing decisions by perusing the newspaper or stopping by the local dealership. With internet reviews, dealers can even lose a sale before the dealer knows a customer is looking. In fact, in an Automotive Social Media and Reputation Trend Study conducted by Digital Air Strike in November 2012, it was found that 70% of car buyers say online dealership reviews influence where they shop and many of those car buyers will travel long distances to connect with dealers with positive reviews.

This change in consumer buying habits has caused dealers and manufacturers to change their marketing strategies. Internet departments have long been commonplace at dealerships. But now even the manufacturers are putting pressure on dealerships to adapt. For example, just this week GM issued a mandate to ensure that all its dealerships solicit customer reviews, post them on the right consumer sites and respond promptly to negative reviews that can hurt both the vehicle brand and the dealership. Failure to comply with this mandate puts at risk 20 percent of what GM’s four brands pay quarterly in dealer Standards for Excellence bonuses pegged to vehicle sales, CSI and other measures. GM approves only three vendors for this service.

Several startup technology companies are eager to get the lucrative business of dealerships. While the industry is experiencing a mad rush to keep up with consumer shopping and buying habits, both vendors and dealers might want to heed the lessons of the past, trends of the present and look to the future with sound legal compliance in mind before launching that new technology or purchasing that new digital service. Here are some things that come to mind:

Lessons of the Past:

Avoid the "lights out" lawsuit by having competent automotive industry counsel review and negotiate agreements and opine on the sufficiency of disclosures.

Remember those DMS contracts that disclaim liability for non-compliance with state or local laws and require the dealers to defend and indemnify the DMS provider in any lawsuit asserting non-compliance with those laws? A classic example of how this pesky contract provision comes back to bite a dealer is in the context of Truth-In-Lending class actions over dealership disclosures to consumers, where the dealer relies on the DMS provider to accurately program the software used to print its retail installment sales contracts. I’ve had to explain to many dealers faced with a potentially devastating class action lawsuit, seeking to unwind thousands of car deals why the DMS vendor owes no responsibility to the dealer. Talk about an uncomfortable conversation!

How about those finance company agreements that have you warrant and represent that all of the information you submit to them to get a customer’s contract purchased is truthful and accurate and free from fraud? I’ve represented dealers facing a several million dollar buyback demand when the finance company discovers an identity theft or fraud ring of which the dealer was unaware. Sometimes it was a bad employee, sometimes a bad customer, sometimes both. But those disasters could have been avoided had the contract been reviewed and negotiated by counsel before it was consummated.

Finally, remember the Trevor Law Group, that posse of slick, twenty-something legal entrepreneurs who held the entire California retail automotive industry (including repair shops) hostage in the 1990s with their advertising lawsuits? While they got a dose of reality – disbarment (participating in those hearings was a gratifying experience) – those lawsuits changed the entire way dealers advertised in print and TV ads and fostered a culture of compliance with advertising regulations that had previously been spotty, at best.

Trends of the Present:

Don’t assume you know the rules governing new media.

In December 2011, Automotive News reported on the texting lawsuit that publicly-held Lithia Motors was facing after 57,800 consumers' cell phones received a brief text message: "0% financing on used vehicles during the biggest sale ever. Over 3000 used vehicles at Lithia Motors." Lithia followed up with a second short text to 48,000 of those phones a week later. This reportedly resulted in a 2.5 million dollar settlement of a class action filed by a recipient of one of those messages.

The company Lithia contracted with to broadcast those texts was DMEautomotive. DMEautomotive put its texting program on hold at that time, and has since posted its Ins and Outs of a Compliant Mobile App and other compliance based articles on its website to assist and encourage dealers to seek legal counsel and adopt best practices in implementing new technology into their marketing practices. Bully for them. According to court documents, DMEautomotive, while not named as a defendant in the suit against Lithia, contributed financially to the settlement.

In any event, this lawsuit serves as a cautionary reminder to dealers who use a variety of new media for advertising and marketing: Don't assume you know the rules governing those new media.

