FTC Staff Comment to the Hon. Aldo A. DeAngelis Concerning Illinois S.B. 1978 to Prohibit Auto Brokering

Suite 1437
55 East Monroe Street
Chicago. Illinois 60603
Area Code 312 353·8156
FEDERAL TRADE COMMISSION
Chicago Regional Office
March 	21, 	1989
COMMISSION AUTHORIZED
The Honorable Aldo A. 	DeAngelis
Assistant Minority Leader
Senate 	of the 	State of 	Illinois
309 	State Capitol
springfield, 	Illinois 	62706
Dear Mr. 	DeAngelis:
The 	staff 	of 	the 	Federal 	Trade 	Commission's 	Chicago
Regional 	Office 	and 	Bureau 	of 	Competition 	are 	pleased 	to 	have
this 	opportunity to 	respond 	to 	your 	letter of 	February 	21,
1989, 	requesting 	our 	comments 	on 	amendments 	to 	the 	Illinois
Vehicle 	Code 	provided 	for 	in 	Senate 	Bill 	1978. 1 	It 	is 	our
understanding 	that 	this 	legislation was 	passed 	on January 	10,
1989, 	the 	final 	day 	of the 	85th 	legislative 	session, 	and 	that
these 	amendments 	were 	not 	debated 	either on 	the 	floor 	or 	in
committee. 2 	These 	amendments, 	if 	they become 	effective, 	may
reduce 	competition and 	increase 	the 	prices 	paid by 	Illinois
consumers 	for 	new and 	used 	cars. 	We 	believe 	that 	consumers
will 	be 	best 	served 	if competition 	in 	the 	sale 	of 	automobiles
in 	Illinois 	is 	not 	restricted 	unnecessarily.
This 	legislation makes 	two 	principal 	changes 	in 	the
Illinois 	Vehicle 	Code, 	each 	of which 	is 	likely 	to 	prohibit
innovative 	forms 	of 	competition 	in 	automobile 	sales. 3 	First,
this 	legislation defines 	"broker" 	and prohibits 	"brokers"
from 	selling new and used 	cars. 	Second, 	S.B. 	1978 	expands
the 	dealer 	licensing provisions 	of 	the 	Illinois Vehicle 	Code
1 	These 	comments 	represent 	the views 	of the 	staff 	of
the 	Federal 	Trade 	Commission's 	Chicago Regional 	Office 	and
Bureau 	of 	Competition and do 	not 	necessarily 	represent 	the
views 	of 	the 	Commission 	or 	any 	individual 	Commissioner.
2 	The 	Bill 	and 	its 	amendments 	will 	become 	law 	if
Governor Thompson does 	not veto 	the 	Bill 	by April 	6, 	1989.
3 	S.B. ·1978 	amends 	sections 	5-100 	(Definitions), 	5-101
(New Vehicle 	Dealer 	Licensing), 	and 	5-102 	(Used Vehicle
Dealer 	Licensing) 	of 	the 	Illinois 	Vehicle 	Code. 	Ill. 	Rev.
Stat. 	ch. 	95 	1/2.

The 	Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	2
to 	require 	a 	dealer's 	license 	in order to 	perform many 	of 	the
activities 	(such as 	advertising 	automobile 	sales) 	that 	can
now be performed without 	a 	license. 	These 	restrictions 	would
end the 	practices 	of 	credit unions 	and 	buying 	clubs 	that
currently assist 	consumers 	in 	locating a 	licensed 	automobile
dealer willing 	to 	sell 	at 	a 	substantial 	discount. 4 	Although
each 	of 	the 	amendments 	contained 	in S.B. 	1978 	operates
differently 	in 	its 	specifics, 	both amendments 	would
effectively 	eliminate 	these 	types 	of 	automobile marketing
methods.
