Auto dealers nationwide received good news Monday when the Fifth Circuit Court of Appeals struck down the CARS Rule, a set of regulations passed by the Federal Trade Commission (FTC) that would have imposed cumbersome reporting and disclosure duties on dealers.
The National Automobile Dealers Association (NADA), which spearheaded the court challenge, hailed the ruling as a victory for dealers and consumers because the rule "would have added massive amounts of time, complexity, paperwork and cost to the car-buying and car-shopping experience for virtually every customer."
Background
Published in January 2024, the Combating Auto Retail Scams Trade Regulation Rule, or CARS Rule for short, was touted by the FTC as a way to curb deceptive automotive sales practices. The FTC said it was targeting false advertising, hidden fees, and bait-and-switch tactics, all of which the agency claimed remain widespread despite existing laws.
The CARS Rule mandated clear disclosures of vehicle pricing, restricted valueless add-ons and required consumer consent before charging for optional services or products.
NADA and the Texas Automobile Dealers Association petition challenged the CARS Rule in an appeal to the Fifth Circuit.
The challenge hinged on three arguments:
- The FTC’s failure to issue an advance notice of proposed rulemaking (ANPRM), violated its own procedural regulations under the FTC Act.
- The arbitrary and capricious nature of the FTC’s cost-benefit analysis failed to adequately justify the rule.
- Procedural irregularities denied dealers and NADA a fair opportunity to participate in the rulemaking process.
The petitioners sought to vacate the rule or, alternatively, remand it for further evidence collection.
Practically, auto dealers expressed concern that the CARS Rule would create new and redundant regulations that would complicate the process of selling cars.
Court’s Analysis
In its 21-page opinion vacating the CARS Rule, the Fifth Circuit agreed with NADA, writing “that the FTC failed to issue an advance notice of proposed rulemaking in violation of its own regulations.”
The court focused on the FTC’s procedural deficiencies in adopting the rule and concluded that the flaws necessitated vacating the CARS Rule.
The Fifth Circuit found that the CARS Rule was subject to the FTC’s internal procedural regulations requiring an ANPRM. The court determined that while the Dodd-Frank Act allowed the FTC to bypass statutory ANPRM requirements, it did not eliminate the Commission’s own procedural obligations.
“It is a given of administrative law that agencies must follow their own regulations,” the court noted, adding that the “FTC violated this principle when it failed to issue an advance notice of proposed rulemaking” before commencing the rule making process.
Emphasizing the importance of procedural rigor, the court wrote “the FTC’s failure to meet the requirements of its own regulations cannot be excused as harmless error. Procedural compliance is essential to the legitimacy of administrative rulemaking.”
The court also rejected the FTC’s argument that this procedural oversight was harmless error. It emphasized that the absence of an ANPRM deprived stakeholders of an earlier opportunity to shape the rule, which could have influenced its final form.
Although the FTC pointed to extensive stakeholder engagement during the comment period, the court concluded that the ANPRM’s procedural benefits were not adequately replaced.
In dissent, Judge Higginson argued that the rulemaking process was sufficiently robust, with extensive public participation and stakeholder input over a decade. He contended that the petitioners failed to demonstrate meaningful prejudice from the lack of an ANPRM and warned against setting aside a consumer protection rule grounded in years of evidence.
[View source.]