Just last week, news broke of a Louisiana marketing company that has been permanently banned from automobile advertising and marketing in North Carolina. Since Arizona, Iowa, Kentucky, Maryland, Oregon and Pennsylvania joined North Carolina in bringing the action, there will likely be repercussions for the vendor in those states as well. While this appears to be just rewards for a sketchy operation, dealers who used this company are vulnerable as well. For example, that marketing company was hit by the state of Washington back in 2007. In that case, the dealer paid nearly twice the penalties and legal fees that the marketing company had to pay. More disturbingly, the dealer had to enter into a Consent Decree with the Attorney General that stated among other things: “Any violation committed after the date of entry of this Consent Decree of any of the injunctive terms of this Consent Decree shall constitute a violation of an injunction for which civil penalties of up to $25,000 per violation may be sought by the Attorney General”. In other words, any advertising missteps this dealer makes will cost it dearly. This injunction is permanent by the way.

The Washington state Assistant Attorney General stated it best: “Washington dealers need to be upfront and honest in their advertisements and should carefully select the companies they hire to promote their business. All companies that do business in Washington must know and operate in accordance with Washington laws. Both dealers and ad firms can be found in violation of Washington laws if their promotions fail to include all legally required disclosures. Some marketing firms, especially those located in another state, may not be familiar with Washington’s car dealer and consumer protection laws. If these companies use promotions that mislead or deceive interested buyers, both the marketing firm and the dealer may be found in violation of Washington laws.” While it sounds like they’re on the warpath in Washington, this really is sound advice, particularly with the advent of start ups in this marketing space, which may not have the resources or savvy to hire counsel to conduct a federal and 50 state survey of advertising and promotions laws in the automotive industry and chart out a national legal compliance strategy.

In other big news, last week, the Federal Trade Commission (FTC) reached a settlement with a mobile app company, its data provider, and their CEO in its first Fair Credit Reporting Act (“FCRA”) enforcement action involving mobile applications. The mobile app in question enabled users to search criminal records databases. The company advertised the apps as tools for conducting criminal background checks on potential employees.

Under the FCRA, individuals or organizations that use outside entities, including apps, to procure certain background information on employees or applicants in connection with their employment (or potential employment) must comply with certain notice, authorization, and other rules. Although the companies included disclaimers in their terms and conditions stating that they were not FCRA compliant, that their products were not to be considered screening products for employment, insurance, loans, and credit screening, and that anyone who used their reports for such purposes assumed sole responsibility for FCRA compliance, the Commission viewed these disclaimers as insufficient to avoid liability under the FCRA because the mobile app company advertised that the reports could be used to conduct searches on potential employees, and therefore, the companies could expect them to be used for employment purposes. The lesson here for mobile app developers is that some liability cannot be disclaimed.

The lesson for dealers is to make sure the services you use are legally compliant. More information on the settlement is here.

Look to the Future:

Periodically review and update marketing practices to implement compliance with new laws.

Starting October 16, 2013 (my birthday, for those of you who want to send me a note), dealers must obtain prior express written consent for all “auto dialed or prerecorded telemarketing calls to wireless numbers and for prerecorded calls to residential lines,” according to the Federal Communications Commission’s recent rule changes pursuant to the Telephone Consumer Protection Act. For those dealers who used auto-dialing or prerecorded telemarketing calls to mobile phones, this change will require updated policies.

FTC Endorsement Guides are continually changing, particularly for word of mouth marketing activities, like blogging and Facebook posts, which dealerships are utilizing with more frequency. The Word of Mouth Marketing Association publishes online guidebooks and has developed a Code of Ethics that the FTC recognizes as authoritative. Under these guidelines, affiliations with the marketed product or company must be properly disclosed. This is an emerging area that could result in enforcement action. Dealers, like anyone else, should be aware of the consequences of these rules when marketing through social media.


Incorporating social media and new technologies into dealerships can help them become more profitable and allow them to connect with more car buyers in better ways as long as dealers and providers use common sense:

  • Have competent automotive industry counsel review and negotiate agreements and opine on the sufficiency of disclosures.
  • Don’t assume you know the rules governing new media.
  • Periodically review and update marketing practices to implement compliance with new laws.