FTC Staff Comment to the Hon. Elaine Gordon Concerning Florida H.B. 770 to Limit the Methods Auto Rental Companies May Use to Calculate and Advertise Base Rental Charges

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·Aoom 1000
111' PHC"".. SI. NW
AIlaNa. Georgl_ 30367
(~)347~
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
ATLA.""'A REGIOr\AL OFFICE
1
COMMISSION AUTHORIZED
April 	17, 	1989
The 	Honorable Elaine Gordon
Florida 	House 	of 	Representatives
432 	House 	Office 	Building
Tallahassee, 	Florida 	32399-1300
Dear Representative 	Gordon:
The 	staff 	of 	the 	Federal 	Trade 	Commission 	is 	pleased 	to
have 	the 	opportunity 	to 	respond 	to 	your 	request 	for 	comment 	on
House 	Bill 	770 	("the 	Bill"), 	currently pending 	before 	the 	Florida
legislature. 1 	We 	are 	providing 	these 	remarks 	in 	response 	to 	your
letter 	of March 	31, 	1989. 	Our comment 	addresses 	aspects 	of 	the
Bill 	that 	may 	adversely 	affect 	consumers. 	We 	would 	be 	pleased
to 	offer 	additional 	assistance 	on 	any 	particular 	amendments 	that
are 	offered. 	.
The 	Bill 	would, 	if 	enacted, 	limit 	the 	methods 	automobile
rental 	companies 	may 	employ 	in calculating 	base 	rental 	charges
and 	in 	advertising 	those 	prices. 	In 	addition, 	the 	Bill 	would
alter 	the 	current methods 	of 	allocating 	the 	costs 	and 	risks 	of
damage 	to 	or 	theft 	of 	a 	rental 	vehicle. 	We 	are 	concerned that
parts 	of 	these 	provisions~might result 	in 	increased 	costs 	to
consumers 	who 	rent 	automobiles 	without 	prOViding 	significant
benefits 	to 	the majority 	of 	automobile 	renters 	or 	to 	the 	public
at 	large.
The 	Federal 	Trade 	Commission 	is 	charged with promoting
competition 	and 	protecting consumers 	from 	unfair 	and 	deceptive
commercial 	practices. 2 	In 	fulfilling 	this 	mandate, 	the 	staff 	of
1 	These 	comments 	are 	the views 	of 	the 	staff 	of 	the Atlanta
Regional 	Office 	and 	the 	Bureau 	of 	Consumer Protection of 	the
Federal 	Trade 	Commission. 	They 	are 	not 	necessarily the 	views 	of
the 	Commission or any 	individual 	Commissioner.
2 	~ 	15 	U.S.C. 	S 41 	et 	seQ.

the 	Federal 	Trade Commission 	often 	submits 	comments, 	upon
request, 	to 	federal, 	state, 	and 	local 	governmental 	bodies 	to 	help
them 	assess 	the 	competitive 	and consumer welfare 	implications 	of
pending policy 	issues. 	In enforcing the 	Feder~ Trade Commission
Act, 	the 	Commission 	has 	gained considerable 	experience 	in
analyzing 	the market 	impact 	of various 	private 	and 	governmental
restraints 	on competition and the 	costs 	and benefits 	to 	consumers
of 	these 	restraints.
The 	Commission and 	its 	staff 	have 	considered 	other matters
involving the 	car 	rental 	industry. 	The 	Commission recently
commented 	on Guidelines 	prepared by 	the 	National 	Association 	of
Attorneys 	General's 	Task Force 	on 	~ar Rental 	Industry Advertising
and 	Practices 	(NNAAG Guidelines"). 	The 	advertising, 	pricing,
and 	the 	allocation of 	liability portions 	of 	the 	Bill 	are very
similar 	to 	portions 	of 	these 	NAAG Guidelines.
