FTC Staff Comment to the Hon. John W. Hallock, Jr. Concerning Illinois H.B. 787 to Prohibit Fleet Dealers From Conducting Sales at Non-Permanent Locations

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November 	13, 	1986
The 	Honorable 	John W. 	Hallock, 	Jr.
Minority Whip
House 	of 	Representatives
State 	Capitol 	Building
Springfield, 	IL 	62706
Dear 	Mr. 	Hallock:
The 	Federal 	Trade 	Commission's 	Chicago 	Regional 	Office 	and
Bureaus 	of 	Competition, 	Consumer 	Protection, 	and 	Economics 	are
pleased 	to 	have 	the 	opportunity 	to 	respond 	to 	your 	letter 	of
No~~mber 7, 	1986, 	requesting 	our 	commint 	on 	HB 	787 	and 	Governor
Thompson's 	amendatory 	veto 	of 	HB 	787. 	In 	essence, 	HB 	787, 	as
originally 	passed, 	would 	have 	the 	effect 	of 	prohibiting 	fleet
dealers, 	such 	as 	Bertz 	and 	Avis, 	from 	conducting 	fleet 	sales 	at
locations 	other 	than 	licensed, 	permanent 	dealer 	lots. 	The
probable 	effect 	of 	such 	legislation 	is 	to 	increase 	the 	prices
paid 	by 	consumers 	for 	used 	cars. 	Governor 	Thompson's 	amendatory
veto 	of 	HB 	787 	substantially 	reduces 	the 	anticompetitive 	effect
Of 	the 	legislation 	as 	originally 	passed 	by 	expressly 	permitting
off-site 	fleet 	sales 	when 	certain 	conditions 	are 	met. 	However,
as 	we 	discuss 	below, 	there 	does 	not 	appear 	to 	be 	a 	need 	for
imposing 	new 	restrictions 	on 	the 	issuance 	of 	a 	supplemental
vehicle 	dealers 	license 	simply 	because 	the 	dealer 	wishes 	to
conduct 	a 	sale 	outside 	the 	dealership's 	usual 	market. 	We 	believe
that 	consumers 	~ill best 	be 	served 	if 	the 	market 	is 	left 	free 	to
operate 	without 	unnecessary 	regulation.
The 	interest 	of 	the 	Federal 	Trade 	Commission 	staff 	in 	this
legislation 	stems 	from 	the 	Commission's 	mandate 	to 	enforce 	the
antitrust 	and 	consumer 	protection 	laws 	of 	the 	United 	States.
1 	These 	comments 	represent 	the 	views 	of 	the 	Chicago 	Regional
Office 	and 	the 	Bureaus 	of 	Competition, 	Consumer 	Protection,
and 	Economics 	of 	the 	Federal 	Trade 	Commission 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Federal 	Trade
Commission 	or 	any 	individual 	Commissioner. 	The 	Federal
Trade 	Commission, 	however, 	has 	reviewed 	these 	comments 	and
has 	voted 	to 	authorize 	their 	presentation.

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The 	Honorable 	John 	W. 	Hallock, 	Jr.
November 	13, 	1986
Page 	2
Section 	5 	of 	the 	Federal 	Trade 	Commission 	Act 	prohibits 	unfair
methods 	of 	competition, 	and 	unfair 	or 	deceptive 	acts 	or
practices. 	By 	enforcing 	this 	statute, 	the 	Commission 	staff 	has
gained 	s~bstantial experience 	in 	analyzing 	the 	impact 	of 	various
restraints 	on 	competition 	and 	the 	costs 	and 	benefits 	to 	consumers
of 	such 	restraints. 	Further, 	the 	Federal 	Trade 	Commission 	has
been 	actively 	involved 	in 	used 	car 	market 	issues 	during 	recent
years. 	In 	1984, 	the 	Commission 	issued 	the 	Used 	Motor 	Vehicle
Trade 	Regulation 	Rule 	("Used 	Car 	Rule") 	to 	reduce 2 the 	effects 	of
oral 	misre~resentation5 in 	used 	car 	transactions. 	The 	develop-
ment 	of 	this 	r~le as 	well 	as 	the 	conduct 	of 	investigations 	and
studies 	relating 	to 	the 	automobile 	industry 	have 	provided 	the
Commission 	staff 	with 	8ub~tantial expertise 	in 	numerous 	aspects
of 	the 	automobile 	market.
