Brooke Conkle, Chris Capurso, and Alan Wingfield discuss the National Automobile Dealer Association's challenge to the Federal Trade Commission's CARS Rule.
In this podcast episode, Brooke Conkle and Chris Capurso are joined by esteemed senior practitioner Alan Wingfield to discuss the National Automobile Dealer Association's (NADA) challenge to the Federal Trade Commission's (FTC) CARS Rule. The conversation centers around the recent oral arguments held by the Fifth Circuit on October 9, involving both the NADA and the Texas Automobile Dealers Association (TADA). The discussion aims to provide insights into the origins and implications of the CARS Rule, as well as the legal arguments presented by the dealer associations in their challenge and the FTC in defense.
Moving the Metal: The Auto Finance Podcast — Dissecting Oral Arguments in NADA’s Challenge to the CARS Rule
Hosts: Brooke Conkle and Chris Capurso
Guest: Alan Wingfield
Recorded: 10/10/24
Date Aired: 10/18/24
Brooke Conkle:
Welcome to Moving the Metal, the premier legally focused podcast for the auto finance industry. I'm Brooke Conkle, a partner in Troutman Pepper's Consumer Financial Services Practice Group.
Chris Capurso:
I'm Chris Capurso, an associate in Troutman Pepper's Consumer Financial Services Practice Group.
Brooke Conkle:
Today we're joined by the esteemed Alan Wingfield, and we will be discussing oral argument on the National Automobile Dealer Association's challenge to the FTC CARS rule. But before we jump into that, let me remind you to please visit and subscribe to our blogs. We have two great ones that may be of interest to you, TroutmanPepperFinancialServices.com and ConsumerFinancialServicesLawMonitor.com, and also we have a bevy of other podcasts that you might find interesting. The Consumer Finance Podcast, which as you might imagine is all things consumer finance-related. FCRA Focus, a podcast dedicated to all things credit reporting. Unauthorized Access, a deep dive into the personalities and issues, and the privacy, data, and cybersecurity industry. And finally, Payments Pros, a great podcast focused exclusively on the payments' industry. All of these insightful shows are available on your favorite podcast platform, so check them out. And speaking of those platforms, if you like what you hear, please leave us a review and let us know how we're doing. We'd love to hear from you. Alternatively, please feel free to reach out to us directly. Our contact information can easily be found on our firm's website, troutman.com. If you enjoy reading our blogs or listening to our podcasts, please also check out our Financial Services mobile app. To download, simply go to your iOS or Android app store and search for Troutman Pepper. Not only does our app have all of our blog content and podcast episodes in one handy place, it also has a listing of all of the firm's financially focused attorneys. So check it out and see what you think.
For today, as I mentioned, we're discussing the CARS rule with Alan Wingfield. Guys, the Fifth Circuit held oral argument on October 9 in the NADA and TADA, Texas Automobile Dealer Association, challenge to the FTC CARS rule. Chris, how did we get here and what is the CARS rule?
Chris Capurso:
Yeah. And before I get started, I just want to know, we all listened to the oral argument together and it was kind of like a nerd-out moment because I got to see two litigators listen to an oral argument, and as somebody who does not litigate, they picked up on things and I was like, "Whoa." It reminds me of The Office, where Andy was watching the movie and they were talking about something else and he was like, "I can't believe how smart a film these guys are. They're catching things that are way over my head." That's the way I felt. I'm going to give the basic background on the FTC CARS rule. So, in December 2023, the FTC finalized the CARS rule, which stands for the Combating Auto Retail Scams rule, very good acronym. The CARS rule is one of the most significant regulations to impact motor vehicle dealers and impacts auto finance companies as well in recent memory.
And the CARS rule does several things, and I'm just going to go through the laundry list of them because we've talked about it before. First, it prohibits misrepresentations about, quote, "Material information in a motor vehicle sales transaction,” including the costs or terms of buying, financing, or leasing a vehicle, any costs, limitations, benefits, or any other aspect of an add-on product or service, and the availability of vehicles and an advertised price. The rule also requires a dealer to get a consumer's express informed consent to charge the consumer for any item. It prohibits a dealer from charging consumers for add-on products that do not confer a benefit, and requires a dealer to disclose in any representation that add-on products are not required. It requires a dealer to clearly disclose the, quote, "Offering price" of a vehicle in, among other things, any advertisements that reference a specific vehicle.