Pricin~ and 	Adyertisin~ Restrictions
The 	Bill would 	require 	that 	any 	fee 	that 	consumers
generally must 	pay be 	reflected 	in 	the 	total 	advertised 	price
rather 	than being 	stated separately.4 	This 	requirement,
referred 	to 	as 	Nbundling" 	apparently 	is 	directed 	toward
preventing car 	rental 	firms 	from 	advertising 	base 	rental 	rates
that 	do 	not 	reflect 	certain charges, 	surcharges, 	and 	airport
access 	fees, 	that 	some 	consumers, 	at 	least 	in 	certain 	locations,
3 	Letter 	from 	the 	Federal 	Trade 	Commission 	(Commissioner
Strenio 	not 	joining) 	to 	Robert 	T. 	Stephan, 	Attorney General,
Kansas 	(February 	24, 	1989). 	A copy 	is 	attached. 	The
preliminarily approved Guidelines 	were 	adopted with 	revisions 	by
the 	Attorneys 	General 	at 	their March meeting.
4 	nA 	person who 	rents 	a 	private 	passenger motor vehicle
to 	another 	for 	30 	contipuous 	days 	or 	less 	may 	advertise, 	quote,
or 	charge 	only 	a 	rental 	rate 	that 	includes 	the 	entire 	rental
amount 	except 	taxes 	and 	a 	mileage 	charge, 	if 	any, 	which 	a 	renter
must 	pay 	to 	rent 	the 	vehicle 	for 	the 	period 	of 	time 	to 	which 	the
rental 	rate 	applies 	. 	• 	• 	• 	A person may 	not 	charge 	any
additional 	fee 	as 	a 	condition 	of 	rentin9 	the vehicle, 	including
required 	fuel 	or 	airport 	surcharges, 	or 	any 	fee 	for 	transporting
the 	renter 	to 	the 	location where 	the 	vehicle 	will 	be 	delivered 	to
him. 	However, 	a 	renter may 	be 	separately charged 	for 	an 	item 	or
service 	provided 	in 	connection with 	a 	transaction 	if 	he 	can 	avoid
the 	charge by choosing not 	to 	obtain or use 	the 	optional 	item 	or
service, 	including 	any 	optional 	insurance 	••••" 	House 	Bill
770 	S 3(3).
2

must 	pay. 	We 	agree 	that 	it may 	be 	an 	unfair 	or 	deceptive 	act 	or
practice 	for 	a 	company 	to 	fail 	to 	disclose 	unavoidable 	charges
prior 	to 	taking 	reservations 	for 	rental 	cars. 	The 	bundling
approach 	adopted 	by 	the 	Bill, 	however, 	may be 	upnecessary 	to
protect consumers 	from 	deception or 	unfairness. 	For 	instance, 	it
is 	not 	clear why 	an 	advertisement 	stating the 	availability of 	a
vehicle 	for 	W$25 	per day 	plus 	a 	$12 	fuel 	charge" 	-- which
apparently would be 	forbidden 	if 	the 	Bill 	were 	enacted -- 	is 	more
deceptive 	or unfair than 	an 	advertisement 	stating the 	rate 	as
W$37 	for 	first 	day; 	$25 	for 	each 	succeeding day" 	-- 	which
apparently would be 	acceptable. 	Nor 	is 	it 	clear 	that 	consumers
would be misled 	as 	to 	the 	total 	cost 	of 	the 	car 	and 	fuel 	by
either 	advertisement. 	It 	is, 	of 	course, 	desirable 	that 	consumers
have 	material 	information on 	rental 	prices 	before 	they 	sign 	a
rental 	agreement. 	They can obtain that 	information 	from 	a
variety 	of 	sources, 	however, 	including 	advertising, 	conversations
when 	reserving 	a 	rental 	vehicle, 	and 	from 	the 	company
representative 	at 	the 	rental 	counter.
