Request for Comments Concerning Disclosures in the Resale of Vehicles Repurchased Due to Warranty Defects

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