CarShield, a company that sells vehicle service contracts (VSCs), will pay $10 million to settle FTC allegations that its advertisements and telemarketing pitches deceived consumers, the agency announced on July 31.
The money will be used to provide refunds to consumers who were defrauded.
The stipulated complaint filed by the FTC stated that American Auto Shield (AAS) has designed, provided and administered VSCs through CarSheld; it said that between September 2019 and November 2022, CarShield sold VSCs solely on behalf of AAS and has earned commissions of about $600 million.
The FTC said that many consumers who signed contracts with the company discovered that their repairs were not covered, despite making payments of up to $120 a month. The FTC also alleged that CarShield’s celebrity and consumer endorsers made false statements in its ads; the endorsers tried to assure consumers that buying a CarShield service plan will give them “peace of mind” and protection from the cost of vehicle breakdowns. Many of the endorsers are not customers of the VSC they touted, the FTC said.
The company also sold its plans using telemarketers, who used scripted statements written by the company. Among other things, they tell consumers that “there is just a $100 deductible for any covered repair.”
However, many consumers have been unable to use the repair facility of their choice because they do not accept the VSCs, according to the complaint. In addition, many repairs are not covered and consumers do not receive a promised rental car.
The proposed order, which must be approved by a federal judge, will prohibit CarShield from making misrepresentations concerning the coverage and benefits of the VSCs. The company also must make required disclosures and must follow the FTC’s Telemarketing Sales Rule. The order also prohibits the company from misrepresenting any endorser’s experience with the ASCs.
The allegations against CarShield are consistent with the FTC’s view that add-on products and services that do not actually provide a benefit to consumers are deceptive. The FTC’s Combating Auto Retail Scams Rule (“CARS Rule), which is currently stayed due to a court challenge, prohibits the sale of any add-on product or service that confers no benefit to the consumer. 16 C.F.R. § 463.5(a). The CARS Rule also prohibits misrepresentations concerning any “costs, limitation, benefit, or any other material aspect of an add-on product or service.” 16 C.F.R. § 463.3(b).
The legal challenge to the CARS Rule, particularly the argument that it failed to meet the Administrative Procedure Act’s standard of reasoned decisionmaking, may have additional traction in light of the Supreme Court’s decision in Loper Bright Enterprises et al v. Raimondo overturning the Chevron Doctrine. However, the CarShield complaint makes clear that a failure to meet the standards articulated in the CARS Rule will be viewed by the FTC as an unfair or deceptive practice under Section 5 of the FTC Act regardless of whether the new rule is effective.
[View source.]