Adoption 	of 	the 	requirement 	that 	any mandatory 	fee 	must 	be'
included 	in the 	total 	advertised 	price may 	reduce 	consumer
welfar€ 	in 	several 	ways. 	This 	requirement may 	increase 	the 	cost
of 	advertisements 	containing 	price 	information because 	the
bundling 	requirement, 	coupled with 	differences 	in charges
assessed 	by 	franchisees 	and 	in 	surcharges 	imposed by various
airports, 	may make 	it 	difficult 	for 	some 	car 	rental 	companies 	to
build 	these 	fees 	into 	nationally 	advertisable 	rates. 5 	This 	may
result 	in 	reduced 	price 	promotion, 	and 	lead 	to 	higher prices.
Because 	numerous 	economic 	studies 	have 	demonstrated 	that 	price
advertising enhances 	competition 	and 	lowers 	prices,6 	we 	suggest
5 	The 	NAAG 	Car Rental 	Task Force 	recognized 	this
possibility. 	National 	Association of Attorneys 	General, 	Task
Force 	on 	Car Rental 	Industry Advertising 	and 	Business 	Practices,
Preliminary Report 	(Jun~ 19, 	1988) 	at 	8.
6 	~,~, 	Schroeter et 	al., 	Advertising 	and
Competition 	in Routine Legal 	Service Markets: 	An 	Empirical
Investigation, 	36 	J. 	Indus. 	Econ. 	49 	(1987); 	Cleveland Regional
Office 	and 	Bureau 	of 	Economics, 	Federal 	Trade 	Commission,
Improving Consumer Access 	to Legal 	ServIces: 	The 	Case 	for
Removing 	Restrictions 	on Truthful 	Advertising, 	Federal 	Trade
Commission Staff 	Report 	(1984); 	Kwoka, 	Advertising 	and 	Price 	and
Quality of 	Optometric 	Services, 	74 	Am. 	Econ. 	Rev. 	211 	(1984):
Cady, 	An 	Estimate 	of 	the 	Price 	Effects 	of 	Restrictions 	on 	Drug
Price Advertising, 	14 	Econ. 	Inquiry 493 	(1976); 	Benham, 	The
Effects 	of Advertising on 	the 	Price of 	Eyeglasses, 	15 	J. 	L. 	&
3

caution 	in 	imposing any 	requirements 	that 	may 	discourage 	price
advertising. 7
Lessor 	Liability 	1
Depending on 	the 	terms 	of 	the 	rental 	agreement, 	Florida
rental 	car consumers 	presently may be 	held 	responsible 	for 	all 	or
a 	substantial 	part 	of 	any 	damage 	to 	or 	loss 	of 	the 	rental
vehicle. 	However, 	for 	a 	separate 	fee 	the 	consumer 	ordinarily 	has
the 	option 	of 	purchasing 	a 	Collision Damage Waiver 	("COW")B 	under
which 	the 	rental 	company 	agrees 	to 	assume 	the 	risk 	of 	loss 	or
damage 	to 	the vehicle. 9 	The 	Bill 	would 	make 	significant 	changes
in 	the 	allocation of 	the 	risk 	that 	a 	rental 	vehicle 	will 	be
damaged 	or 	stolen. 	The 	Bill would 	require 	car 	rental 	companies,
as 	an 	integral 	(and 	therefore 	not 	separately billable) 	part 	of
every 	rental 	transaction, 	to 	assume 	responsibility 	for 	losses 	in
excess 	of 	$200 	in most 	situations. lO 	In 	practical 	effect, 	a 	$200
Econ 	337 	(1972).
7 	Besides 	potentially discouraging 	price 	advertising,
enactment 	of 	the 	bill 	may 	lead 	to 	consumers' 	rentals 	at 	some
locations 	subsidizing 	rentals 	at 	other 	locations. 	For example,
if 	rental 	agencies 	are 	forced 	to 	bundle 	airport 	access 	fees 	into
their 	national 	rental 	fee, 	customers 	renting 	automobiles 	in
locations 	that 	have 	no 	such 	fees 	will, 	in effect, 	subsidize 	those
renting 	automobiles 	in 	locations 	that 	have 	fees.
e 	Many 	corporate 	and 	government 	discount 	rates 	include
this 	waiver 	in 	their 	base 	rental 	fees.
