Which Gov't Agencies are Targeting Auto Dealers?

...AND HOW TO REDUCE YOUR EXPOSURE

Jim Radogna

Jim Radogna is a nationally-recognized auto industry consultant specializing in dealership legal compliance. He is the Founder and President of Dealer Compliance Consultants, Inc. and works with KPA LLC, a full-spectrum automotive risk management firm. Jim developed a strong background in dealership operations, having spent over 15 years in dealership management. He is a sought-after speaker and frequent contributor to several automotive industry publications.

The Legal Landscape For Dealers in 2015…

What’s Changed?

Plenty of Political Capital in going after car dealers. The Feds have traditionally gone after bigger fish and left car dealers to state & local regulators. The 2010 Dodd-Frank Consumer Protection Act exempt most dealers from CFPB oversight BUT enhanced the FTC’s existing authority over motor vehicle advertising, sales and lease practices. State AGs can now enforce FTC Act. Federal enforcement leads to more local enforcement…Politics… AG comments to FTC, “Complaints to the States about motor vehicle dealer practices traditionally rank among the top

complaint categories by quantity among all consumer complaints received annually…together, we can do even more to ensure a fair and competitive retail automobile marketplace.”

Getting “caught” is no longer a just a small fine and slap on the wrist. The dollar amounts of penalties have risen dramatically and regulators have begun using the media to penalize those dealers caught in order to intimidate others.

The severity of the offenses is often exaggerated by flashy media hype. E.g. “Operation Steer Clear” and “Operation Ruse Control”

Bottom Line: The Digital Age brings more long-term consequences and public humiliation than dealers have ever seen before. The potential cost for reputation damage is staggering!

The FTC Has Been Working Overtime Chasing Dealers…

• Over 20 Advertising Violations since 2012• $360K civil penalties for violating consent decree• $185K penalty for sale of F&I add-ons (bi-weekly payment product)• FTC claims that in many cases “the prices of add-ons are not disclosed adequately or they fail to provide the promised

benefits.”• $90K penalty for buyers guide violations• Operation Ruse Control - The FTC worked with 32 state and local law enforcement partners to lodge 187 court complaints

in the U.S. and 65 actions in Ontario and British Columbia, Canada. The charges include allegations of deceptive advertising, automotive loan application fraud, odometer fraud, deceptive add-on fees and deceptive marketing of car title loans.

• Information Safeguards, and Risk Based Pricing Notice violations.• Some other areas they are apparently looking at include spot deliveries; payment packing; vehicle leasing; unfair,

deceptive, and abusive practices; and arbitration agreements. • FTC official stated that if an unlawful advertisement goes up on Day 1 and the dealer keeps it up until Day 90, or the FTC

enforcement unit catches it on Day 90, the dealer could be liable for 90 days of violations at $16,000 per day. “Protecting consumers in the auto marketplace remains a top priority for the FTC, If auto dealers are not following the rules of the road, we will step in to apply the brakes.”

• Most new car dealers are “exempt” from CFPB supervision (trade off was more enforcement power to the FTC).• Most lenders are not.• Working partnerships with FTC, DOJ and other agencies – “If a complaint is against a large bank, we will handle it directly. If

however a complaint involves a small bank or a nonbank, we will refer it to another federal agency with the authority to handle it.

• December 2013 - $98 million settlement against Ally along with DOJ for rate discrimination.• July 2015 - $24 million settlement with Honda Financial AND agreed to cap rate markup at 1.25%.• Fined used car dealer group $8 million for allegedly harassing customers.• Sending Civil Investigative Demands (CID) to used car dealers – 4 years of virtually all business records - extraordinarily time-

consuming and costly to comply with.

• 8 dealership employees indicted and plead guilty to falsifying credit applications, power booking, straw purchases, and payment packing.

• A dealer and 9 of his employees were indicted by a federal grand jury for conspiracy to commit wire fraud as a result of deceptive advertising, fraudulent sales practices, and falsely reporting sales to the manufacturer.

• 5 Indictments, prison time and restitution for odometer tampering. Highest penalty 5 years in prison and $1.5 million restitution.

• 2 Indictments and prison time for bank fraud (fraudulent car loans through credit unions) – 2 years in prison and $357k penalty/ 11 years in prison and $203k penalty.

• Rate Discrimination suits against dealers - $225k, $363k and $95k

Notable State Attorney General and Other Agency Actions Against Dealers:

• North Carolina AG - $850K for failing to deliver vehicles as promised• Oklahoma MVC - $350k for advertising violations • Louisiana UVMC - $298k for deceptive business practices• Maine AG – UDAP violations against dealer and 7 lenders – lenders agreed to no longer purchase contracts from

dealer• New Jersey AG - Vehicle history disclosures, payment packing and advertising violations - $1.8 million• New York AG – $342k in advertising violations• New York AG - $13.5 million for sale of credit repair and identity theft add-ons

• The Dodd-Frank Act also gives state Attorneys General increased enforcement authority for violations of federal consumer protection law as well as state law such as Unfair and Deceptive Acts and Practices statutes.

