FTC Staff Comment to the Hon. Ted Weggeland Concerning California A.B. 3539 to Make Explicit How Californias Law Governing Vehicle Dealers Applies to Brokering Services for New Cars

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V940011
U~rTEDSTATES OF AMERICA
FEDERAL TRADE Co.MMISSION
S,tJol FRANCISCO i.EQIO!'lAL OFFICE
901 Merkol Streer, Suite 570
San F,anc;iaco, CA 94103·1768
Voice: '4151744·7920
Fax: (41 Sl 744-7940
April 	29 r 	1994
The 	Honorable 	Ted Weggeland
Transportation Committee
California 	State 	Assembly
State 	Capitol
P.O. 	Box 	942849
Sacramento, 	CA 	94249-0001
COMMISSION 	AUTHORIZED
Dear Mr. 	Weggeland:
The 	staff 	of 	the 	Federal 	Trade 	Commission' 	offers 	this
comment 	on Assembly 	Bill 	No. 	3539. 	This 	bill 	would make 	more
explicit 	the 	status 	of 	businesses 	that 	offer 	the 	service 	of
wbrokering W new vehicle 	sales. 	These 	businesses 	may 	include
individual 	brokers 	and 	organizations 	such 	as 	credit 	unions 	and
buying 	clubs. 	We 	believe 	that 	the 	provisions 	of 	this 	bill 	that
would 	enable 	those 	services 	to 	compete 	more 	effectively 	would
benefit 	California 	consumers 	by 	saving 	them money and
inconvenience.
I. 	Interest 	and 	experience 	of 	the 	Federal 	Trade Commission.
The 	Federal 	Trade 	Commission 	is 	empowered to prevent 	unfair
methods 	of 	competition and unfair 	or 	deceptive 	acts 	or 	practices
in 	or 	affecting 	cornmerce. 2 	Consistent 	with 	this 	statutory
mandate, 	the 	Commission and 	its 	staff 	work 	to 	identify
restrictions 	that 	hinder 	competition 	and 	increase 	costs 	without
providing 	countervailing benefits 	to 	consumers.
The 	Commission 	has 	long 	been 	concerned 	about 	restrictions
imposed 	on 	retailing methods 	that 	can be- beneficial 	to 	consumers.
In 	the 	retail 	automobile market 	in 	particular, 	the 	Commission 	has
1 These 	comments 	represent 	the 	views 	of 	the 	staff 	of 	the 	San
Francisco 	Regional 	Office and 	the 	Bureau 	of 	Competition 	of 	the
Federal 	Trade 	Commission, 	and 	do 	not 	necessarily 	represent 	the
views 	of 	the 	Commission 	or any 	individual 	Commissioners.
2 15 	U.S.C. 	§ 	41 	~ ~.

ruled 	that 	dealers 	io 	the 	Detroit 	area 	unreasonably 	restricted
competition by agreeing 	to 	limit 	their 	hours 	of 	operation. 3 	The
staff 	of 	the 	Commission 	has 	published 	economic 	research 	about
automobile 	marketing.'
The 	staff 	of 	the 	Commission has 	submitted 	comments 	to 	state
governmental 	bodies 	nationwide 	about 	proposals 	to 	restrict
competition among automobile 	marketers. 	The 	staff 	has 	frequently
commented on proposals 	to 	prohibit 	brokering 	or 	regulate 	off-
premises 	sales, 	most 	recently 	in 	Indiana,s 	and 	also 	in
Missouri,6 	California, 7 Wisconsin,' 	Illinois, 9 and Michigan. 10
3 Detroit Auto Dealers 	Ass'n, 	Inc., 	FTC 	Dkt. 	No. 	9189
(February 22, 	1989), 	aff'd 	in 	part 	and 	remanded 	in 	part, 	955 	F.2d
457 	(6th 	Cir.), 	cert. 	denied, 	113 	S. 	Ct. 	461 	(1992); 	consent
agreements 	accepted 	for 	public 	comment 	(January 	24, 	1994; 	April
14,1994).
4 See 	Robert 	P. 	Rogers, 	The 	Effect 	of 	State 	Entry 	Regulation
on 	Retail 	Automobile Markets, 	Federal 	Trade 	Commission, 	Bureau of
Economics 	Staff 	Report 	(January 	1986). 	The 	Report 	concluded 	that
state 	laws 	restricting 	the 	number 	of 	automobile 	dealers 	in an
area 	were 	costly 	to 	consumers.
~ Comment 	to 	Rep. 	Rick 	McConnell 	(February 	22, 	1994).
