The Fifth Circuit Court of Appeals has struck down the FTC’s controversial CARS Rule, saying that the commission violated its own procedural rules by failing to issue an Advance Notice of Proposed Rulemaking (“ANPRM”) before publishing the rule.
“The FTC asserts that even if the Commission was required to publish an ANPRM, its failure to do so was ultimately harmless error,” two of the judges on the three-judge panel wrote. “We disagree.”
The CARS Rule was promulgated by the FTC pursuant to Section 1029 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the FTC to prescribe rules with respect to unfair or deceptive acts or practices by motor vehicle dealers. When the FTC issued the Notice of Proposed Rulemaking, it said the impetus for the rule was surging auto prices and high levels of consumer complaints related to motor vehicles in spite of vigorous enforcement efforts in recent years. In announcing the proposed rule, the FTC stated that it was intended to address deceptive and unfair practices in the motor vehicle marketplace, including bait-and-switch tactics and unlawful practices related to add-on products or services and hidden charges.
The National Automobile Association and the Texas Automobile Association filed a petition with the Fifth Circuit, challenging the rule. The groups asserted that the commission had failed to follow proper procedures in issuing the rule.
The associations asked the court to vacate the rule, saying that the commission violated its own rules by failing to issue an ANPRM, that the commission arbitrarily and capriciously failed to present a reasoned basis for the rule and that the FTC’s cost-benefit analysis was flawed.
The FTC stayed the effective date of the rule pending the resolution of the court case.
The court said its decision hinged on whether the FTC Act or the Dodd-Frank Act applied to the issuance of the rule. The court concluded that the rule was issued under Section 18(a) of the FTC Act and, as a result, the commission’s own rules required it to issue an ANPRM. The FTC had argued that the Dodd-Frank Act relaxed that requirement.
Judges Patrick E. Higginbotham and Jerry E. Smith agreed that the FTC was required to issue an ANPRM, while Judge Stephen A. Higginson dissented.
Higginson said the auto industry had sufficient notice of the rule, even if an ANPRM was not issued.
The case has attracted attention from a number of groups that have filed amicus briefs. We have previously discussed a series of the briefs filed in support of the petitioners. For more information about the CARS Rule and its potential impact, links to a two-part podcast discussing the rule with special guest Richard (“Rick”) Hackett, former Assistant CFPB Director responsible for auto finance regulation, can be found here.