State Attorneys General compare notes!

Auto Fraud Attorneys

• Auto group class action settlement for text messaging violations - $2.5 million (they got lucky because a subsequent settlement by Jiffy Lube was $47 million!)

• Backdating contracts – repurchase of over 1500 vehicles – Roughly $20-30 million in liability• Dealer group settled a documentation fee class action lawsuit for over $8 million• Lawsuits have begun from mechanical issues, alleged misrepresentation of a vehicle’s condition, lies or unkept promises,

undisclosed prior damage or vehicle history, payment packing claims, failure to honor warranties or service contracts, you name it.

• They’ve ended up becoming class action claims for improper disclosures, overcharging of fees, improper contract rescissions, undisclosed deferred down payments, backdated contracts, etc.

Best Practices For Avoiding Legal Issues In Your Sales Department:

• First, make a commitment to take compliance seriously.• Demonstrate a “good faith effort” at compliance - establish compliance policies and procedures, train all employees on

those policies, and document employees’ understanding of the policies and procedures. • Conduct regular compliance audits.• If you’re not sure, don’t guess! Invest in an advertising review service and give your staff access to expert advice such as a

compliance hotline. • Be selective about where you get your advice. Chances are your F&I product providers are not really “experts” in

compliance, nor are your advertising agencies or marketing companies, despite claims to the contrary. Automotive compliance is a very specialized area that requires full time focus by industry experts – it’s a constantly moving target.

• Many potential legal issues can be avoided by simply responding to customer complaints and perhaps offering a goodwill concession. All customer concerns should be addressed promptly by qualified personnel, regardless of their perceived validity.

• Carefully scrutinize what products you’re selling. Are they legal in your state? Do the products you sell offer real value to consumers?

• Add-ons need to be sold at fair, consistent prices. Price-gouging is a recipe for disaster in the current regulatory environment.

• Disclose, disclose, disclose! It’s vital that every customer in every transaction knows exactly what they’re buying, agrees to the purchase without coercion or deception, and that you can prove it.

Environmental Health & Safety Compliance

• OSHA has “Local Emphasis Programs” in place for Lift Safety. An OSHA press release said, “OSHA compliance officers will begin conducting random inspections to identify and evaluate hazards of lifts used in the automotive industry, including at automobile dealerships.”

• Once inspectors are onsite for a random lift inspection, what else will they find???• Auto Dealers no longer exempt from OSHA 300 Recordkeeping as of January 1st, 2015 (Injury & Illness Logs)• Recent OSHA enforcement action resulted in over $600k in fines for dealer group

• DOT is focused on hazardous materials shipments

• EPA continues to write large citations for uncontrolled refrigerant releases

Every dealership should have a comprehensive OSHA safety program in place including:

• Regular OSHA inspections: Quarterly, biannually, or annually• Regular safety committee meetings• Reporting and incident management program• Record Keeping• OSHA safety training• Loss prevention and accident management

OSHA fines can be up to $90,000 per violation!

DOT Compliance

• With all of those recent airbag recalls and with the increase in hybrid and electric technologies dealers are being asked more and more to ship these items.

ALL employees involved in the shipping and receiving of hazardous materials must be properly trained:• Parts management – they oversee the transportation of hazmat• Parts shipping & receiving – they load & unload hazmat & might even prepare shipping papersAdditional employees that may need to be trained include:• Parts drivers – they may transport hazmat• Service employees – they may prepare & package hazmat (take for example a battery being returned to the manufacturer.

The service employee prepares the battery for shipment and may even place it in the shipping container)• Service management – they may oversee hazmat employee operations and may sign for hazmat shipments with the

disposal of their facilities wastes.

• The EPA regulates air quality under the Clean Air Act. Section 609 of their regulations cover mobile refrigerants used in vehicle air conditioning systems.

• These refrigerants are ozone depleters and have been shown to contribute to global warming. As such the EPA wants to make sure that they are properly managed.

• Your refrigerant recycling equipment needs to be registered with the EPA. This includes all equipment used to recycle R-12, R-134a and now R1234yf refrigerants

• In addition to registering equipment, all technicians who are involved in the recycling process need to take an EPA approved Refrigerant Recycling course.

• EPA citations can easily surpass 6 figures and are among some of the higher fines a dealership might be exposed to in their Fixed Operations Department.

