5th Circuit Vacates FTC New Car Dealer Rule

On January 27, 2025, the Fifth Circuit handed new car dealers a significant win by invalidating the Combating Auto Retail Scams (CARS) Trade Regulation Rule issued by the Federal Trade Commission (FTC) in December 2023. In a 2-1 ruling, the Court found the FTC violated procedural rules by not providing advance notice of the planned regulation.

The FTC adopted the CARS Rule with the aim to eliminate alleged misleading advertising and sales tactics by new car dealers with various transparency and disclosure requirements. The National Automobile Dealers Association (NADA) challenged the Rule in January 2024, arguing the FTC did not follow its rulemaking process, lacked sufficient evidence for the Rule’s necessity, and performed an inadequate cost-benefit analysis. The July 2024 effective date of the Rule was paused pending review of NADA’s challenge. 

Section 18(a)(1)(B) of the FTC Act authorizes it to prescribe rules to prevent unfair or deceptive acts and practices. The FTC is required to issue an advance notice of proposed rulemaking (ANPRM) when promulgating regulations thereunder. The Commission asserted that ANPRM was not necessary for the CARS Rule because the Rule was promulgated using the FTC’s express authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to adopt auto industry-specific consumer protection regulations. The Court noted that whether the FTC erred in promulgating the CARS Rule without an ANPRM hinged on whether the statutory authority for the Rule arose from Section 18(a)(1)(B) or from the Dodd-Frank Act. Upon considering applicable statutory language, the Court held that the Dodd-Frank Act did not grant the FTC any substantive authority separate from § 18(a)(1)(B) of the FTC Act, so while the Dodd-Frank Act “lowered the procedural floor for certain rulemaking,” it did not “abrogate the FTC’s additional procedural safeguards” under the FTC Act.

Having determined the FTC was not exempt from the ANPRM requirement, the Court then considered whether the Commission’s procedural failure was a harmless error. Because NADA “took full advantage of every opportunity to participate in the FTC’s rulemaking process,” the Court found “reason to believe that [NADA] would have used the advanced notice to participate earlier and more extensively than they were otherwise able” and that, with such additional participation, there was a “real possibility that the issuance of an ANPRM could have changed the outcome of the final rule.” Therefore, NADA established sufficient prejudice to render the FTC’s procedural error not harmless.

One judge dissented.  On the central issue of formal ANPRM notice, the dissenting judge noted the CARS Rule came “after a decade of roundtables, comments, and over 100,000 consumer complaints,” many involving NADA, and therefore NADA failed to meet its burden in showing the lack of ANPRM caused it prejudice.  The dissent also noted that any challenge to the FTC’s basis for the CARS Rule as arbitrary and capricious is without merit: “The FTC’s factual findings showing ample evidence of unfair and deceptive trade practices, including hidden or junk fees, more than passes court scrutiny….”

While it is difficult to predict whether the FTC will appeal the 5th Circuit’s decision, this should not be seen as a green light for dealers to ignore the various transparency and disclosure requirements imposed by the CARS Rule which were intended to combat alleged misleading advertising and sales tactics by new car dealers.  Given the goal of protecting consumers, and “after a decade of roundtables, comments, and over 100,000 consumer complaints, many leading to federal and state law enforcement actions” it is likely the Commission will continue working with state attorneys general to bring aggressive enforcement actions against dealers engaged in alleged fraud or other improper actions. See https://www.seyfarth.com/news-insights/ftc-continues-aggressive-enforcement-actions-to-deter-deceptive-pricing-practices-by-car-dealers.html; https://www.seyfarth.com/news-insights/ftc-posts-dollar20-million-settlement-with-dealer-group-for-alleged-deceptive-practices.html