Mike Charapp: On Disclaimers and OEM Price Restraints

Nationally renowned attorney-at-law Michael Charapp, now at Mahdavi, Bacon, Halfhill, & Young, PLLC, has long been on the leading edge of issues related to dealership compliance.  Given the current market conditions, driven by lower inventories and higher demand on in-stock units, Mr. Charapp has prepared two invaluable articles related to MSRP.  WANADA has received permission from Mr. Charapp to reprint the articles in full below because of their timeliness and utility.  If you are interested in seeking legal advice from Mr. Charapp on these or any other topics, he may be reached at mcharapp@mbhylaw.com or (703) 352-1300.

Mythbusters: Effects of a Disclaimer

Dealers often face a dilemma when advertising prices of vehicles.  Competitors unlawfully advertise at prices at which they will not deliver vehicles, which in today’s market are scarce.  Dealer personnel feel they must meet or beat that price, and they advertise at a price at which they do not intend to sell the vehicle.

When confronted, dealer personnel claim they can do this if they use a disclaimer that the actual selling price of the vehicle may be higher because of prevailing market conditions.  They believe the warning in the disclaimer solves the unrealistic pricing issue.

That is a myth, and it is busted.

It is basic law of the FTC and states that if you advertise a price, vehicles (or at least one if you advertise by stock number) must be available at that price.  Advertising at a price intending to sell it for a higher price is an act of bait and switch, the cardinal sin for the FTC and under state unfair and deceptive acts or practices statutes.

For the FTC, bait and switch is a deceptive sales tactic in violation of section 5 of the FTC act that prevents unfair or deceptive acts or practices.  Most state laws prevent the same activities.  For example, the law in Virginia is typical and makes it an unfair, deceptive, or misleading act or practice to use bait advertising:

“Bait” advertising, in which an advertiser may have no intention to sell at the price or terms advertised, shall not be used. By way of example, but not by limitation:

  1. If a specific vehicle is advertised, the seller shall be in possession of a reasonable supply of said vehicles, and they shall be available at the advertised price. If the advertised vehicle is available only in limited numbers or only by order, that shall be stated in the advertisement. For purposes of this subdivision, the listing of a vehicle by stock number or vehicle identification number in the advertisement is one means of satisfactorily disclosing a limitation of availability.
  2. Advertising a vehicle at a certain price, including “as low as” statements, but having available for sale only vehicles equipped with dealer added cost “options” which increase the selling price, above the advertised price, shall also be considered “bait” advertising.

Far from curing the bait and switch problem, a disclaimer warning consumers that vehicles may be sold at higher prices because of prevailing market conditions will actually make the problem worse.  Regulators will use that as proof that the dealership did not intend to sell vehicles at the prices advertised.

A disclaimer is used to explain the advertised terms.  It cannot be used to negate the advertising.  You must be prepared to sell vehicles at the prices advertised.


Mythbusters: OEMs Setting Prices

Dealers are facing increased pressure from their OEMs to limit selling prices of certain vehicles – usually new model battery electric vehicles (BEVs) – to MSRP.  Dealers, who for years have struggled to eke out a profit in competition with other dealers, feel they should be free to sell at whatever price they can get.  After all, they reason, MSRP is “SUGGESTED”.  They argue that any agreement they would have with their competitors could land them in jail for price fixing, so how can OEMs fix prices?

The answer comes from a U.S. Supreme Court case decided in 2007.  That an OEM may not impose price restraints on its dealers is a myth that is busted.

 A Texas retailer, Kat’s Kloset, sold purses known as “Brighton bags” at a discount.  The California manufacturer refused to continue to supply the retailer because the shop violated the manufacturer’s policy against discounting.  A Texas jury ruled that the supplier had engaged in unlawful resale price maintenance and awarded $4 million to Kat’s Kloset.  A federal appeals court upheld the decision.  The United States Supreme Court agreed to review that.

Resale price maintenance, a form of price fixing, had been a “per se” violation of the anti-trust laws for nearly a century, dating back to the 1911 U.S. Supreme Court ruling in Dr. Miles Medical Company v. John. D. Park & Sons.  For a per se violation, a jury only has to find that the price fixing took place to find that the law was violated.  It need not determine whether there was an unreasonable impact on competition.

In Leegin Creative Leather Products, Inc. v. PSKS, Inc. d/b/a Kat’s Kloset, the Court ruled that the century old doctrine prohibiting suppliers from imposing price restrictions on products they sell under the per se doctrine of the anti-trust laws is no longer the law.  The court ruled that such restraints must be considered by the rule of reason to determine anti-competitive impact.

What does this mean for the car business today?  Franchisor price restrictions are not automatically illegal.  If a dealer wants to challenge such a restriction, a court must now consider the policy on a case-by-case basis to determine the impact on competition, a very stringent test.   That is especially the case for BEVs where the OEM will argue that what they consider price gouging will negatively affect the OEM’s attempt to build its BEV acceptance in a very competitive market.

Dealers – horizontal competitors – may not agree on selling prices or terms because those agreements are still per se violations of the antitrust laws.  But price restrictions imposed by an OEM on its dealers – vertical price restraints — are not per se illegal, and OEMs will use them as they see fit to limit prices at which vehicles may be sold or to prohibit advertising at discount prices.

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