6 	Comment 	to 	Sen. 	J. 	B. 	Banks 	(April 	6, 	1990).
7 Comment 	to 	Sen. 	Quentin 	L. 	lopp 	(January 	5, 	1990).
8 Comment 	to 	Wisconsin 	Department 	of 	Transportation
(November 	3, 	1989).
9 Comment 	to 	Sen. 	Aldo 	A. 	DeAngelis 	(March 	21, 	1989). 	The
bill 	would also 	have 	expanded 	dealer 	licensing 	provisions.
Another proposal, 	the 	subject 	of 	a 	comment 	to Gov. 	James 	R.
Thompson 	(September 	8, 	1989), 	would 	have 	tightened 	market 	area
restrictions 	on 	franchised 	dealerships 	and 	extended 	those
restrictions 	to 	franchised 	auto 	service 	centers. 	Governor
Thompson 	amendatorily vetoed 	the 	provisions 	relating 	to 	car
dealerships 	and 	automobile 	service 	centers 	and 	vetoed 	the 	dealer
licensing 	bill. 	The 	staff 	also 	commented 	on a 	bill 	to 	prohibit
car 	dealers 	from 	holding 	sales 	outside 	their 	local 	markets.
Comment 	to 	Rep. 	Woods 	Bowman 	(April 	24, 	1987).
10 Comment 	to 	Sen. 	Dick 	Posthumus 	(September 	29, 	1988). 	For
other 	comments 	on 	state 	proposals 	concerning vehicle 	sales, 	see
comments 	to 	Florida 	Sen. 	Gwen Margolis 	(March 	29, 	1988) i 	South
Carolina 	Rep. 	David C. 	Waldrop, 	J£. 	(L~rch 21, 	1988); 	California
Assemblyman Richard 	Katz 	(January 	29, 	1988); 	and 	Texas 	Gov.
William P. 	Clements, 	Jr. 	(June 	I, 	1987).

II. 	Description 	of 	A.B. 	3539.
This 	bill 	would make 	more 	explicit 	hOw 	the 	law 	governing
vehicle 	dealers 	applies 	to 	brokering 	services 	for 	new motor
vehicle 	sales. 	The 	law's 	definition 	of 	~dealer~ already 	includes
services 	that 	brokers 	provide. 1I 	The bill 	would 	add 	a 	separate
definition of 	"brokering,~ describing 	it 	as 	an 	arrangement 	under
which 	a 	dealer, 	for 	a 	fee 	or 	other 	consideration 	and 	for 	someone
else, 	arranges, 	negotiates, 	assists, 	or 	effects 	the 	purchase 	of 	a
vehicle 	that 	the 	dealer 	does 	not 	own. I:
The 	bill 	would 	revise 	how 	dealers 	treat 	inter-dealer
transfers 	of 	new vehicles, 	in 	part 	by 	simplifying 	the 	definition
of 	"new vehicle,~ 	to mean 	one 	that 	has 	not 	been 	the 	subject 	of 	a
retail 	sale. 13 	In 	their advertisements, 	dealers, 	such as
brokers, 	that 	lack 	new-vehicle 	franchises 	would 	no 	longer 	be
required 	to 	describe 	the 	vehicles 	that 	are 	the 	object 	of 	their
services 	as 	"used. n14 	Other 	provisions 	of 	law would 	still
11 Vehicle 	Code 	§§ 	285(a) 	and 	(b) 	define a 	"dealer" 	to
include 	one 	that 	nnegotiates~ a 	"sale 	or 	exchange 	of 	an 	interest"
in 	a 	vehicle 	and 	receives 	or 	expects 	"commission, 	money,
brokerage 	fees," 	or 	other value 	from 	the 	seller 	or 	purchaser, 	and
one 	that 	deals 	in vehicles, 	~whether or 	not 	~uch vehicles 	are
owned~ by 	the 	"dealer." 	The 	statutory 	conditions 	for 	obtaining a
dealer's 	license, 	set 	out 	in Vehicle 	Code 	§ 	11703, 	would 	not
prevent 	an 	individual 	or 	firm 	that 	only 	provided 	the 	services
described 	here 	from 	obtaining 	one. 	A dealer must 	have 	an
established 	place 	of 	business, 	but 	for 	a 	dealer 	that 	does 	not
offer vehicles 	for 	sale 	at 	retail, 	that 	place 	of 	business 	can be
simply 	an 	office. 	Vehicle 	Code 	§ 	1671(a).