Since 	the 	amendments 	to 	the 	Illinois 	Vehicle 	Code
provided 	for 	in S.B. 	1978 	were 	neither discussed 	nor 	debated
prior 	to 	passage, 	we 	have 	little material 	beyond 	the 	language
of 	the 	amendments 	themselves 	from which 	to 	infer 	their
purpose. 	As 	far 	as 	we 	aware, 	the 	only 	contemporaneous
statement on 	this 	question was 	from 	the 	Illinois 	New 	Car 	&
Truck Dealers Association 	in 	its 	Legislative 	Bulletin of
January 	26, 	1989, 	two weeks 	after S.B. 	1978's passage. 	The
Car 	Dealers Association 	stated 	that: 	"It appears 	that 	this
language 	should 	stop 	the 	Walmarts, 	Buying Services, 	Credit
Unions 	and 	other persons 	who 	attempt 	to 	broker automobiles 	in
Illinois 	from 	acting 	as 	a 	licensed dealer 	[sic]." 	Our 	review
of 	these 	amendments 	suggests 	that 	the 	Car 	Dealers
Association's 	characterization accurately 	reflects 	the 	likely
effect 	of 	this 	legislation. 5
Interest and Experience 	of the 	Federal 	Trade Commission
Our 	interest 	in 	this 	legislation stems 	from 	the
Commission's mandate 	to 	enforce 	the 	consumer protection 	and
antitrust 	laws 	of 	the 	United States. 	The 	Federal 	Trade
Commission 	is 	charged with 	promoting competition 	and
protecting consumers 	from 	unfair competition 	and 	unfair 	and
4 	In 	such 	cases 	the 	sales 	transaction 	is 	completely
between the 	consumer and 	the 	car dealer, 	with 	the 	credit
union 	or buying club 	simply 	acting 	as 	a 	broker. 	Credit
unions 	that 	sponsor 	such 	sales 	allow automobile dealers 	to
use 	their parking 	lots 	to 	display 	new 	or used 	cars 	and 	then
invite 	credit union members 	to 	attend. 	Credit unions 	thus
not 	only assist 	their members 	in 	the 	purchase 	of 	automobiles,
but get 	an 	opportunity 	to 	offer 	financing 	for 	any 	automobile
purchased 	at the 	sale.
5 	We are 	not 	familiar 	with 	any automobile 	sales 	being
conducted by Walmarts.

6
The Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	3
deceptive practices. 6 	In 	fulfilling 	this 	mandate, 	the 	staff
of 	the 	Federal 	Trade Commission often 	submits 	comments, 	upon
request, 	to 	federal, 	state, 	and 	local 	governmental 	bodies 	to
help 	assess 	the 	competitive and consumer welfare 	implications
of 	pending 	policy 	issues. 	In 	enforcing 	the 	Federal 	Trade
Commission Act, 	the Commission 	staff 	has 	gained 	substantial
experience 	in 	analyzing 	the 	impact 	of various 	restraints 	on
competition 	(both by 	private 	action 	and 	through government
intervention) 	and 	the 	costs 	and benefits 	to consumers 	of 	such
restraints.
During 	recent 	years, 	the 	Commission has 	been 	actively
involved 	in 	issues 	relating 	to 	the 	retail 	automobile market.
In 	1984, 	for 	example, 	the 	Commission 	issued 	the 	Used Motor
Vehicle Trade 	Regulation 	Rule 	("Used 	Car Rule") 	in 	an 	effort
to 	educate 	consumers 	about 	their warranty 	rights 	and 	to
prevent 	the 	injury 	that 	can 	be 	caused by 	oral
misrepresentations 	in 	used 	car transactions. 7 	The 	Commission
has 	also 	recently 	ruled 	that 	automobile 	dealers 	in 	the
Detroit 	area violated 	the 	antitrust 	laws 	by agreeing 	to 	limit
their hours 	of 	operation. 8 	In 	addition, 	the 	Commission 	staff
has 	conducted 	economic 	research concerning 	automobile
marketing. 9
See 	15 U.S.C. 	§41 	et 	seg.
7 	Used Motor Vehicle Trade Regulation 	Rule, 	16 	C.F.R.
Part 	455. 	The Used 	Car Rule 	requires 	used 	car dealers 	to
place 	a 	sticker 	in 	the 	window of 	each car 	that 	clearly 	states
the warranty coverage 	being offered 	and 	that 	suggests
consumers 	obtain an 	independent 	inspection 	of the vehicle
prior to 	purchase. 	16 	C.F.R. 	§455.2. 	These 	stickers 	form
part 	of 	the 	contract of 	sale 	for 	a 	used 	car. 	16 	C.F.R. 	§455.3(b).
8 	Detroit Auto 	Dealers 	Assln, 	Inc., 	FTC 	Docket 	9189
(February 	22, 	1989).
9 	The 	Commission's 	Bureau 	of 	Economics 	recently
completed a 	study 	concluding that 	state 	laws 	restricting 	the
number of 	automobile 	dealers 	in an 	area 	increase 	costs 	to 	car
buyers 	in 	this 	country by 	as 	much 	as 	$3 	billion each 	year.