It requires a dealer to disclose in any representation about a monthly payment, the total of payments the consumer will pay after making all scheduled payments. It requires a dealer when making any comparison between payment options that includes discussion of a lower monthly payment to disclose that the lower monthly payment will increase the total amount of payments if true. And finally, but certainly not least, the CARS rule requires dealers to maintain records of compliance with it for at least 24 months. And though the CARS rule, as I mentioned, was passed in December 2023, was supposed to go into effect July 30, 2024. Unlike New Hampshire, which we're going to cover in the next podcast, they don't do retroactive things at the FTC. Even though that was supposed to go into effect on July 30, 2024, the FTC paused the effective date pending litigation in the US Court of Appeals for the Fifth Circuit, which is what we're discussing today.
Brooke Conkle:
So, Alan, tell us a little bit about the challenge. What is NADA arguing is wrong with the role and how is the FTC responding?
Alan Wingfield:
Well, first, let's level-set on what the actual litigation is because it's unusual. What the NADA did was launched a challenge in the first instance in the first case in the Court of Appeals. Normally you think about a lawsuit starting in a trial court, district court, and federal system. Being resolved there, then being appealed to a court of appeals. Here, pursuant to specific statutory authorization, they filed their challenge directly with the Fifth Circuit. So, it's sort of a little bit unusual action because the Fifth Circuit here will be making a decision on a blank slate without the benefit of a district court's view of things. And that's relatively unusual for circuit court.
So that's the fundamental procedural posture with the petitioners, the NADA and the Texas Automobile Deals Association, are asking if this Circuit to do is to set aside the rule as being arbitrary, capricious, or having been done in violation of law. So, they're asking basically the Fifth Circuit to undo it completely. And so, this court proceeding is about whether there's a legal basis for doing so.
Brooke Conkle:
So, let's move into our thoughts on the actual oral argument. Before we get there though, let's talk about the three-judge panel who heard the argument. And as Alan mentioned, this appeal, it's really frankly not an appeal. It's really a challenge because it's going directly to the Circuit Courts, was intentionally filed by NADA and TADA in TADA's backyard, frankly, in the Fifth Circuit. This was an intentional move. The challenge could have been filed in any one of the courts of appeals throughout the United States. The appeal though, was intentionally filed in the Fifth Circuit. This is a court of appeals that historically has been extremely antagonistic to democratic-led initiatives and certainly antagonistic to agency law. And so, all of the stars aligned for NADA to file this in the Fifth Circuit.
The three judges who heard the oral argument were Judges Higginbotham, Smith, and Higginson. Now, judges Higginbotham and Smith were both appointed by President Ronald Reagan, and Judge Higginson appointed by President Barack Obama. So, all three of these gentlemen, this is not their first rodeo. They've seen it all at this point. They've been on the bench quite some time. And, Alan, we listened to the oral argument. What did you expect to hear yesterday?
Alan Wingfield:
My expectation going into it, given the Fifth Circuit's reputation in recent years of being deeply hostile to regulatory state, was a very active bench, very active judges seeking to find ammunition from the oral argument to bolster a decision against the rule. We saw some of that as we can talk about, but probably not the extent that I might've expected.
Brooke Conkle:
Yeah. For me, what was surprising was we expected that the argument would be heavy on procedural issues and specifically on whether an advanced notice of proposed rulemaking was needed before the FTC could issue its notice of proposed rulemaking. But I think what was surprising for me was frankly just how heavy the oral argument was on those procedural points. And as someone who gladly wears the banner of procedural nerd, this was very procedural even for me, this was really deep into the weeds of agency law and the grants offered to the FTC, through the FTC Act, the Dodd-Frank Act, and really the interplay of those two statutes, and what the FTC is allowed to do under those two laws.
What I also found surprising was that the FTC really didn't hit the factual underpinnings behind the rule in the same way that the NADA challenged those factual underpinnings. I really thought I would hear a lot about the savings that the CARS rule would offer for consumers be cost, or lack thereof, on the industry, but also the bad actors that the FTC really considered to be the impetus behind the rule. The FTC really just didn't go after those issues as much as I thought they would. They certainly did to a certain extent. But Alan, also the tone of the questions, I think we anticipated that the FTC would see a panel that was highly suspicious of their motives, highly suspicious of their ability to promulgate the rule at all. And that wasn't necessarily what we heard. Is that right?
Alan Wingfield:
That's right. I would say the tone was fairly even-handed. There was certainly no diatribes or angry voices in the room, both counsel conducted themselves with utmost decorum as you might expect. The judges were interested in sorting your way through these gnarly procedural and technical legal questions in an orderly and clear way. So, it came across as a standard oral argument in a civil case as opposed to a hanging party.
Brooke Conkle:
So, Alan, as I listened yesterday, I really thought that the council for the NADA really hit a couple of key points really well. And the first was the NADA's council said, "What the FTC is missing in this role is the link between the regulations which are so burdensome on the industry and preventing the bad acts." And I really thought that was a point. He didn't really overplay his hand on that, but that was one for me that really, really hit home.