12 A. B. 	3539 	§ 	1, 	to 	add 	Vehicle 	Code 	§ 	232.5. 	This 	new
definition 	would 	not, 	by 	its 	terms, 	cover 	similar 	services
offered 	in 	conjunction 	with 	leasing. 	The 	existing 	definition 	of
"lessor" 	parallels 	t,hat 	of 	"dealer," 	by 	including 	an 	individual
or 	firm 	that 	negotiates 	or 	attempts 	to 	negotiate 	a 	lease 	and 	that
expects 	to 	receive 	a 	commission, 	"brokerage 	fees," 	or 	other value
from 	the 	lessee. 	Vehicle 	Code 	§ 	372.
13 A.B. 	3539 	§ 	2, 	to 	amend Vehicle 	Code 	§ 	430. 	Currently, 	a
"new vehicle" 	is 	one 	that 	has 	not 	been 	sold; 	however, 	several
exceptions 	preserve 	the 	"new" 	status 	of 	vehicles 	chat 	are
transferred 	among 	dealers 	before 	being 	sold 	to 	consumers. 	Cf.
Vehicle 	Code 	§ 	665, 	making 	a 	similar 	exception 	from 	the
definition 	of 	"used vehicle. ft
14 A.B. 	3539 	§ 	3, 	to 	amend 	Vehicle 	Code 	§ 	11713 (b) .

prohibit 	a 	dealer 	from 	advertising 	for 	sale 	new vehicles 	of 	a
line 	c::r 	make 	for 	which 	the 	dealer 	lacks 	a 	franchise .1$ 	This 	bill
~ould permit 	such 	dealers 	to 	advertise 	that 	they 	offer 	brokering
services. 16
The 	bill 	would 	also 	regulate 	brokering 	services. 11
Brokering 	agreements 	with 	consumers 	would 	have 	to 	be 	in
writing. 	Purchase 	deposits 	could 	not 	exceed 	2.5 	percent 	of 	the
selling price 	and would 	be 	refundable 	on 	demand, 	and 	deposits 	and
purchase 	funds 	would 	have 	to 	be 	placed 	in 	trust 	until 	delivery
(or 	refund) .19 	A dealer 	could 	not 	act 	as 	a 	"broker" 	and 	a 	seller
in 	the 	same 	transaction. 20 	A broker 	could not 	accept 	any
compensation 	from any party 	other 	than 	the 	consumer. 21 Brokering
service 	contracts 	would 	have 	to 	describe 	in detail 	the 	vehicle
being 	obtained, 	its 	actual 	or 	estimated price, 	the 	fee 	or
consideration 	to 	be 	paid 	for 	brokering 	services, 	and 	the 	amount
of 	the 	deposit. 22 	The 	contract 	would also 	have 	to 	advise 	that
the 	consumer 	has 	the 	right 	to 	cancel 	if 	the 	price 	exceeds 	the
estimated price 	and 	that 	the 	deposit 	is 	fully 	refundable, 	and
would 	have 	to 	include 	a 	warning 	that 	the 	agreement 	is 	for
brokering 	services, 	not 	for 	actual 	purchase.~
15 Vehicle 	Code 	§ 	11713.1(f).
16 A.B. 	3539 	§ 	3, 	to 	amend 	Vehicle 	Code 	§ 	11713(b}.
11 A.B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735. 	Most 	of 	t.hese
requirements 	duplicate 	requirements 	that 	already 	apply when 	a
deposit 	is 	paid 	t.o 	a 	dealer 	that 	lacks 	a 	new vehicle 	franchise
for 	the 	make 	being purchased. 	Vehicle 	Code 	§ 	11713(p).
II A.B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735{a) (1).
19 A. B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735 (a) (2), 	(3),
( 4), 	and 	(5) .
=A.B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735(a) (6).
21 	A.B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735 (a) (7). 	This
constraint. 	is 	not 	necessarily 	inconsistent 	with 	how brokers,
including 	credit. 	unions 	and 	buying 	services, 	apparently 	operate.
For 	credit 	unions, 	consideration 	could 	take 	the 	form 	of 	the
interest 	paid 	on 	their 	loans; 	for 	buying 	clubs, 	it 	could 	be 	the
fees 	received 	from 	their 	members.
2~ A.B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735(b)(2), 	(3),
(4), 	(5).
:u 	A.B. 	3539 	§ 	5, 	to 	add Vehicle 	Code 	§ 	11735{b} (5), 	(6).

III. 	Effects 	ot 	A.B. 	3539.
The 	bill 	would 	clarify 	the 	status 	and 	perhaps 	encourage 	the
business 	of 	offering, 	for 	a 	fee, 	to 	help 	consumers 	arrange 	new
vehicle 	purchases. 	This 	service 	appears 	in 	many 	forms. 	One
source, 	which 	has 	been growing 	over 	the 	last 	few 	years, 	is
individual 	brokers 	and 	buying 	services 	that 	offer 	consumers 	the
service 	of 	arranging 	new 	car 	transactions, 	usually 	for 	a 	set 	fee.