9 	The 	form 	of 	these 	arrangements 	may vary 	among 	rental
firms. 	For 	example, 	under 	the 	terms 	of 	Avis' 	Florida 	rental
agreement, 	theft 	loss 	is 	covered 	as 	part 	of 	the 	base 	rental 	fee,
independent 	of 	whether 	the 	renter 	purchases 	its 	cow. 	Hertz, 	on
the 	other hand, 	offers 	a 	so-called 	"Loss 	Damage Waiver" 	rather
than 	a 	COW. 	This 	waiver 	covers 	loss, 	damage, 	and 	theft, 	none 	of
which 	are 	covered 	in the 	base 	rental 	price. 	As 	used 	herein, 	the
term COW may be 	read 	to 	embrace 	eith~r type 	of 	waiver.
10 	The 	Bill 	provides 	that 	an 	"authorized driver" 	--
defined 	as 	"the 	person 	to 	whom 	the vehicle 	is 	rented; 	his 	spouse
who 	is 	a 	licensed 	driver 	and 	satisfies 	the 	rental 	company's
minimum 	age 	requirement; 	his 	employer, 	employee, 	or 	coworker who
is 	engaged 	in business 	activity with 	him, 	is 	a 	licensed driver,
and 	satisfies 	the 	rental 	company's 	minimum 	age 	requirement; 	a
person who 	operates 	the 	vehicle 	during 	an emergency or while
4

limitation 	on 	consumer 	liability 	for 	damage 	and 	theft 	is
tantamount 	to 	mandating 	that 	car 	rental 	companies 	bundle COW
coverage 	into 	every car 	rental 	transaction. 	Any 	legislatively
imposed bundling 	requirement 	will 	restrict 	consqmer choice 	among
COW-like 	coverages 	of 	rental 	cars. 11 As 	a 	result, 	some 	consumers
will 	have 	to 	bear 	greater costs, 	primarily 	in 	the 	form 	of 	higher
base 	prices, 	than 	they 	otherwise might 	incur to 	cover the
accident 	and 	theft 	losses 	statutorily 	shifted 	to 	the 	rental 	car
companies. 	Recent 	news 	reports 	suggest 	that 	this 	may be
happening 	to 	some 	consumers 	in 	at 	least 	one 	state. 	A recent
article 	in 	The New York 	Times 	regarding 	adoption of 	COW-bundling
legislation 	in 	Illinois 	said:
[CJar-rental 	companies 	have 	raised 	their rates 	in
Illinois, 	where 	the ban 	on 	collision waivers 	took
effect 	Jan. 	1. 	Hertz 	raised 	its 	prices 	by 	8 percent 	in
parking 	the 	vehicle 	at 	a 	commercial 	establishment; 	or 	any 	persQn
expressly 	listed 	by 	the 	rental 	company on 	the 	rental 	agreernen~ as
an 	authorized 	driver" 	-- 	may be 	held 	liable 	in 	a 	limited 	number
of 	situations 	for 	damage 	or 	loss: 	(1) 	caused 	intentionally 	or 	as
a 	result 	of 	the 	authorized 	driver's 	intentional 	misconduct; 	(2)
arising 	out 	of 	the 	authorized 	driver's 	operation 	of 	the 	vehicle
while 	under 	the 	influence 	of 	alcohol 	or 	drugs; 	(3) 	caused while
the 	authorized 	driver 	is 	engaged 	in 	a 	speed 	contest; 	(4) 	if 	the
rental 	transaction 	is 	based 	on 	fraudulent 	or 	false 	information
supplied 	by 	the 	person 	to 	whom 	the 	vehicle 	is 	rented; 	(5) 	arising
out 	of 	the 	use 	of 	the 	vehicle 	while 	committing 	or 	otherwise