Human Resources Discrimination and Harassment Claims

I-9 ComplianceWage and Hour

• Discrimination and Harassment • I-9 Compliance• Wage and Hour

The number of workplace harassment and discrimination claims filed during recent years has increased dramatically and the potential penalties are staggering:

• Over $2 million to resolve EEOC same-sex sexual harassment suit• Auto dealer employees win $19 million in discrimination lawsuit• Auto dealership pays $2.3 million for sex discrimination• $1.5 million to settle sex and age bias lawsuit• Average cost of an EEOC lawsuit is over $156k

• Be aware that there are many different laws and under these laws almost everyone is in a “protected class”. • “Harassment” does mean only “sexual harassment”, it has become clear that in today’s work environment the term is much

broader than that and include “hostile workplace”• Conduct that may be considered to be harassment or discrimination is sometimes so commonplace in dealership

environments that people often don’t recognize the behavior as being inappropriate. • Having a policy in place and hanging posters is simply not enough protection for a dealership nowadays. • If an employer can prove that it exercised reasonable care to prevent and promptly correct any harassing behavior and the

complaining employee unreasonably failed to take advantage of any preventative or corrective opportunities the employer provided or to otherwise avoid harm, the employer may avoid liability for unlawful harassment.

Best Practices for demonstrating that an employer has taken reasonable care in preventing or mitigating harassment:

• Clearly communicate to all employees that harassment will not be tolerated and clearly explain prohibited conduct.

• Create a sexual harassment complaint procedure and explain the employee’s obligation to report any conduct that may be viewed as harassing.

• Provide harassment prevention training to all employees to ensure that they understand their rights and responsibilities.

• Take any claim seriously and investigate it – NO EXCEPTIONS! You can’t ignore complaints and allow inappropriate behavior because the person is a “top producer” or “they don’t mean anything by that”.

• Taking prompt and appropriate action.• NEVER retaliate!

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Form I-9 Compliance In compliance with the Immigration Reform and Control Act of 1986, all U.S. employers must verify the identity and employment eligibility of all new employees (both citizen and noncitizen) hired after November 6, 1986.

This requirement is satisfied by having the new employees complete Form I-9 within 3 days of hire.

Form I-9 also is used to re-verify work authorization information for rehires and employees who renew their work authorization documentation.

Fines are per employee and there are civil and criminal penalties

Three Most Common Wage and Hour Violations

1. 1099 Contractor vs Employee

2. Exempt vs Non- Exempt

3. Off the Clock Work

4. Minimum Wage Requirements

5. “Comp” Time

1. Minimum Wage Requirements2. Exempt vs Non- Exempt3. Off the Clock Work

The DOL is pursuing a multi-year enforcement initiative specifically focused on retail establishing including dealerships. State and federal agencies cooperate so you will have a “double whammy”.

The costs of wage and hour violations are significant:An Auto Group agreed to pay over $797k in back minimum wages to 480 former and current sales employees, and agreed to comply with the FLSA in the future.

Minimum Wage Requirements

Sales people, service advisors and service techs on “flat rate” still must be paid for every hour worked although they may be exempt from overtime requirements. They are NOT exempt from overtime unless the employee's regular rate of pay exceeds one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked.

Written pay plans are required by law in some states and an excellent practice in all states. Clarifies and memorializes pay structures.

Exempt vs Non-Exempt Common Misunderstandings:

• Paying a “salary” does not equate to exempt status. Salary is a method of wage payment not a legal classification.• Job title is not important- just calling a person a manager doesn’t make it so.• College or advanced degree does not necessarily mean exempt.• Executive and Highly Compensated employees are not necessarily exempt, Both of the following tests must be met to be

exempt:

Salary Basis Test: employee must receive predetermined amount which amount is not subject to reduction because of violations in the quantity or quality of work performed.

ANDDuties Test: Employee’s duties must satisfy all factors under one of the recognized exempt categories.

Off-the-Clock Work

Common inadvertent violations include:

• Asking a non-exempt employee to work during his/her lunch break• Asking a non-exempt employee to complete a task after he/she has clocked out for the day• Failing to pay a non-exempt employee for work done after hours or on weekends, such as answering emails from home• Engaging exempt and non-exempt employees in work- related conversations when he/she is on unpaid leave

Final thoughts…

• Punitive damages are not insurable in many states, so the dealer can be on the hook for the big dollar portion of a lawsuit.

• A recent court decision ruled that insurance companies can deny coverage in lawsuits where the dealership’s employees “intentionally mislead” customers.

• Arbitration clauses in sales contracts may not protect dealers in unfair and deceptive acts and practices claims. These UDAP claims may be able to be separated from contract claims as statutory and tort actions. As such, they’re not necessarily covered by the arbitrary class action waiver clauses.

• Ask yourself what could happen if you were to have your day in court? In 2011, a California jury delivered a $14 million verdict against a dealer in a wrongful death lawsuit for an allegedly “faulty tire repair”…

Thanks for attending! If you have any further questions, please feel free to contact me:Jim Radogna

jradogna@kpaonline.com(858) 722-2726