On Oct. 9, 2024, a three-judge panel of the Fifth Circuit Court of Appeals in New Orleans heard oral arguments regarding the Petition for Review filed by the National Automobile Dealers Association (NADA) and the Texas Automobile Dealers Association (TADA) challenging the FTC CARS Rule (a.k.a. The Vehicle Shopping Rule). The case is National Automobile Dealers Association & Texas Automobile Dealers Association v. FTC, No. 24-60013, 5th Cir. (Jan. 5, 2024).

The FTC CARS Rule is a sweeping trade regulation rule that will introduce strict regulations for motor vehicle dealers. The Rule has numerous requirements that will affect all aspects of dealers’ sales operations including advertising practices, consumer disclosures and recordkeeping, requiring dealerships to make substantial operational adjustments to comply. Although the Rule has been finalized, its implementation has been voluntarily “stayed” — meaning delayed — by the FTC pending the resolution of this legal challenge brought by NADA and TADA.

Highlights from the Oral Argument: The oral argument largely revisited the points raised in the briefs, with extensive discussion on federal agency rulemaking. Specifically, the Court and parties debated whether this Rule was a trade regulation under Section 18 of the FTC Act which requires an Advance Notice of Proposed Rulemaking (ANPRM), or if it was, as the FTC contends, issued pursuant to the authority under the Dodd-Frank Act (which does not require an ANPRM), and if the Rule separately required an ANPRM based on the FTC’s own internal rulemaking procedures. The judges asked several questions regarding appellate authority on these issues, the legislative history of the rulemaking process, and whether, if an ANPRM was required for the CARS Rule, the failure to issue an ANPRM was a “harmless error” — meaning the absence of an ANPRM did not cause any significant harm and would not invalidate the Rule. Several of the judges appeared receptive to NADA’s arguments, with NADA appearing better prepared to address the Court’s questions, while the FTC attorney at times hesitated and struggled to provide clear answers to some questions. At times, the judges expressed skepticism about both parties’ contentions on whether the court should or was empowered to act.

On the topic of “harmless error,” NADA argued that the error was not harmless, as NADA and dealers lacked sufficient time to respond to the numerous questions raised in the Notice of Proposed Rulemaking (NPRM) and to properly analyze the cost-benefit impacts. The lack of an ANPRM meant that the critical threshold question of whether a rule was needed at all was not open to comment. The FTC countered that NADA did fully engage in the rulemaking process and, when questioned by the Court, noted that the agency had revised its time-savings estimate (from three hours to two hours) based on NADA comments, and removed the requirement to provide a list of add-ons. As an aside, NADA had initially requested an extension to respond to the NPRM during the CARS Rule rulemaking process, but this request was denied by the FTC.

During the discussion of the cost-benefit analysis, one judge cited the Truth in Lending Act (TILA) as an example, noting that it took 10–20 years of litigation before courts outlined with clarity the scope of the required disclosures and predicted a similar protracted process for this Rule.

A key clarification the FTC attorney made (which reiterates FTC commentary in the Rule) was that the “Offering Price” required under the Rule is a ceiling, not a floor — meaning dealers can negotiate down from the offering price but are not restricted to a fixed price.

An interesting exchange occurred when the FTC attorney stated that the CARS Rule would allow the agency to seek monetary penalties and consumer redress for violations. In rebuttal, the NADA attorney pointed out that such remedies are only available to the FTC if rulemaking procedures requiring an ANPRM are followed. This could potentially pose a challenge for the FTC if they prevail in this case but later seek to impose penalties or obtain consumer redress.

As expected, the Court took the matter under submission, and a written opinion will be issued at a later, unknown date.

What to Expect Next: The Fifth Circuit has a reputation for taking a more critical look at federal agencies’ rulemaking. This means the Court carefully scrutinizes whether agencies like the FTC are implementing policies that go beyond what Congress has authorized. For example, the Court has recently struck down certain agency actions, emphasizing the Court’s view that significant decisions affecting the economy or individual rights should be made by elected officials, not by agencies acting independently. As previously noted, the CARS Rule case involves a somewhat technical argument that the FTC did not follow required rulemaking procedures, whereas the FTC argues that it followed the required rulemaking procedures. 

There is no deadline for the Fifth Circuit to issue its written ruling, though typically decisions are issued within two to six months after oral argument. It is likely we will have the Court’s ruling by early 2025. Depending on the ruling, it is possible that a party may appeal to the U.S. Supreme Court. If the ruling from the Fifth Circuit favors the FTC, however, the FTC may attempt to implement the CARS Rule pending any appeal to the Supreme Court.

What Dealers Should Do in the Meantime: Although the legal challenge to the Rule might succeed, requiring the FTC to revisit its approach and even potentially start the rulemaking process over, the reality is that complying with the Rule’s broad and complex requirements will demand a considerable amount of time, effort and resources and place a significant strain on dealership staff. As a result, it is essential for dealers to take proactive measures now to be prepared if the Rule becomes effective. Furthermore, according to the FTC, many of the Rule’s prohibitions and requirements are simply formalizing existing regulations. In other words, regardless of the CARS Rule’s final outcome, dealers must review and adjust their advertising, F&I and related practices accordingly because many of these requirements already exist in different forms. Indeed, recent enforcement actions against dealers initiated by the FTC and state attorneys general demonstrate that regulatory enforcement will continue and increase regardless of whether the CARS Rule becomes effective.

Dealerships should proactively prepare for the CARS Rule by reviewing their advertising practices to ensure compliance. This includes preparing to clearly display the “Offering Price” in all advertisements for specific vehicles or those referencing monetary amounts or financing terms. The Offering Price is the all-in cash price that a dealer will sell a vehicle to any buyer excluding only charges imposed by the government. Under the CARS Rule dealers must also disclose the total of all payments if a monthly payment is mentioned and avoid any misrepresentations. Establishing comprehensive disclosure processes is essential; employees should be trained to provide mandatory disclosures both in writing and verbally during initial communications with consumers, whether in person, online or over the phone.

Additionally, dealerships need to plan for obtaining and documenting express informed consent before charging for any items, including optional add-ons, and upgrade their recordkeeping systems to meet the Rule’s 24-month requirement.

Employee training on the new compliance standards is important for successful implementation. Staff must understand the requirements around disclosures, advertising and recordkeeping, particularly the necessity to disclose the Offering Price in the first response to any consumer inquiry about a specific vehicle or financing terms. Dealers should also review and update vendor contracts to ensure all third-party services are compliant with the Rule. 

For a more in-depth analysis of the CARS Rule, NADA members are encouraged to consult the recently-published Driven publication called “A Dealer Guide to the FTC Vehicle Shopping Rule,” which was co-authored by ComplyAuto, by visiting nada.org.