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Dennis Galbraith

Dennis Galbraith Chief Marketing Officer

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Lithia's Multimillion-Dollar Lesson and What Dealers Can Learn From It

Earlier this month, Lithia Motors Inc. agreed to pay out $2.5 million to settle a class action claim that it violated the Telephone Consumer Protection Act (TCPA) when sending a series of just two broadcast text messages to its customers, messages that Lithia asserts customers opted in to receive. After reviewing court documents and SEC filings, DrivingSales has discovered that Lithia could have been liable for more than sixty times as much as they settled for.  Lithia, or its agent, made one simple mistake seven months ago that cost the dealer group the equivalent of over 1,000 units worth of gross profit and a mountain of good will among its customers. The facts that follow tell a story every dealer should hear and take heed to.

In April of 2011, Lithia sent text messages to approximately 58,000 of its customers with the help of  DME Automotive, a joint venture between JM Family Enterprises Inc. and DME Holdings LLC. The text message gave the customer the ability to opt out of future text messages; unfortunately, a technological glitch caused the opt-out to malfunction. Approximately 6,000 customers who received the first text message tried to opt out, but were included in the second text message that was sent to approximately 48,000 customers.

The settlement gives $175 to each recipient of the first text, another $175 if the second text was received, and an additional $150 if the recipient of the second text had attempted to opt out of the first text. This settlement appears to be a bargain for Lithia relative to the $500 per violation specified by the TCPA and the fact that Washington state law allows for triple damages, $1,500 per violation. Even at the settlement rate, total payout to all impacted consumers would amount to $20.5 million according to court records. The $1.74 million set aside for the plaintiffs fund is based on the assumption that only 8.5% of those consumers impacted will actually make a claim.

 Breakdown of $2.5 million settlement:

·         Fund of $1.74 million paid out to plaintiffs

·         $600,000 in fees and expenses to plaintiff's attorneys

·         $10,000 incentive award to McClintic

·         $150,000 to administer the claims

The lesson for dealers is that the penalties for violating the TCPA are so severe that defendants of these class action suites are nearly forced to settle for a lesser amount to avoid the extraordinary liability of a loss in court. Indeed, the $600,000 paid to plaintiff's attorneys was the lowest amount the court had seen.

It is also important to note that no damages were claimed from the text messages. This could have further increased the settlement amount. Additionally, Lithia maintained throughout the case that each customer had opted in to receive text messages through at least one of several processes. Lithia never acknowledged knowingly violating the regulations, and there was no evidence brought forth that they had.

One would be hard pressed to find any flaws in Lithia's response to this claim. They appear to have handled it expertly in every way, yet they still face a payout that is many times greater than the gross profit potential of the campaign itself. We reached out to both Lithia and DME for additional tips to pass onto the dealer community. Their mutual lack of response is understandable.

Lithia claimed in the court documents that this was their only text campaign. Before long, 58,000 of Lithia's customers will receive a notice regarding the incident, ultimately saying that Lithia did something bad to its customers. In many respects, the settlement notification may be more damaging to Lithia's marketing than the fact that the text messages did not stop when they were supposed to.  

A solid mobile strategy is essential for dealers, and some texting activities are certainly on solid ground. There is no reason any dealer should shy away from texting a service customer about the status of their vehicle if that customer has given them permission to do so.

Broadcast texting, on the other hand, should be left to the pros. Vendor selection should not be made solely on the basis of price. Ask about the vendor's experience and qualifications, and insist on a small, controlled test before embarking on a broadcast campaign. Make your broadcasts to small groups, and make them contextually relevant to the group.

Most of all, recognize that outbound communications to customers phones is an entirely different set of regulations than you face with emails, websites, print, television, radio, or outdoor. Dealers have a reputation for pushing the envelope on advertising, but people's personal phones invite no such push. Behave as though one of your opt-in customers is an attorney just waiting for you to make a mistake. With this much money at stake, that scenario is not far-fetched. Remember, Lithia sent just two text messages. There was only one chance for 6,000 people to recognize that their opt-out had not worked and to cash in on it. The result was a competition over which plaintiff would control the multimillion-dollar class action claims filed in two separate U.S. courts.

The industry has never faced stakes anywhere near this high. Court documents make it clear that DME participated in the financial settlement – they may very well have covered the majority of the claim.  A quick visit to DMEautomotive.com shows that the firm continues to offer text-messaging services.

Eric Miltsch
Wow. Thanks the breakdown Dennis. So...who's really at fault here? The vendor?
Dennis Galbraith
Eric, there was nothing in the court fillings that would indicate whether the dealer group or the vendor was at fault, only that the settlement applied to both and both participated financially. However, even if the vendor paid the entire $2.5 million, the amount of damage to Lithia when notices go out to 58,000 of their customers is beyond calculation. In short, it is easy to blame the vendor, but dealerships must take responsibility for preventing violations, because they will be hurt badly if there are any.
Brian Pasch
Dennis This is a chilling reminder that all dealers should absorb...and take action.
Eric Miltsch
Thanks. It would seem that this isn't the first time this sort of activity has happened within the automotive segment, was the magnitude of the batch the reason for Lithia being made an example - this definitely raises the bar for awareness.
Dennis Galbraith
Thanks Brian. One of the amazing aspects of the story is that it happened to Lithia. They are know to be a well run dealer group with far more resources than most organizations. No matter who you are or who your vendor is, test first.

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