And then again, in the rebuttal section, NADA's attorney said, "When we look at the rule and we look at really what was proposed to be the rule and the rule as it was enacted, specifically the FTC made a decision to exclude RV dealers, boat dealers, those kinds of retailers from the CARS rule, they excluded them. And the rationale there was because of existing law, because these retailers are already regulated." And the NADA's attorneys said, "Well, that's the case for all of them because this is already a supremely regulated industry." To me, that was a really fantastic point of, "Why are we here?” This is an industry that at every step of the transaction you've got regulations, whether it's in advertising, whether it's at point of sale, whether it's in the disclosures. This is not the wild wild west from a regulatory standpoint. And to me that was really a key moment in the argument. How about you?
Alan Wingfield:
Same here. The NADA's counsel made two points in support of that. One was showing that the records reported a finding of bad actors in industry of an infinitesimal amount, like statistical amount. He went through a statistical analysis and said, "0.0013 of all dealers might be bad actors, but you don't impose these huge burdens of regulations on all the rest. Just for that small component of the industry." That didn't really seem to grab the attention of the panel, what did grab the attention of the panel, in fact might've been some of the most encouraging parts of the oral argument for the petitioners, NADA, saying that these acts are trying to stamp out are already thoroughly regulated by the law.
There was an extended discussion of the application of the Truth in Lending Act, the TILA, and TILA's requirements for providing disclosures and finance transactions. The expense and burden deals were already occurred to comply with that. One of the judges spoke up at one point. It was basically musing about the untold burden of billions of dollars that the industry already spent to comply with the TILA requirements. And yet to hear these new regulations coming in, putting redundant, facially redundant requirements to TILA, I felt they scored, especially on that second point about the existing regulation. And the TILA point in particular seemed to capture the interest of the panel.
Brooke Conkle:
Yes. And on the other side of the coin, for the FTC, I thought, where their arguments really hit home with this panel frankly was in the procedural section. Their attorney really had a fantastic grasp of how the statutes worked, how the FTC interplays with Dodd-Frank, and really led off with some of their strongest points and said, "Congress has granted us this authority.” And yes, Court, you have the ability to review it, but that standard of review is going to be different than just coming and looking at this for whether it's arbitrary and capricious. I really thought the procedural argument for the FTC was some of their best points. How about you, Alan?
Alan Wingfield:
I agree with that. I feel like the NADA was going for an easy kill shot on the regulation based on a critique they were making about the failure to issue an advanced notice of the rule. And on that point, it seemed like the panel was at least at echo pose and somewhat perhaps skeptical about that. I think the lack of a record showing that there was any prejudice from these procedural irregularities that they were claiming may prove to downfall those technical arguments. So, it may be what's going to happen here is that the kill shot attempted by the NADA on procedural ground and some of the other technical arguments working in the case will ultimately not be what this case is decided on. It's going to may be ultimately decided on whether or not the FTC was arbitrary, capricious in issuing the rule. And based on scope of the rule, the burdens of rule where the rule meets the actual showing of harm is trying to address as opposed to ultimately deciding on all these technical issues that they spent much of the oral argument on.
Brooke Conkle:
So, Alan, I know who I thought won. Who do you think won?
Alan Wingfield:
Boy, after 37 years of practice, I've been surprised a lot by courts. And this is a little murkier than the average case. However, reflecting back on the questions from the panel, what issues the panel was seizing on, I tend to think that the FTC probably is going to do pretty well on the procedural issues, but there's at least two judges on this panel who are skeptical that this rule has a sufficient foundation and an actual need to regulate.
Brooke Conkle:
That's right. I think before the oral argument, we were kind of taking bets on how much of a smack down this was going to be for the FTC, but that really wasn't what the oral argument was. Frankly, the bench was not an especially hot bench. They had engaging and thoughtful questions, but they weren't trying to trap either attorney. They weren't looking to make their own points throughout the argument, and both attorneys on both sides did extremely well. I think when we sat down and thought about the oral argument, it was tough to say, "All right, who's going to win?" But the more we kind of looked at the points that each attorney was able to make in favor of his case, I think if I'm a betting person, 55 to 45, I'm going with NADA, but I'll tell you it is certainly closer than we thought it was going to be. So, what comes next? Where are we getting a ruling here?
Alan Wingfield:
Yeah, another great question that the years of experience argue for caution. On the one hand, this proceeding under law is supposed to get expedited treatment by the court. One of the unique aspects of the procedure here is it not only do you directly handle this case with the court of appeals in the first instance, but the court of appeals is supposed to give docket preference to this case. And so, this actually matured fairly quickly by legal standards. It got from initiating a petition to the oral argument fairly quickly, but now goes in the hands of judges to actually make a decision, write a decision. There's no one ordering them around to be quick. And other significant cases decided in the Fifth Circuit by at least some of the judges on this panel has taken a while.
