Feds' focus: Safety notice or sales pitch?
Agencies crack down on dealership ads that refer to recalls, mislead consumers
The word "recall" tends to grab a car owner's attention.
Some dealerships have tried to take advantage of that, sending out mailings that look like vehicle recall notifications but are really advertisements designed to drum up sales or service appointments.
Federal regulators, law-enforcement agencies and consumer advocates are cracking down on such tactics, which they say are deceptive and often illegal. The use of misleading ads may also violate some automakers' franchise agreements.
The Federal Trade Commission said this year that nine dealerships had agreed to settle deceptive advertising charges, and the FTC says it has more stores in its sights.
"We are monitoring the marketplace and have brought a lot of cases recently," said Matthew Wilshire, a staff attorney with the FTC's Bureau of Consumer Protection's Division of Financial Practices.
But letters still go out that, on a quick reading, might seem to be about recalls.
In January, some Hyundai owners in Texas received a bright red flier headlined "VEHICLE RECALL INSPECTION NOTICE" with the automaker's logo in the top right corner. "It is very important that these recalls be verified and/or services performed, as soon as possible," the mailer read, "to insure that the safe condition of your vehicle is not compromised."
But the notice did not refer to a recall. Toward the bottom, it offered a $25 Wal-Mart gift card for test driving a new Hyundai and suggested that, "regardless of whether your vehicle is under a recall notice or not, ... this might be a great time to trade it in" for a newer vehicle.
"A consumer looking at that is going to immediately think there's something wrong with their car," said Leah Napoliello, senior director of investigative services with the Houston Better Business Bureau. "It's very confusing for the consumer."
New NHTSA labels
The National Highway Traffic Safety Administration hopes to reduce confusion with several steps it is taking this year. As of last month, automakers are required to use a standardized red label on the outside of all recall notices.
By August, consumers will be able to use vehicle identification numbers to search online for recalls and determine whether recall repairs have been done. Many automakers already allow recall searches by VIN on their Web sites.
The recall notice label, NHTSA said in a statement, is designed "to protect consumers from misleading sales and marketing materials that mimic, in their wording and presentation, legitimate safety recall alerts from manufacturers that can lead owners to purchase costly products and services that have no connection to a legitimate safety recall." Only automakers are allowed to use the label.
The label requirement doesn't prevent dealers, extended warranty sellers and other companies from sending misleading marketing materials, but the goal is to let consumers know that only mailings with the new red labels are official recall notices.
Companies that try to emulate recall alerts or other official, urgent-looking notices could find themselves in hot water with their states' attorneys general or the FTC, which has made automotive advertising a recent focus. The agency said in January that it had charged 10 dealerships with deceptive advertising -- nine of which agreed to stop using certain tactics for at least 20 years -- and said it has many similar investigations under way.
"We want to make sure consumers don't make purchasing decisions based on misrepresentation. We are really looking closely at this," said Wilshire, the FTC attorney. "A bogus auto recall notice appears to be deceptive to consumers so we are going to be concerned about that, obviously."
In 2010, the FTC settled with a company called Voice Touch Inc., which used automated phone calls to tell consumers their vehicles were subject to recalls and sell them extended service contracts. A year later, the agency returned $3.2 million in refund checks to 4,450 people who it said were duped into buying extended contracts, and two executives were sentenced to prison.
State officials are also taking action. Performance Kia in Everett, Wash., paid $150,000 in penalties and attorneys' fees in 2012 to resolve a lawsuit filed by the Washington State Attorney General's Office.
The case involved a number of claims made by the dealership that the state said were false, including guaranteed trade-in values and inventory availability. In addition, the store mailed letters that looked as if they came from a government agency and purported to be official notices of an "urgent recall," said Marc Worthy, assistant attorney general.
The store denied breaking the law but agreed to a settlement that prohibits it from sending anything that implies a vehicle is being recalled unless it relates to a specific, newly announced manufacturer recall and "contains no offer for products or service unless such offer or product is directly provided by or from the manufacturer." Performance Kia also agreed not to use phrases such as "government program notification."
The dealership's lawyer, Frederick Ockerman, said the case involved "significant overreach" by the state. "We never agreed that we had participated in that conduct but agree that that conduct would be improper," he said.
In general, Worthy said, "it would be impermissible to either make a mailer appear it's from the government or create some sort of false urgency by implying that the car's been recalled."
Worthy said his office frequently monitors and receives complaints about car dealership ads. "Most dealers comply," he said, "but then there's always a fair number that don't, and we're constantly looking at that."
Fake recall notices played a role in the downfall of the world's top-selling Chevrolet dealership group, Bill Heard Enterprises. Heard's dealerships, which generated $2.5 billion in annual revenue at his empire's peak, went out of business in 2008 after the state of Georgia filed a $50 million lawsuit against the company for deceptive advertising. A heavy reliance on subprime buyers and high operating costs also contributed to the collapse.
Documents filed in the case show that a Bill Heard dealership in Georgia sent letters to 10,000 customers with the phrase "URGENT POTENTIAL RECALL NOTIFICATION" in large bold print on the outside. General Motors also responded by threatening to terminate Heard's franchise at the Georgia store, calling the letters an "impermissible way to solicit warranty and recall repairs."
In 2010, several competing dealerships tried to leverage Toyota's heavily publicized unintended acceleration recalls into a marketing opportunity.
A Honda dealership in Kirkland, Wash., sent letters offering a free vehicle appraisal inside envelopes that read: "ATTENTION: Toyota Owners -- Important Recall Information Enclosed." The letter and envelope were posted on consumerist.com. The store's general manager did not return a call from Automotive News.
Freeway Ford, a Houston dealership that has since closed, sent letters claiming to be "important Toyota recall info," with Toyota and Scion logos next to the return address, according to an alert from the Houston BBB.
Bad long-term strategy
The mailers sent to Hyundai owners in January were brought to the BBB's attention by a recipient who happened to be a local TV reporter, Jeff Ehling. In a report on TV station KTRK, Ehling said that the flier came from a direct marketing company on behalf of Ron Carter Hyundai in Conroe, Texas.
Ehling took the flier to the dealership's general manager, Anthony Hewitt, who he said "extolled the virtues of the free services on the flier" but ended the conversation when questioned about the use of the word "recall." Hewitt declined to comment when contacted by Automotive News.
Ehling said NHTSA records revealed that the car he bought was last recalled five years ago.
The BBB has taken no action against the dealership related to the recall flier because it has not received any formal complaints about it, Napoliello said. The dealership has a D+ rating with the BBB due to 41 complaints in the past three years, with all but two being listed as resolved.
Seth Berkowitz, president of Edmunds.com, said sending out recall notices when there is no new recall is a misguided strategy, even if it gets anxious customers to respond.
"The cream of the crop wouldn't engage in that kind of activity," Berkowitz said. "In the long run, it doesn't work very well."
He praised NHTSA's efforts to make recall information more easily accessible and said dealers can play an important role in alerting customers about problems, so long as notifications are tied to a recall affecting a specific customer's vehicle. He said dealerships that outsource their ads to outside marketing firms need to ensure the work is not deceptive.
"People are trying to find a way to get consumers to pay attention," Berkowitz said. "The place where things go sideways is where you use the prevalence of recalls to advertise something completely unrelated." c
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