U.S. appeals court strikes down FTC’s CARS rule

A U.S. appeals court struck down the FTC ’s rule aimed at cracking down on unfair and deceptive practices tied to dealers’ sale of add-on products. The 5th U.S. Circuit Court of Appeals , in a 2-1 decision , ruled that the FTC’s Combating Auto Retail Scams (CARS) Rule violated procedural rules as the FTC failed to provide advance notice while drafting the regulation, according to a Jan. 27 ruling. The court also said that the FTC “failed to articulate a reasoned basis for the rule” and that the agency’s “cost-benefit analysis was arbitrary and capricious.” The decision came in response to legal challenges from the National Automobile Dealers Association (NADA) and the Texas Automobile Dealers Association . The CARS Rule , introduced in June 2022 and finalized in December 2023, was originally set to take effect July 30, 2024 , but faced several delays due to legal challenges. The rule, which targets “bait and switch tactics,” “ junk fees ” and other “deceptive” dealership practices , cost consumers “more than $3.4 billion and an estimated 72 million hours each year shopping for vehicles,” according to a December 2023 FTC release. ‘A great outcome for consumers’ NADA President and CEO Mike Stanton described the decision as “a victory for the rule of law and a great outcome for consumers. “As we have been saying since this rushed, poorly researched, and unnecessary rule was announced, the FTC’s CARS Rule would have added massive amounts of time, complexity, paperwork and cost to the car-buying and car-shopping experience for virtually every customer,” Stanton said in a statement provided to Auto Finance News today. “That truly would have been a nightmare for consumers and dealers alike,” he said. “ Thanks to the success of this legal challenge, dealers can get back to what they do best, which is creating the best - possible customer experience and reducing transaction times wherever possible.” A spokesperson with the FTC declined to comment on the decision but the agency has previously said it has authority under the Dodd-Frank Act to make rules regarding “unfair or deceptive dealer practices.” Need for advanced notice The FTC has argued that the Dodd-Frank Act gave it the authority to implement the CARS rule without advance notice of proposed rulemaking. The appeals court analyzed the FTC’s authority under the Dodd-Frank Act and found that is not the case, Marci Kawski , partner at law firm Husch Blackwell , told AFN . The decision is a victory for auto lenders , who can be held liable for dealer violations, she added. “To make good rules, an agency should give entities that will be subject to those rules and other stakeholders time to properly consider a proposed rule,” Kawski said. “To make good rules, an agency should give entities that will be subject to those rules and other stakeholders time to properly consider a proposed rule." -- Marci Kawski, Husch Blackwell “Not only did the FTC not issue an [advanced notice], but it also closed the comment period quickly and would not extend the comment period,” Kawski said. “The FTC went into rule making without sufficient facts and without sufficient information to promulgate a rule that was fair and that considered all perspectives of important stakeholders.” Judge Stephen Higginson dissented, asserting that the Dodd-Frank Act conferred authority upon the FTC to establish the rule. Higginson, who was appointed by President Barak Obama in 2011, further argued that the FTC had undertaken adequate regulatory analysis. Additionally, he noted that the advance notice played a minimal role in the case. “Even assuming advance notice was due, petitioners have failed to meet their burden in showing that the lack of a formal advance notice of rulemaking prejudiced them, ” Higginson said. Judge Patrick Higginb otham , appointed by President Ronald Reagan in 1982, and Judge Jerry Smith , also appointed by Reagan, voted in favor of the appeal. What’s next It is unlikely there will be as many enforcement actions relying on language from the now-vacated CARS Rule, Kawski said. Despite the CARS Rule having never taken effect, the FTC used elements of the rule to bring action against several dealership groups, most recently a record-breaking $20 million settlement with Chicago-based Leader Automotive Group and its parent company AutoCanada on Dec. 19, 2024. However, the FTC has several options going forward, including addressing criticism of the rule and issuing a revised version, Julia Whitelock , partner at law firm Hudson Cook , told AFN . The FTC could continue partnering with state attorneys general to take action against dealerships they consider using unlawful sales practices. States could also step in if the FTC adopts a more limited regulatory approach, Whitelock said. “Enforcement actions aren’t going away , . ” she said. Auto Finance Summit East 2025 is set for May 12-14 at the JW Marriott Nashville featuring fireside chats with Santander Consumer USA and Chase Auto. Visit autofinance.live for more information. Click here to register for the event.

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