And I was looking at one significant decision written by one of the panelists and it took them 14 months from the oral argument to issuing a decision, a significant case. So over, under, maybe one month to 14 months, maybe something on the closer end might make sense given that the statute reports to require the court to give preference to this proceeding.
Brooke Conkle:
That's right. And there are a panoply of options for the result in this case. We could have a rule that is going to stand the test of time, isn't touched by the Fifth Circuit. We could have a rule that is invalidated on procedural grounds, we could have a rule that's invalidated on substantive grounds. We could have a rule that is potentially like a half-in, half-out scenario where the court takes kind of a line-item veto to portions of the rule. We just don't know at this point. The one thing we do anticipate is that if the rule goes through unaffected, which frankly may be unlikely, we anticipate that the FTC is going to issue a lightning-fast compliance date. So, if this rule makes it through for auto finance companies and for dealers, compliance is coming straight at you. And then we may have clarity on the CARS rule, but Chris, how clear is that clarity going to be, honestly? Do we have anything else coming down the pike?
Chris Capurso:
Funny, you should ask Brooke, because a win for industry on the CARS rule means the Junk Fees rule is a coming potentially if it ever gets anywhere. And as a reminder to everybody, the FTC in November of last year now published what is called the Junk Fees rule. And basically, it imposes some requirements around additional fees, including clearly and conspicuously disclosing what is called the total price, that includes all fees except for some very specific ones, germane to this industry, shipping fees, charges paid to government officials. It also prohibits including an amount a consumer must pay in an offer, display or advertisement without displaying the total price, that total price figure I talked about, more prominently than any other information. And then it talks about misrepresenting the nature of a fee. You have to disclose clearly and conspicuously the nature and purpose of any amount that’s paid, if it's excluded from the total price, and then also just not misrepresenting the nature and purpose of any amount a consumer may pay, including refundability, things like that.
So, it imposes a lot of requirements on fees, which as we discussed is one of the tenants of the CARS rule. The interesting part is that the junk fees rule, while it applies to a lot of people, because the term business, as it’s used in the rule, is very broad, it specifically excludes motor vehicle dealers that have to comply with the CARS rule. So, it's this weird flow where if say the CARS rule goes away, then all of a sudden that exception for motor vehicle dealers and the Junk Fees rule is abandoned because there is no CARS rule, there's no CARS rule to comply with. So now we have the Junk Fees rule. It's all much like the discussion with the CARS rule, it's all caveated because we don't know where the Junk Fees rule is.
On the regulations.gov, we had an informal hearing on the junk fees rule back in April, and then it’s crickets. In fact, the website says, "Next action undetermined, July 0, 2024." So obviously that’s a default to put in there and it’s just been six plus months of no word on this. Maybe they’re devoting all their resources to the CARS rule, who knows? But we just don't know what's going to happen with the Junk Fees rule. I’d be curious for your guys’ thoughts on this, but I would expect if it comes back in a better timeline than the one Alan said could be the higher bound and it’s negative for the FTC, they strike the CARS rule, do they just pour everything into this Junk Fees rule?
I thought there’d be a little bit more pre-election to be honest on this because this touches on a lot of industries and a lot of things people almost universally hate like trying to buy a ticket and it's a $20 ticket and then you have $40 in charges. Things that are a pretty bipartisan, like I hate this type of thing, but it still hasn’t caught on even before an election as big as this one. So that's all to say there could be ramifications if the CARS rule doesn’t go into effect, there may not. Much like our responses to the CARS rule, it may be good news, it may not. It’s the typical lawyer answer. It depends.
Brooke Conkle:
That’s right. I think we’re in a world of clarity is relative and the only certain thing is we are in a cycle of churn, that this is the new normal. Certainly, following the Loper Bright decision that agency law can be up for grabs and what seems certain may not be anymore.
Chris Capurso:
Yeah. And with that, we will wrap it up for today’s podcast, so thank you to our audience for tuning in. Don't forget to check out our blogs where you can subscribe to the entire blog or to just the specific content you find most helpful. That's the ConsumerFinancialServicesLawMonitor.com and the TroutmanPepperFinancialServices.com blogs. And while you're at it, why don't you head on over to troutmanpepper.com and sign up for our Consumer Financial Services mailing list so that you can stay abreast of current issues with our insightful alerts and advisories and receive invitations to our industry insider webinars. And of course, please mark your calendars for a great new episode of Moving the Metal, which will be released in two weeks. Until next time.
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