HB 	787 	amends 	the 	Illinois 	Vehicle 	Code 	to 	prohibit 	the
issuance 	of 	a 	supplemental 	license 	to 	a 	licensed 	new 	or 	used
vehicle 	dealer 	intending 	to 	hold 	a 	sale 	outside 	that 	dealer's
relevant 	market 	area. 	Section 	2 of 	the 	Motor 	Vehicle 	Franchise
Act 	defines 	relevant 	market 	area 	as 	a 	10 	or 	15 	mile 	radius 	around
the 	dealer's 	principal 	location, 	depending 	on 	the 	population 	of
the 	county. 	It 	is 	our 	understanding 	that 	most 	fleet 	sales 	are
currently 	held 	outside 	the 	seller's 	relevant 	market 	area. 	Thus,
the 	effect 	of 	the 	bill 	is 	to 	virtually 	eliminate 	fleet 	sales 	as
presently 	conducted.
HB 	787 	is 	contrary 	to 	the 	public 	interest 	because 	it 	will
unnecessarily 	restrain 	competition 	in 	the 	used 	car 	market. 	The
usual 	practice 	of 	fleet 	dealers, 	such 	as 	Hertz 	and 	Avis, 	is 	to
hold 	used 	car 	sales 	on 	credit 	union 	property. 	Such 	sales 	entail
low 	overhead, 	and 	fleet 	dealers 	may 	therefore 	pass 	along 	substan-
tial 	savings 	to 	consumers. 	Credit 	unions 	recently 	surveyed 	by
the 	Illinois 	Credit 	Union 	League 	estimated 	that 	credit 	union
members 	paid 	an 	average 	of 	$1,118 	less 	for 	a 	used 	car 	sold 	at 	a
credit 	union 	sponsored 	fleet 	sale 	than 	they 	would 	have 	paid 	a
"conventional" 	used 	car 	dealer. 	Thus, 	the 	principal 	effect 	of
restricting 	supplemental 	licensing 	for 	used 	car 	dealers 	is 	simply
to 	increase 	costs 	to 	consumers 	in 	the 	used 	car 	market.
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16 	C.F.R. 	S 	455.
The 	FTC Bureau 	of 	Economics' 	Staff 	Report 	on 	the 	Effect 	of
State 	Entry 	Regulation 	on 	Retail 	Automobile 	Markets, 	January
1986, 	is 	a 	recent 	example 	of 	the 	FTC's 	concern 	with 	anti-
competitive 	regulations 	in 	the 	automobile 	market.

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The 	Honorable 	John 	W. 	Hallock, 	Jr.
November 	13, 	1986
Page 	3
Fleet 	sales 	directly 	promote 	competition 	in -the 	used 	car
market. 	We 	understand, 	for 	example, 	that 	fleet 	sales 	are 	often
held 	in 	or 	near 	smaller 	cities 	or 	towns 	where 	there 	are 	otherwise
few 	used 	car 	outlets. 	Fleet 	sales 	also 	benefit 	consumers 	in 	the
car 	rental 	market 	by 	enabling 	fleet 	dealers 	to 	turn 	over 	their
inventories 	efficiently. 	By 	effectively 	prohibiting 	fleet 	sales
as 	they 	are 	now 	conducted, 	HB 	787 	will 	tend 	to 	increase 	the 	cost
of 	car 	rentals.
Under 	Governor 	Thompson's 	amendatory 	veto 	language, 	fleet
sales 	may 	be 	conducted 	outside 	a 	dealer's 	relevant 	market 	area 	if
sponsored 	by 	a 	financial 	institution 	or 	credit 	union 	operating 	in
Illinois. 	We 	understand 	that 	this 	provision 	was 	added 	to 	address
concerns 	about 	"fly-by-night" 	used 	car 	sellers. 	It 	appears,
however, 	that 	most 	fleet 	sales 	in 	Illinois 	are 	already 	conducted
in 	conjunction 	with 	a 	financial 	institution 	or 	credit 	union, 	so
that 	the 	amendatory 	veto 	simply 	mandates 	what 	the 	market 	already
ptovides. 	Further, 	it 	would 	seem 	that 	concerns 	about 	unscrupu-
lous 	dealers 	are 	already 	addressed 	by 	the 	general 	licensing
requirements 	for 	automobile 	sellers. 	Thus, 	it 	is 	not 	evident
that 	the 	provision 	proposed 	by 	the 	Governor 	is 	necessary 	except
to 	counteract 	the 	effects 	of 	HB 	787 	as 	passed. 	The 	bill, 	even
amended 	as 	the 	governor 	proposes, 	could 	harm 	consumers 	by
constraining 	future 	innovation 	in 	the 	financing 	of 	used 	cars.