Robert 	P. 	Rogers, 	The 	Effect 	of state 	Entry Regulation 	on
Retail 	Automobile Markets, 	Federal 	Trade 	Commission 	Bureau 	of
Economics 	Staff Report 	(January 	1986).

The 	Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	4
The 	Commission 	staff has 	commented 	on proposed 	Illinois
legislation that would 	have 	prohibited 	car dealers 	from
holding 	sales 	outside 	of 	their 	local 	markets. 10 	In 	addition,
the 	Commission staff 	recently voiced 	concern that 	proposed
legislation 	in Michigan 	prohibiting 	automobile 	broke ring
would 	have 	reduced 	competition and 	increased 	the 	prices 	that
consumers 	pay 	for 	automobiles. 11 	During 	the 	past 	two 	years,
Commission 	staff has 	submitted comments 	to 	other 	states 	on
issues 	similar to 	those 	raised by S.B. 	1978. 12 	In 	each 	case
we concluded 	that 	these 	legislative 	initiatives 	could have
resulted 	in 	raising 	the 	prices 	that 	consumers 	paid 	for 	new
and used 	cars.
Automobile Marketing Methods
As 	the 	Car Dealers 	Association 	recognizes, 	several
innovative methods 	are 	available 	to 	steer consumers 	to
licensed 	automobile dealers 	willing 	to 	sell 	at 	a 	discount.
One 	source 	is 	credit 	unions 	that 	sponsor automobile 	sales 	(by
licensed 	dealers) 	on 	their premises. 	The 	credit 	unions
encourage these 	sales 	because 	it gives 	them an 	opportunity 	to
offer automobile 	financing. 	since 	cars 	are 	sold 	in volume,
the 	credit 	unions 	can 	obtain 	substantial 	savings 	for 	their
members.
10 	Letter of April 	24, 	1987, 	from John M. 	Peterson,
Director, 	Chicago Regional 	Office 	of the 	Federal 	Trade
Commission, 	to 	the 	Honorable Woods 	Bowman, 	state
Representative, 	concerning House 	Bills 	787 	(1986) 	and 	1173
(1987). 	Governor Thompson ultimately vetoed both 	bills.
11 	Comments 	of 	the 	Cleveland Regional 	Office 	and 	Bureau
of 	Economics 	staffs 	of 	the 	Federal 	Trade 	Commission 	on
Michigan House 	Bill 	4390 	by Mark Kindt, 	Director, 	Cleveland
Regional 	Office 	(September 	29, 	1988).
12 	See 	letter 	from 	the 	FTC 	staff 	to 	the 	Florida 	Senate
(March 	29, 	1988): 	letter 	from 	the 	FTC 	staff 	to 	the 	South
Carolina House 	of Representatives 	(March 	21, 	1988); 	letter
from Jeffrey 	I. 	Zuckerman, 	Director, 	FTC 	Bureau 	of
Competition, 	to William 	P. 	TeWinkle, 	Wisconsin 	State 	Senate
(February 	19, 	1988); 	letter 	from 	the 	FTC 	staff 	to 	the
California State Assembly 	(January 	29, 	1988): 	letter 	from 	the
FTC 	staff to 	the Governor of Texas 	(June 	1, 	1987).

The 	Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	5
Fleet dealers, 	such 	as 	Hertz 	and 	Avis, 	are 	a 	principal
source 	of automobiles 	for 	sales 	conducted 	on 	credit union
premises. 	The 	fleet 	dealers 	are 	seeking a 	means 	of 	selling
their used 	rental 	cars. 	Low overhead 	sales 	offered 	in
conjunction with 	credit 	unions 	enable 	fleet 	dealers 	to 	turn
over 	their 	inventories 	efficiently. 	It 	is 	possible 	that 	this
process will, 	in 	turn, 	enable 	rental 	agencies 	to 	charge
consumers 	lower prices 	when 	renting 	automobiles.