These 	brokers 	may 	solicit 	competitive bids 	from 	dealers 	for
vehicles 	that 	meet 	their 	customers' 	requirements. 	Thus, 	brokers
can 	save 	consumers 	money 	on 	the 	purchase 	price, 	and 	they 	can also
save 	them 	"search 	costs," 	including 	the 	cost 	of 	time 	and 	effort
spent 	on 	haggling.
Another 	source 	of 	assistance 	is 	credit 	unions, 	which 	sponsor
automobile 	sales 	conducted 	through 	dealers. 	In 	such sales,
dealers 	make 	vehicles 	available 	to 	credit 	union 	members 	at
favorable 	prices. 	Credit 	unions 	encourage 	these 	sales 	to 	promote
opportunities 	to 	provide 	financing. 	Franchised 	dealers 	may 	agree
to 	participate 	to 	attract 	potential 	customers 	and 	to 	ensure
higher 	sales 	volumes, 	which 	in 	turn may make 	it 	possible 	for 	the
dealers 	to 	offer 	substantial 	savings.~ 	Consumers 	may 	benefit
from 	lower prices, 	easier 	shopping, 	and 	better 	financing
arrangements.
Buying 	clubs 	and 	referral 	services may 	also 	arrange 	to 	make
new 	cars 	available 	to 	consumers 	at 	discount 	prices. 	These
services, 	which 	generally 	charge 	an annual 	membership 	fee,
arrange 	new 	car 	transactions 	for 	their members 	at 	guaranteed
prices 	with participating 	franchised 	dealers. 	As 	with 	the 	credit
unions, 	dealers 	may 	agree 	~ith buying 	clubs 	to 	offer 	cars 	to 	the
club's 	members 	at 	reduced 	prices; 	in 	retu.l1, 	the 	dealers 	gain
access 	to 	customers 	and 	perhaps 	increased 	volume. 	A survey 	of
six automobile 	buying 	services 	by 	Changing 	Times 	magazine
concluded 	that 	customers 	buying 	cars 	through 	these 	services 	would
have 	realized 	substan~ial savings 	on 	each purchase.~
These 	arrangements 	would 	be 	included 	in 	the 	proposed
definition 	of 	wbrokering." 	Brokers 	apparently must 	be 	"dealers,"
and 	A.B. 	3539 	would 	not 	change 	the 	la~'s existing 	requirements
~ Credit 	union-sponsored 	sales maystirnulate 	other 	business
for 	dealerships, 	too. 	Special 	financing 	terms 	and 	rates 	may be
offered 	for 	the 	sale, 	and 	credit 	union members 	may 	shop 	with 	pre-
approved 	financing 	terms. 	Moreover, 	these 	terms 	may be 	kept 	open
after 	the 	sale 	ends, 	so 	consumers 	may 	have 	the 	option 	to 	obtain a
car 	that 	was 	not 	available 	at 	the 	sale, 	still 	under 	the 	sale's
financing 	terms.
~ Taking 	the 	Hassle 	out 	of 	Car-Buying, 	Changing 	Times, 	Aug.
1988, 	a~ 	37. 	See 	als~ Kiplinger's 	Personal 	Finance Magazine,
Dec. 	1992; 	Car 	Buying 	for 	Those Who 	Hate 	to 	Haggle, 	Business
Week, 	Aug. 	30, 	1993, 	at 	86.

for 	becoming 	a 	Rdealer."'6 	California. law 	now 	requires 	that, 	in
advertisements 	for 	such 	services 	offered by 	firms 	that 	do 	not
actually 	sell 	the 	vehicles, 	the 	vehicles 	must 	be 	called 	"used.-
By 	removing 	that 	requirement, 	specifically 	authorizing
advertisements 	of 	brokering 	services, 	and 	redefining 	what 	is 	a
-new" 	vehicle, 	A.B. 	3539 	would 	permit 	these 	services 	to 	be
advertised more 	accurately. 	That 	should 	enable 	brokering
services 	to 	compete more 	effectively.n
The 	proposed amendment 	appears 	to 	leave 	in 	place 	provisions
that 	might 	prevent 	brokers 	from 	naming particular makes 	or models
in 	their 	advertisements,21 however, 	and 	such 	a 	prohibition 	could
still 	leave 	broke ring 	services 	at 	a 	competitive 	disadvantage 	and
increase 	consumers' 	costs. 	A credit 	union 	or 	buying 	club 	that
had made 	specific 	arrangements 	with 	particular dealers 	might 	wish
to publicize 	the 	makes 	and models 	that 	the 	arrangements 	covered.