The 	Governor's 	amendatory 	veto 	also 	requires 	dealers 	to
provide 	service 	warranties 	on 	vehicles 	offered 	for 	sale 	outside
the 	dealers' 	relevant 	market 	areas. 	This 	provision 	may 	be
unnecessary, 	since 	it 	is 	our 	understanding 	that 	major 	fleet
dealers 	such 	as 	Hertz 	and 	Avis 	already 	offer 	complete 	service
records 	and 	warranties 	with 	the 	used 	cars 	they 	sell. 	In
addition, 	the 	Federal 	Trade 	Commission's 	used 	Car 	Rule, 	as 	noted
above, 	affords 	warranty-related 	protection 	to 	consumers 	whether
they 	purchase 	used 	cars 	from 	off-site 	dealers 	or 	from
qconventional" 	used 	car 	dealers. 	The 	Used 	Car 	RUle 	requires 	car
dealers, 	including 	off-site 	dealers, 	to 	post 	a 	-Buyers 	Guide" 	in
the 	window 	of 	each 	used 	vehicle 	they 	offer 	for 	sale. 	The 	Buyers
Guide 	must 	state 	whether 	the 	vehicle 	comes 	with 	a 	warranty 	and,
if 	so, 	what 	specific 	warranty 	protection 	the 	dealer 	will
provide. 	If 	the 	vehicle 	comes 	with 	no 	warranty, 	then 	the 	sticker
must 	also 	disclose 	this 	information. 	Under 	the 	rule, 	the 	Buyers
Guide 	becomes 	part 	of 	the 	consumer's 	sales 	contract 	and 	overrides
any 	contrary 	provisions 	that 	may 	appear 	in 	that 	contract.

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The 	Honorable 	John 	W. 	Hallock, 	Jr.
November 	13, 	1986
Page 	4
We 	do 	not 	believe 	that 	requiring 	fleet 	dealers 	to 	provide
warranties 	would 	be 	in 	the 	best 	interest 	of 	consumers.
Generally, 	when 	dealers 	are 	required 	to 	provide 	warranties, 	their
costs 	increase 	and 	the 	result 	is 	higher 	prices 	to 	consumers. 	We
believe 	that 	consumers 	are 	in 	the 	best 	position 	to 	determine
whether 	they 	wish 	to 	purchase 	used 	cars 	with 	or 	without
warranties, 	and 	dealers, 	in 	turn, 	are 	in 	the 	best 	position 	to
react 	to 	perceived 	consumer 	interest 	in 	such 	information. 	In
addition, 	such 	a 	course 	of 	action 	would 	allow 	COnsumers 	to 	pay
for 	the 	level 	of 	warranty 	service 	desired. 	The 	important 	point
is 	that 	there 	be 	a 	disclosure, 	as 	mandated 	by 	the 	FTC 	Used 	Car
Rule, 	of 	whether 	or 	not 	consumers 	are 	receiving 	a 	warranty.
In 	conclusion, 	we 	believe 	that 	HB 	787 	as 	originally 	passed
by 	the 	Illinois 	General 	Assembly 	would 	ultimately 	harm consumers
of 	used 	vehicles. 	Restricting 	competition 	in 	the 	manner 	proposed
would 	lead 	to 	unnecessary 	increases 	in 	fleet 	dealers' 	costs 	and,
correspondingly, 	to 	unnecessary 	increases 	in 	the 	prices 	consumers
pay 	for 	used 	vehicles. 	Similar 	effects 	are 	also 	likely 	to 	be
felt 	in 	the 	rental 	market 	for 	vehicles. 	Governor 	Thompson's
amendatory 	veto 	of 	HB 	787 	substantially 	reduces 	the 	anti-
competitive 	impact 	Of 	the 	bill 	by 	preserving 	competition 	in 	the
used 	vehicle 	market. 	However, 	as 	discussed 	above, 	there 	does 	not
appear 	to 	be 	a 	need 	to 	impose 	any 	new 	restrictions 	of 	this 	nature
on 	sales 	by 	fleet 	dealers.
It 	is 	our 	position 	that 	consumers 	will 	best 	be 	served 	by
competition 	in 	a 	market 	free 	from 	unnecessary 	regulatory
restraints. 	We. appreciate 	this 	opportunity 	to 	provide 	our 	views
on 	the 	competitive 	effects 	of 	HB 	787.
Very 	trUly 	yours,
L~oh 	M. 	Peterson
Acting 	Director
CHICAGO 	REGIONAL 	OFFICE
JMP; jd
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