The 	credit union 	fleet 	sales 	save 	Illinois 	consumers
substantial 	amounts 	in 	their used 	car purchases. 	For
example, 	in 	1986, 	credit unions 	surveyed by 	the 	Illinois
Credit union 	League 	estimated 	that 	consumers 	paid 	an 	average
of 	$1,118 	less 	for 	a 	used 	car 	at 	a 	credit union 	sponsored
fleet 	sale than 	those 	consumers would 	have 	paid 	to 	a
"conventional" 	used 	car dealer. 13
Another marketing development 	that 	provides 	consumers
with 	an 	opportunity 	to 	obtain 	substantial 	savings 	in 	the
purchase 	of new 	cars 	is 	the 	emergence 	of 	automobile 	buying
clubs 	and 	referral 	services. 	These 	services 	generally 	charge
an 	annual membership 	fee 	and 	arrange 	new 	car purchases 	for
members 	at 	guaranteed 	prices with 	participating dealers. 	An
August 	1988 	survey 	of 	six automobile 	buying 	services 	by
Changing Times magazine 	concluded 	that 	customers purchasing
cars 	through 	these 	services 	would 	have 	realized 	substantial
savings 	on 	each 	purchase no matter which 	service was
picked. 14
Our understanding 	is 	that Amway 	Corporation, 	for
example, 	offers 	a 	program through which 	its 	distributors 	and
their 	customers 	may 	purchase 	new 	cars 	from 	licensed dealers
for 	a 	maximum of 	$150 	over the 	factory 	invoice 	price.
According to Amway, 	these 	discount 	sales 	are 	available
through 	independent Amway 	distributors 	to 	persons 	paying 	a
suggested annual 	fee 	of 	$24.95 	and 	may 	be 	exercised 	at 	any 	of
13 	The 	Illinois 	Credit Union 	League 	surveyed 	the 	nearly
1,000 	Illinois 	consumers who 	purchased used 	fleet 	vehicles 	at
special 	sales 	conducted by credit 	unions 	in 	conjunction with
National 	Car Rental 	during 	the 	last 	six months 	of 	1988. 	Of
those 	surveyed, 	80% 	reported 	that 	the 	used 	car price was
"good or excellent" 	and 	87.5% 	reported 	that 	the 	purchased
car's performance was 	"good" 	or 	"excellent."
14 	Takina 	the 	Hassle 	out 	of 	car-Buying, 	changing Times,
August 	1988, 	at 	37.

The 	Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	6
67 	Illinois 	automobile 	dealers 	who 	handle 	128 	lines 	of
automobiles. 	The Amway Auto Network 	is 	currently 	available
in 	thirty states, 	the 	District 	of 	Columbia 	and 	the 	united
states virgin 	Islands. 15 	These 	types 	of programs 	appear to
offer consumers. substantial 	benefits.
Prohibitions on "Brokering" 	Automobile Sales
S.B. 	1978 	would prohibit 	credit unions, 	buying 	clubs, 	or
the 	like 	from 	acting 	as 	"brokers" 	in 	sales 	of 	new or used
automobi1es,16 	and 	thus 	would ban 	the 	practices described
above. 	It 	is 	difficult 	to 	see how 	this 	change 	will 	benefit
consumers 	or competition. 	We 	have 	no 	reports 	of 	significant
or 	extensive 	fraud 	or deception 	that 	have 	injured consumers
who participate 	in 	these 	discount 	sales 	programs, 	and 	current
law already provides meaningful 	protection 	to 	the 	public.
Automobile 	sales 	are 	covered by 	the 	Illinois 	Consumer 	Fraud
Act,17 	and 	the Commission's Used 	Car Rule 	helps 	protect
consumer's 	warranty 	rights 	when 	purchasing used 	cars. 18 	In
addition, 	all 	automobile dealers 	must 	be 	licensed by 	the
15 	The American Automobile Association 	also 	works 	with
selected automobile dealers 	throughout 	the 	country 	to 	provide
its members 	with 	opportunities 	to 	purchase new motor vehicles
at 	substantial 	discounts. 	Changing Times, 	supra, 	at 	35-38.
16 	The definition 	of 	"broker" 	encompasses 	anyone 	who 	is
compensated 	for 	being 	involved 	in 	a 	car 	sales 	transaction 	and
who 	is 	not 	a 	licensed dealer 	or 	the 	dealer's 	employee, 	a
manufacturer or manufacturer's 	employee, 	or the 	owner of 	the
car being 	sold. 	Ill. 	Rev. 	stat. 	ch. 	95 	1/2, 	§5-100. 	Other
amendments 	prohibit brokers, 	as 	defined 	in 	the 	Bill, 	from
selling new 	cars 	(Ch. 	95 	1/2, 	§5-101) 	and 	from 	selling 	used
cars 	(Ch. 	95 	1/2, 	§5-102).
The definition of 	"broker" 	is 	so 	broad 	that 	an 	attorney
who 	becomes 	involved 	in 	the 	sale 	of 	a 	client's 	car 	and
receives 	legal 	fees 	for 	his 	assistance 	could arguably 	be
acting 	illegally 	as 	a 	broker.