The 	advertising 	prohibition would prevent 	the 	credit 	union 	or
buying 	club, 	which 	would 	lack new vehicle 	franchises, 	from
advertising 	the 	availability 	of 	those vehicles 	that 	they do 	not
have 	on 	their 	"premises" 	or 	cannot 	get 	"directly" 	from a
distributor. 	In 	addition, 	a 	consumer 	interested 	in purchasing a
particular model 	might 	be most 	interested 	in 	finding 	a 	broker
that 	claimed 	to 	specialize 	in 	it. 	The ban 	on 	advertising
brokering 	services 	for 	particular makes 	could 	impose 	costs 	on 	the
consumer 	wishing 	to 	find 	that 	broker. 	The 	reason 	for 	this
advertising 	restriction 	is 	not 	clear 	to 	us. 	The 	legislature
26 	Vehicle 	Code 	§11700 	et 	seg.; 	cf. 	Vehicle 	Code 	§1671,
setting 	requirements 	for 	an 	office 	or established place 	of
business.
v 	There 	appears 	to 	be 	a 	potential 	inconsistency between 	two
requirements 	of 	Vehicle 	Code 	§11713{p), 	which would be
perpetuated 	by 	the 	proposed new Vehicle 	Code 	§11735. 	On 	the 	one
hand, 	a 	Rdealer n 	cannot 	accept 	a 	purchase 	deposit 	unless 	the
vehicle 	is 	on 	the 	dealer's 	premises 	or 	"available" 	to 	it
"directly" 	from 	the manufacturer 	or 	distributor. 	On 	the 	other
hand, 	though, 	the 	statute 	and 	the 	bill 	establish 	terms 	for
accepting 	purchase 	deposits 	by 	dealers, 	such as 	brokers, 	that may
not 	fit 	those 	descriptions, 	either because 	they 	lack 	display 	or
storage 	facilities 	or because 	they 	do not 	have 	vehicles 	available
to 	them 	"directly· 	from 	the 	named 	sources.
21 Vehicle 	Code 	§ 	11713.1(f) 	applies 	to 	advertisements 	of
vehicles 	for 	·sale." 	It 	would 	not 	apply 	to an 	advertisement 	of
brokering 	services 	that 	did 	not 	constitute 	an 	advertisement 	for
the 	"sale" 	of 	a 	vehicle. 	Vehicle 	Code 	§ 	11713(b) 	prohibits
advertising 	or 	offering 	for 	sale 	any vehicle 	not 	actually 	for
sale 	on 	the 	dealer'S 	premises 	or 	available 	to 	the 	dealer 	directly
from 	the 	manufacturer 	or distributor; 	although 	the 	proposed
amendment 	to 	this 	section 	would 	permit advertisement 	of 	brokering
services, 	it 	does 	not 	make 	clear 	whether 	such an 	advertisement
could 	name 	particular makes 	or 	vehicles.

might 	be 	concerned 	that 	brokering 	service 	advertisements
specifying 	a 	particular model 	could 	be 	connected with unethical
and 	even 	illegal 	methods 	of 	procuring 	vehicles. 	It 	may 	be 	that
scme 	brokers 	who 	have 	claimed 	the 	ability 	to 	make 	deals 	on
particularly popular models 	have 	violated 	the 	law 	through 	unfair
or 	deceptive 	practices 	in 	the 	claims 	they 	have 	made 	or 	in 	their
course 	of 	dealing. 	But 	the 	legislature 	might 	consider 	whether
that 	problem could be 	addressed 	directly, 	by 	sanctions 	against
brokers 	that 	engage 	in 	these 	practices, 	rather 	than by preventing
all 	advertising 	of 	brokering 	services 	for 	particular models.~
IV. 	Conclusion.
The 	provisions 	of 	A.B. 	3539 	that 	would 	enable 	brokering
services, 	as 	offered by 	individual 	brokers 	and 	by 	organizations
such 	as 	credit 	unions 	and 	buying 	clubs, 	to 	compete more
effectively would 	benefit 	California 	consumers 	by 	saving 	them
money 	and 	inconvenience.
Sincerely,
Jeffrey A. 	Klurfeld
Director
29 This 	comment 	expresses 	no 	views 	on 	the 	effects 	on
consumers 	or 	competition of 	other 	aspects 	of 	California's 	Vehicle
Code 	that 	regulate 	dealer 	advertising.