States wary of TrueCar's methods

TrueCar, the Internet auto shopping service, casts itself as an innovator battling entrenched industry methods. And now it indeed is colliding with many long-standing state laws designed to protect the interests of car dealers and shoppers.

Regulators in Colorado, Wisconsin and Virginia have issued bulletins to dealers or sent letters to TrueCar concluding that legal problems exist with TrueCar's business model of charging dealers for leads that turn into a sale.

And dealer associations in three more states -- California, Kansas and Ohio -- say members who use TrueCar may be violating state law.

The legal questions, which could affect a significant number of TrueCar's dealership clients that represent 5,200 or so franchises in 49 states, come at a critical time for the company. On Jan. 1, TrueCar was scheduled to become Yahoo.com's partner for auto shopping. TrueCar agreed to pay Yahoo $150 million over three years.

The partnership will expand TrueCar's reach greatly, and it is recruiting dealerships to handle the additional business.

But the state regulators and associations say TrueCar dealers could face stiff financial penalties for potential violations of state laws governing advertising and so-called bird-dogging, or paying a third party a fee that is contingent on a sale. And regulators in at least two states say TrueCar lacks the appropriate licenses.

Last week TrueCar said in a statement that it has been contacted by regulators in six states: Colorado, Louisiana, Nebraska, Kansas, Virginia and Wisconsin.

"TrueCar continues to work directly with regulators to ensure that at no time will our dealer partners be in violation of any laws by participating on the TrueCar network," the company said.

"We're in the process of making meaningful changes to the service, which will be completed by the end of January 2012, in order to address specific concerns raised by regulators."

While TrueCar has its critics, some dealers are happy with its service.

Jeff Kotlarek, Internet sales manager at Taylor Chevrolet in suburban Detroit, said he typically offers his vehicles to TrueCar customers at $100 below invoice price.

But vehicle sales from TrueCar leads can generate a substantial profit, he said, when customers buy accessories, warranties or features, such as moonroofs, that they didn't originally request.

The intensified scrutiny from regulators wasn't the only bad news in December for TrueCar and Scott Painter, the company's ambitious and charismatic founder and CEO. Group 1 Automotive Inc., the fourth-largest U.S. dealership group, told its 42 dealers who were participants to sever their ties with TrueCar. Group 1 said it objected to TrueCar's access to its dealerships' computer systems and also questioned the cost.

And now the regulatory concerns are causing some dealers to drop TrueCar.

California megadealer David Wilson decided to drop TrueCar two weeks ago because of legal risks. After doing some research, he concluded that any dealer in California who sells a vehicle through TrueCar is breaking the law.

Wilson, who had been using TrueCar's services at three of his 16 stores, also said he had sold just 15 cars through the company in the past six months. He said TrueCar adds no value to a transaction and wants to be paid more than what the dealership nets on a sale.

"Why do I want to put myself in jeopardy for that?" he said.

TrueCar said its service accounted for about 250,000 U.S. auto sales in 2011, about 2 percent of the estimated 12.7 million-unit U.S. market. But the Yahoo agreement should expand TrueCar's influence significantly in 2012.

Here's how TrueCar works: A shopper on TrueCar.com chooses a vehicle and sees information labeled as invoice price and dealer cost. The shopper then specs out a vehicle, and participating dealerships near the shopper's home offer prices, which can be below TrueCar's invoice price. TrueCar says the offer includes all fees but no taxes, and has no expiration date. The dealer pays TrueCar $299 for every completed new-car sale.

Over the years, consumers or dealers prompted state legislatures to pass laws to ban practices such as bird-dogging, which is paying fees to third parties for leads that turn into sales; brokering, which is charging a fee to a retail customer to find and negotiate the purchase of an auto; and using the word "invoice" in advertising.

Now, in the era of Internet leads and marketing, the question becomes: Is TrueCar merely offering prohibited services in a new form? Or, as the company contends, is it offering a new, and misunderstood, business model that does not violate existing laws?

For instance, is TrueCar a lead service, such as Autobytel, which gathers leads and sells them to dealers? Or is it a different animal that operates like a broker?

TrueCar acknowledges confusion about its business model.

"We are certainly open to changes that enhance our ability to comply with a particular state's needs and to more accurately reflect what we do," the company said. "TrueCar is not a broker, traditional advertiser or lead generation company. We do not arrange or negotiate sales for dealers, nor do we advertise vehicles for sale.

"Rather, TrueCar is an Internet marketing company -- the dealer's window through the Internet to customers searching for vehicles."

On Dec. 15, Colorado regulators issued an opinion that TrueCar's materials and Web site violate several state regulations, including advertising rules, and could lead to "bait-and-switch" scenarios.

Among the advertising problems are use of the term "invoice" and failure to include all costs in the advertised vehicle price, state regulators said.

