On May 14, 2024, the Federal Trade Commission’s (“FTC”) filed its brief in opposition to Petitioners’ Brief in the legal challenge to the Combating Auto Retail Scams Rule (“CARS Rule”). The petitioners are the National Automobile Dealers Association and Texas Automobile Dealers Association (collectively, “NADA”). In its opposition, the FTC addresses NADA’s three main arguments, namely that the FTC: (1) unlawfully issued the CARS Rule without the required advance notice of proposed rulemaking (“ANPR”), (2) failed to articulate a rational connection between its factual findings and its decision to impose a far-reaching, industry-wide rule, and (3) unreasonably and arbitrarily evaluated the benefits and costs of the CARS Rule. In its brief, the FTC argues that it was not required to provide an ANPR prior to proposing the rule, did not need to demonstrate industry misconduct or a regulatory gap to justify the rule, and that its cost-benefit analysis justifying the rule is not judicially reviewable.

As we have previously discussed, the CARS Rule, published in the Federal Register on January 4, 2024, sets new requirements for the sale, financing, and leasing of new and used vehicles by motor vehicle dealers. It prohibits certain misrepresentations in the financing process, sets disclosure requirements on dealers’ advertising and sales communications, mandates that dealers obtain consumers’ express, informed consent for charges, and prohibits the sale of add-on products or services if there is no benefit to the consumer. NADA filed its petition challenging the CARS Rule on January 5, 2024 and the effective date of the rule, originally set for July 30, 2024, is currently stayed pending a determination of the petition by the U. S. Court of Appeals for the Fifth Circuit.

In regards to NADA’s argument that the FTC improperly bypassed the ANPR requirement, the FTC argues that no such requirement exists for the CARS Rule. The FTC concedes that it would generally issue an ANPR when issuing rules related to unfair or deceptive acts or practices under Section 18(a)(1)(B) of the FTC Act (which authorizes it to prescribe rules to prevent unfair or deceptive acts and practices) when rulemaking is undertaken without other express authorization from Congress. However, according to the FTC, Congress authorized it to issue rules prohibiting unfair or deceptive acts or practices by motor vehicle dealers using regular Administrative Procedure Act (“APA”) procedures. See 15 U.S.C. § 57a(a)(1)(B).

The FTC contends that, as stated in both the preamble and authority provision of the rule (§ 463.1), the CARS Rule was promulgated using express authority given to the FTC in the Dodd-Frank Act. Therefore, the FTC asserts that the CARS Rule was promulgated under authority other than Section 18(a)(1)(B) and was proper and in accordance with regular APA procedures “notwithstanding section 18 of the [FTC] Act. 12 U.S.C. § 5519.” The FTC also argues that any ambiguity regarding the FTC’s rulemaking procedure should be resolved in its favor, and that even if it were required to publish an ANPRM, no harm arose from its failure to do so.

The FTC next argues that NADA failed to raise a meritorious challenge that the CARS Rule is arbitrary and capricious under the APA, as it was not required to find widespread misconduct or a regulatory gap that needs to be filled to promulgate the rule. The FTC argues it has broad power to prescribe rules to define and prevent unfair and deceptive acts or practices by motor vehicle dealers, and Congress did not say it can only act if it finds widespread misconduct or a regulatory gap. The FTC claims its factual findings – which include assertions of bait-and-switch advertising and “junk fees” – are more than sufficient to satisfy judicial review under the deferential standard to be applied in determining whether the rule is arbitrary and capricious under the APA. We would note, however, that the level of deference courts must give to regulations of administrative agencies is currently the subject of scrutiny by the Supreme Court, which is likely to significantly narrow, if not overturn, the framework for judicial deference set forth in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council., Inc. [Further discussion of the oral arguments in the cases seeking to overturn Chevron deference can be found in our two-part podcast which is available here.]

Finally, the FTC argues that its cost benefit analysis, undertaken pursuant to Section 22 of the FTC Act. is not subject to judicial review. Section 22 requires “an analysis of the projected benefits and any adverse economic effects and any other effects of the final rule.”15 U.S.C. § 57b-3(b)(2)(C). In support, the FTC points to language in Section 22 which states that “[t]he contents and adequacy of any regulatory analysis prepared or issued by the Commission under this section, including the adequacy of any procedure involved in such preparation or issuance, shall not be subject to any judicial review in any court” unless the FTC “failed entirely to prepare a regulatory analysis.” 15 U.S.C. § 57b-3(c)(1) (emphasis added). The FTC concludes that the APA does not apply where statutes preclude judicial review, and, even if it did, the FTC properly assessed the benefits and costs of the rule.

We recently discussed amicus briefs filed in support of the petition and will continue to monitor developments in the case. We expect a vigorous rebuttal to the FTC in Petitioners’ Reply Brief, which is due on June 13, 2024, with oral argument to follow. For more information about the CARS Rule and its impact, listen to our two-part podcast with special guest Richard (“Rick”) Hackett, former Assistant CFPB Director responsible for auto finance regulation, which can be found here.