involved 	in 	the 	commission 	of 	a 	felony; 	(6) 	arising 	out 	of 	the
use 	of 	the 	vehicle 	to 	carry 	persons 	or 	property 	for 	hire 	or 	to
push 	or 	tow 	anything; 	(7) 	occurring while 	the 	vehicle 	is 	operated
with 	the 	authorized 	driver'S 	consent, 	by 	a 	person 	other 	than 	an
authorized driver; 	or 	(8) 	arising 	out 	of 	the 	use 	of 	the 	vehicle
outside 	the 	continental 	United 	States 	and 	such 	use 	is 	not
authorized by 	the 	rental. agreement. 	House 	Bill 	770 	SS 	3(1) 	&
(2) •
11 	These 	options 	include 	purchasing no 	insurance 	and
assuming 	the 	full 	risk 	("going 	naked"), 	purchasing COW, 	relying
on personal 	automobile 	liability 	insurance 	that 	extends 	to 	rented
cars, 	and 	using 	coverage 	provided by 	a 	third 	party 	such 	as 	a
credit 	card 	provider. 	Initially, 	credit 	card 	providers 	extended
these 	benefits 	to 	holders 	of 	their 	"prestige" 	cards, 	such 	as
Wgold," 	"platinum," 	and corporate 	cards. 	Recently, 	however,
American Express 	extended 	rental 	car damage 	coverage 	to 	its 	basic
"green" 	card. 	Other 	credit 	card 	companies 	are expected 	to 	follow
suit. 	The 	Record, 	Jan. 	15, 	1989, 	at 	B2, 	col. 	2.
5

Illinois .•.. 	Alamo 	and 	Budget 	have 	also 	followed
Hertz's 	lead 	by 	raising 	prices 	in 	Illinois, 	but 	no
other major company has 	raised 	prices 	across 	the
board. 12 	1
Our 	analysis 	of 	the 	COW 	issue 	comes 	to 	a 	different
conclusion 	from 	that 	reached 	in 	the 	NAAG Guidelines. 13 	According
to 	the 	Guidelines, 	COW 	sales 	are 	troubling 	in 	part 	because
consumers 	lack adequate 	information and they 	encounter 	deception
or high pressure 	at 	the 	rental 	counter. 14 	However, 	where
consumers 	suffer 	from 	insufficient 	or confusing 	information,
remedies 	requiring 	the disclosure 	of more 	or 	better 	information
often may 	resolve 	the 	problem. 	Providing 	consumers 	information
on COW may be more effective 	and 	less 	costly 	than 	requiring 	that
COW be 	sold 	in 	the 	rental 	bundle 	regardless 	of 	whether 	consumers
want 	it. 15
Accordingly, 	we 	believe 	that 	a 	legislature 	considering
whether 	to 	regulate 	the 	risks 	associated with 	damage 	to, 	or 	the,"
12 	The 	N.Y. 	Times, 	Jan. 	7, 	1989, 	Slat 	52, 	col. 	1.
More 	recently, 	a 	Hertz 	spokesman has 	indicated 	that 	due 	to
a 	New 	York 	COW-bundling 	law 	due 	to 	go 	into 	effect 	on April 	1,
1989, 	"the company's 	rates 	will 	go 	up 	about 	8%, 	or 	$3 	to 	$4 	per
day 	for 	rentals 	in New 	York." 	The 	N.Y. 	Daily News, 	Feb. 	13,
1989, 	at 	23. 	Budget, 	according 	to 	its 	spokesman, 	has 	already
raised 	rates 	8 to 	10% 	in 	Illinois 	and 	plans 	an 	increase 	of 	just
under 	10% 	in New York. 	Alamo, 	which 	does 	not 	operate 	in New
York, 	has 	put 	a 	20% 	rate 	increase 	into 	effect 	in 	Illinois. 	~
N.Y. 	Times, 	April 	2, 	1989, 	S 5 	at 	3.