A bait-and-switch occurs when a consumer who has been quoted a specific price arrives at a dealership to find the vehicle already sold or otherwise unavailable, and the dealer then tries to sell a different vehicle.

The Colorado Department of Revenue said dealers ultimately are responsible for any violations. For dealers, that could mean fines of as much as $10,000 per occurrence and possible license revocation, said Tim Jackson, president of the Colorado Automobile Dealers Association.

The state also said it is concerned that TrueCar could be engaging in unlicensed sales.

"It's very serious," said Jackson, who used the attention-grabbing method of certified, return-receipt mail to send association members a bulletin on the TrueCar issues in mid-December.

"We didn't want it to end up just as another memo on the desk for dealers who may not be aware that this process is putting their dealership's compliance and potentially their dealership licensure and that of their salespeople at risk."

Lee Payne, a Honda and Hyundai dealer in suburban Denver, has stopped TrueCar transactions but did not cancel his relationship with TrueCar when the regulatory challenge arose. He had been using it at his Honda store for just a few weeks.

"We work really hard to be compliant, and if they're not compliant, we need to let that play out and see what the regulators decide," Payne said. "That's our biggest concern right now."

TrueCar acknowledged two weeks ago that some dealers have left recently for various reasons. Group 1 said it did not want to open its dealerships' computers. And Honda has warned its dealers that advertising prices below invoice on Internet shopping sites could put at risk the dealers' payments from the factory for local marketing.

In mid-December, TrueCar said it had 5,840 participating franchises and was recruiting more to handle a surge of leads expected from the Yahoo partnership.

Last week, TrueCar said it had clients representing more than 5,200 franchises and dealers representing 227 more franchises that had agreed to become clients. The company also said that since October it has received a record number of inquiries from dealers interested in joining TrueCar.

Peter Welch, president of the California New Car Dealers Association, says he is worried about regulatory penalties for his TrueCar members. He says dealers using TrueCar also could be swept into any class-action lawsuits that arise in the litigation-heavy state.

Welch said he believes the TrueCar model violates several points of California law, including advertising and licensing requirements. For instance, dealers in California aren't allowed to use invoice comparisons -- saying, for example, that an offered price is below the dealer's invoice -- and such comparisons are prominent on the TrueCar Web site.

"I don't believe the dealers understand that this whole thing is an advertising medium and they have to comply with all the advertising laws," Welch said.

TrueCar said in its statement that it is not an advertising medium.

The California trade association is completing a legal review and will warn dealers about their potential exposure, Welch said. Dealers can lose their licenses over violations, but Welch estimated that 90 percent of violations are settled with fines.

Some dealer associations and regulators say TrueCar's model violates a ban on bird-dog arrangements.

In Virginia, the state Motor Vehicle Dealer Board warned dealers in October 2010 that it was illegal to pay a fee to Zag.com, the former name for some of TrueCar operations, in exchange for a sale.

Dealers were urged to stop the practice or face a $1,000 fine for each violation and possible suspension or revocation of their licenses. Bruce Gould, executive director of the Virginia Motor Vehicle Dealer Board, says TrueCar's practices violate the state's prohibition on bird-dog fees. On Dec. 20, Gould sent a letter to Painter saying the board would discuss the matter at a Jan. 9 meeting.

If the board agrees with his analysis, Gould says he will remind dealers that their payments to TrueCar are not legal.

"We try to take the position of giving everyone a fair warning, to say, 'OK, you're doing something wrong, you've got to stop it,'" Gould said. "If it continues, we'll have to bring out the guns."

Two weeks ago, the Wisconsin Department of Transportation sent TrueCar a letter saying dealers can't legally use the service. Wisconsin law prohibits bird-dogging.

Wisconsin law also requires licensing of persons and companies involved in selling vehicles in the state, and TrueCar doesn't have the proper licensing, according to the letter.

"It has generated a lot of concern among dealers," said Bill Sepic, president of the Wisconsin Automobile & Truck Dealers Association, which has fielded about 20 calls on the issue since early December.

Dealers could be penalized as much as $5,000 for each licensing violation and have their licenses suspended or revoked. But regulators aren't planning to take action against dealers now; they want to give fair warning, said John Remy, program specialist in Wisconsin's Division of Motor Vehicles' Dealer and Agent Section.

Don McNeely, president of the Kansas Automobile Dealers Association, said the association believes that TrueCar's model violates the Kansas prohibition against brokering. A broker charges a fee to a retail customer to find and negotiate the purchase of an auto.

In its statement, TrueCar said it has "received an enormous amount of support and encouragement from our dealer partners in recent weeks. They recognize that the facts about TrueCar differ significantly from some of the statements in the press, and that well informed buyers are an opportunity rather than a threat to dealers."

Said Jackson of the Colorado dealer association: "This is not just a witch hunt on TrueCar. For us, it's helping ensure our dealers remain compliant regardless of what platforms and systems they use. So it's TrueCar today, and it could be somebody else tomorrow."