Supreme Court rulings impact auto finance

The Supreme Court in April decided two consumer protection cases that affect the automotive finance industry: One severely hinders the Federal Trade Commission's ability to seek monetary redress for unfair or deceptive practices; the other clarifies what constitutes an automatic dialing system under the Telephone Consumer Protection Act.

As the Biden administration pushes for a renewed focus on regulating automotive finance and retail, these two cases limit the range of activities for which dealerships can be punished.

The Supreme Court ruled in favor of payday lender AMG Capital Management regarding the FTC's ability to punish businesses for false or misleading advertising.

In the case, the FTC secured $1.27 billion in restitution from AMG on the grounds that it misrepresented loan terms to consumers.

The issue was initially believed to be limited to false advertising enforcement, Hudson Cook partner Mark Rooney wrote in an October article, and would not affect the FTC's ability to seek monetary redress for unfair or deceptive acts or practices.

However, the April 22 decision appears to have introduced a more lengthy process for the FTC, which now must obtain a cease-and-desist order through its own administrative process, then file a separate claim for monetary relief in court.

The court ruled that the powers the FTC had been using to obtain monetary relief never authorized the agency to disgorge companies of ill-gotten gains through the process it had used for the past 40 years.

Acting FTC Chairwoman Rebecca Kelly Slaughter said in a statement that the court "ruled in favor of scam artists and dishonest corporations, leaving average Americans to pay for illegal behavior."

"With this ruling, the Court has deprived the FTC of the strongest tool we had to help consumers when they need it most," Slaughter said.

In the past five years, the FTC returned $11.2 billion in refunds to consumers, the statement also said.

The new layers will add time and cost to the FTC's process and possibly deter the agency from attempting to pursue monetary relief at all, according to Hudson Cook partner Michael Goodman.

"It basically comes close to closing off the option of monetary relief for the FTC altogether in its typical cases," Goodman said. "It's unclear how many defendants will have money still available after all that process has come and gone."

The FTC's governing statute references "injunctions and restraining orders" with respect to false advertising cases, but the agency frequently seeks restitution in these cases — particularly with auto dealers.

Historically, the FTC has been able to bring cases against companies in two ways: going before an administrative law judge within the agency to obtain an injunction or pursuing an injunction in federal court and possibly a monetary award, according to Anthony Badaracco, a partner at law firm Dorsey & Whitney, headquartered in Minneapolis. In the past few decades, the FTC frequently would go directly to the federal courts, he said.

The Supreme Court decision could add substantial time and cost to a process that already takes the FTC several years to complete.

"If they've got to go first through the administrative process ... that could add [another] two or three years to the process," Badaracco said. "If you're a scammer, it might be a little easier to get away with what you're trying to do because the FTC is a little less likely to be able to come after you. That certainly is the FTC's position."

The FTC is already working to reverse the decision through strengthening its statutory authority.

In testimony last month before the House Energy and Commerce Subcommittee on Consumer Protection and Commerce, the FTC called upon Congress to pass legislation to revive its ability to seek financial redress. It's likely Congress will work to amend the FTC Act in that regard, Goodman said.

"The FTC is arguing to Congress, 'Let's go back to what we have been doing for decades that was working for everybody,' " Goodman said. "So rewrite the FTC Act however you need to to clarify that we have this power."

The high court ruled April 1 in favor of Facebook Inc. in a case that provides clarity on how companies should define an automatic telephone dialing system under the Telephone Consumer Protection Act.

The case originated in 2014 when Noah Duguid alleged that despite never using social media platform Facebook, he had been sent numerous text messages from the site about issues with his account.

The 9th U.S. Circuit Court of Appeals determined the text messages violated the act, even though they were not the result of a system generating random sequential numbers.

The Telephone Consumer Protection Act, passed by Congress in 1991, prohibits robocalls without the receiving party's consent, unless "such calls are necessary in an emergency situation affecting the health and safety of the consumer."

The Supreme Court's decision determined that just because a business has calling technology to store or dial multiple numbers, it isn't automatically subjected to liability under the act.

Celia Winslow, a senior vice president at the American Financial Services Association, said in an emailed statement the organization is pleased that the court provided clarification on what constitutes an auto dialer.

The organization filed an amicus brief on the case alongside other trade associations that highlighted concerns about how the act defined an automatic telephone dialing system. One issue raised was that a smartphone could be interpreted as an auto dialer, thus rendering every iPhone call a violation.

AFSA is a national trade association for the consumer credit industry that represents many of the nation's auto lenders.

"We hope that the Court's common-sense ruling will reduce the number of frivolous TCPA lawsuits that enrich plaintiffs' attorneys at the expense of consumers and businesses," Winslow said.

The court's decision likely benefits auto lenders, which have struggled with violations in recent years. In 2019, Nissan Motor Acceptance Corp. agreed to pay $2.2 million to settle a class-action lawsuit accusing the lender of violating the act.