[Federal Register Volume 61, Number 84 (Tuesday, April 30, 1996)]
[Notices]
[Pages 19067-19072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10562]



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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