13 	The Guidelines 	make 	three 	alternative 	legislative
proposals, 	two 	of 	which would 	irrevocably 	allocate most 	of 	the
risk 	of 	damage 	to 	or 	loss 	of 	a 	rental 	car 	to 	the 	rental 	car
company. 	The 	final 	legislative 	proposal 	would 	permit 	a 	rental
car company 	to 	hold 	consumers 	liable 	for 	damages 	resulting 	from
their 	negligence 	or 	intentional 	misconduct 	provided 	that 	the
rental 	car company offered to 	sell 	tc>consumers 	a-waiver 	at 	a
regulated 	price 	related 	to 	the 	company's 	loss 	experience. 	~
HAAG Guideline 	3.1.
14 	See 	generall¥ HAAG Guideline 	3.1 	(c) 	and 	following
discussion.
15 	~ 	Beales, 	Craswell 	& Salop, 	"The 	Efficient 	Regulation
of 	Consumer 	Information," 	24 	J. 	L. 	& Econ. 	491 	(1981).
6

theft 	or 	loss 	of, 	a 	rental 	automobile 	ought 	first 	to 	determine
whether 	information 	now 	conveniently 	available 	to 	consumers
permits 	rational 	decisionmaking 	with 	respect 	to 	cow. 	In 	the
event 	that 	the 	legislature 	determines 	that 	curr,ntly 	available
information 	is 	inadequate, 	it 	then ought 	to 	e~plore fully 	the
efficacy of 	information-generating measures. l 	On 	the 	other
hand, 	if 	consumers 	are 	encountering 	unfair 	or deceptive marketing
practices 	at 	some 	car 	rental 	counters, 	the 	most 	direct 	and
efficient remedy may be 	law enforcement 	action 	against 	the
offenders.
Conclusion
It 	is 	not 	clear that 	the 	Bill, 	if 	enacted, 	would provide 	net
benefits 	to 	automobile 	rental 	consumers. 	We 	suggest 	that 	you
consider 	the 	potentially 	adverse 	effects 	of 	the 	requirement
that 	some 	charges 	be 	bundled 	into 	base 	automobile 	rental 	fees.
We 	also 	hope 	you 	will 	take 	into 	account 	the 	prospect 	that 	the
changes 	in 	liability 	for 	damaged 	or 	stolen 	rental 	vehicles 	could
mean, 	on 	balance, 	higher 	rental 	prices 	for 	consumers. 	'
We 	hope 	that 	these 	comments 	will 	help you 	in your
determination 	of 	whether 	the 	Bill 	is 	likely 	to 	achieve 	the 	goal
of 	protecting consumers 	and 	fostering 	a 	competitive environment
in 	the 	car 	rental 	industry.
We 	appreciate 	the 	opportunity 	to 	comment.
Sincerely,
~a. 	Q 	\~~~~__
Paul 	K. 	Davis
Director
Atlanta Regional 	Office
16 	The 	authors 	of 	the 	NAAG Guidelines 	state 	that 	they do
"not 	believe 	that 	this 	[COW] 	information 	gap 	can b~ filled 	by
more 	disclosures 	. 	•• 	" 	Comment 	tcfNAAG Guideline
3.1 	(c). 	No 	explanation 	is 	offered 	for 'this 	belief. 	Neverthe-
less, 	if 	this 	conclusion 	is 	supported, 	traditional 	law
enforcement 	efforts 	might 	be 	adequate 	to 	prevent 	deception 	or
unfairness 	in 	the 	marketing of 	COW. 	These 	alternatives 	are
worth exploring 	in 	detail 	before 	concluding 	that 	mandated
purchase of 	COW 	is 	the 	proper 	solution 	to 	the 	problem of
unwanted purchase of 	COW.
7