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Lindsey Auguste and Dennis Galbraith

Lindsey Auguste and Dennis Galbraith Investigative Reporters

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The TrueCar controversy continues, this time with state laws.  Board meetings have been called, rulebooks have been pulled out, and investigations are under way regarding the legality of TrueCar affiliations with dealers.  In fact, a handful of state associations are already prohibiting their dealers from doing business with TrueCar in the current capacity.  After reviewing a number of sectional codes across various state associations, DrivingSales is laying out the potential violations and what it means for dealers.

Brokering

TrueCar operates on a relatively new billing model, known as Cost Per Action (CPA).  In this model, TrueCar is only compensated if the introduction they make between dealer and customer results in a sale.  Although this model can be incredibly appealing to dealers, it potentially violates brokering laws across a number of states.  Kansas Automobile Dealer Association (KADA) released an announcement just yesterday reminding its dealers of the state’s brokering prohibition, implemented since 1990.  It defines a broker as “any person who, for a fee, commission, money, other thing of value, valuable consideration or benefit, either directly or indirectly, arranges or offers to arrange a transaction involving the sale of a vehicle, or is engaged in the business of (1) selling or buying vehicles for other persons as an agent, middleman or negotiator; or (2) bringing buyers and sellers of vehicles together, unless excepted”  (See K.S.A. 2010 Supp. 8-2401(x).).

In a recent post on DrivingSales.com by community member Craig Waikem, it is referenced that his state association, Greater Cleveland Automobile Dealer Association (GCADA), has advised their dealers on similar terms.  The Virginia Automobile Dealer Association (VADA) even sent a letter to Scott Painter, CEO of TrueCar, advising the company of these violations and inviting him to attend on upcoming board meeting where the issue will be discussed.  DrivingSales spoke with Painter last week about the issue and his simple response declaring that TrueCar does not serve as a broker in the transaction seems to be called into question by these claims and legal interpretations. 

Privacy

The cost per action billing model TrueCar is based on requires access to any DMS of a dealer they do business with, in order to track those introductions all the way to the sale.  This has been a point of strong debate throughout the course of the controversy, but it comes into the legal circle on issues of customer privacy.  Dealers could be in trouble if the action of TrueCar accessing their customers' information violates their privacy policy with their customers.  Furthermore, the dealership loses the ability to control the flow of information once that information leaves their DMS, and ultimately, the ability to control if their privacy policy and security process are being adhered to.

Advertising

Just days ago, the Colorado Automobile Dealer Association issued a statement based on the December 8 2011 meetings with the Colorado Motor Vehicle Dealer Board and the Auto Industry Division, listing all the ways in which TrueCar violated advertising protocol in the state of Colorado, including font sizing of disclaimers and disclosures, failure to include adequate and comprehensive information on pricing, and even using specific verbiage within the advertisements that violate state law.  Although these advertising issues are more than likely issues that TrueCar can easily remedy, these claims add to the unseemly complexion of the situation.

Who is Really at Fault?

Should these allegations and violations turn out to be true and pass through the court system, dealers are the ones who are left with the responsibility.  CADA stated that if they “receive any consumer complaints regarding the activities of TrueCar, the Board will look to the licensed, selling dealer and will hold the dealer accountable.”  KADA and VADA echoed similar attribution of responsibility, citing civil penalties as well as suspended or even revoked licenses for dealers compensating unlicensed entities in the above-mentioned scenarios.  The threat is real and the states are standing up against TrueCar and forewarning their dealers accordingly.   At the end of the day, the dealer could pay much more than just a transaction fee.

Other Potential Risks?

In their letter to Scott Painter, VADA clarifies the difference between the TrueCar model and other subscription-based third party affiliations, stating that the law limits these relationships to interactions that are not transactional.  Seeing as TrueCar is compensated directly based on introductions that result in a vehicle purchase transaction, they are at a high risk to violate this code. Compensation for competing models like Cars.com, AutoTrader.com, Costco Auto Program, and others is limited to the subscription fee.

Legislation changes, as do legal interpretations, so the outcome cannot be foretold. Yet certainty lies in fact that this issue bounced out of the court of public opinion and into the thorny and expensive legal arena.  Whether CPA models are good or bad for dealers is no longer the issue.  The question is whether they are legal.  That issue may be fought one state at a time with varying results, a nightmare for a national vendor with a national advertising campaign. 

Jim Radogna
Great information, thanks!
Craig Waikem
Brokering is the key issue here, and the dealers will be held accountable. Great article Driving Sales!
Steve Miller
Not to mention, TrueCar has a terrible mobile app, and uses flash for the main product, alienating Apple users.
Marc McGurren
Very interesting for sure. Here in Texas we do not have the typical CPA we just pay a flat fee per month. I don't know what dealers here in Texas will do, but the access to our DMS data always has bothered me.
Chris Costner
It is moving pretty fast to all states. Virginia is now in the mix. This is a great "in a nutshell" breakdown. I started learning once all of this was made public from other posts and forums. The DMS issue is huge and I certainly don't like it either.

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