17 	Illinois 	Consumer 	Fraud 	and 	Deceptive 	Business
Practices 	Act, 	Ill. 	Rev. 	stat. 	ch. 	121 	1/2, 	§262 	et 	seg.
18 	Supra 	note 	7.

The Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	7
state 	of 	Illinois. 19 	S.B. 	1978 	does 	not 	appear 	to 	provide
benefits 	to 	the 	pUblic 	that 	are 	not 	already 	available 	under
current 	law.
The 	anti-brokering 	amendments 	provided 	for 	in S.B. 	1978
appear 	likely 	to 	injure 	Illinois 	consumers by 	restricting
competition 	in 	the 	new and used 	car markets. 	Such a
restriction may 	in 	turn 	result 	in higher prices 	for
consumers. 	Stopping 	the 	"Walmarts, 	Buying Services, 	Credit
Unions 	and 	other persons" 	from 	offering 	consumers 	cost-saving
methods 	of 	purchasing 	new and 	used 	automobiles 	does 	not
benefit 	consumers. 	Rather, 	consumers would 	be 	deprived 	of
the potentially 	substantial 	savings 	that 	they 	could 	obtain
through 	these 	alternative 	automobile 	purchase 	programs.
Amendments 	to 	Licensing Provisions 	for 	Car Dealers
S.B. 	1978 	would 	also 	change 	the 	provisions 	for 	licensing
new and 	used 	car dealers 	in 	a 	manner 	that 	could 	eliminate 	the
ability 	of 	buying clubs 	and 	credit unions 	to 	participate 	in
automobile 	sales. 	Illinois 	law already 	requires 	that 	new 	and
used 	car dealers 	be 	licensed by 	the 	state. 	This 	new
legislation would 	prohibit 	anyone 	except 	licensed dealers 	or
their employees 	from 	1) "displaying 	for 	sale 	[new or 	used]
motor vehicles 	on 	a 	lot 	or showroom"; 	2)"advertising 	for 	[new
or used] 	motor vehicle 	[sic]; 	or" 	3) "regularly or 	actively
soliciting buyers 	for 	[new or used] 	motor vehicles.,,20
Credit unions 	and 	buying 	services 	currently engage 	in 	these
19 	Illinois Vehicle 	Code, 	Ill. 	Rev. 	stat. 	ch. 	95 	1/2,
§5-101 	et 	seg.
20 	Ch. 	95 	1/2, 	§§5-101(a), 	5-102(a) 	(as 	amended 	by S.B.
1978). 	This 	definition 	is 	so 	expansive 	it would 	appear 	to
preclude a 	consumer 	from 	running 	an 	advertisement 	seeking 	to
purchase a 	particular type 	of 	car. 	Although 	surely 	not
intended, 	the 	language 	seems 	susceptible 	to 	a 	strong argument
that 	newspapers 	and magazines would 	not be 	able 	to 	run
automobile 	advertising 	-- 	particularly 	if 	the 	effect was 	to
"regularly or actively 	solicit buyers 	for 	[new or used] 	motor
vehicles."

The 	Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	8
practices 	but probably 	could not 	qualify 	for 	licenses 	because
they do 	not 	actually 	sell 	automobiles 	themselves. 21
These 	amendments 	to 	the 	licensing 	requirements 	have 	the
same 	practical 	effect 	as 	S.B. 	1978's prohibition of
brokering. 	If 	credit unions, 	buying clubs 	or 	similar
organizations 	cannot 	obtain 	licenses 	to 	display automobiles
(on 	their own 	lots), 	advertise 	the 	existence 	of 	these 	sales
(in newsletters 	or other media) 	or 	solicit 	the 	attendance 	of
potential 	purchasers 	(such as 	credit union members) 	at
automobile 	sales, 	it will 	be 	difficult 	or 	impossible 	for 	them
to 	continue their 	current 	practices. 	Illinois 	consumers 	will
simply 	lose 	the 	benefits 	that 	these 	organizations 	provide
through 	these practices.
21 	Although 	the 	amendments 	expand 	the 	types 	of
activities 	that 	require 	an 	automobile dealer's 	license, 	the
requirements 	for 	obtaining a 	license 	and 	the 	duties 	imposed
upon 	license 	holders 	are 	not 	changed by 	the 	amendments. 	A
new car dealer's 	license 	cannot 	be 	granted 	to 	someone who 	is
not 	contractually 	authorized by 	a 	manufacturer or by 	a
franchised 	distributor to 	sell 	the particular makes 	of 	cars
in 	Illinois. 	Ch. 	95 	1/2, 	§5-101(d)1. 	Since 	credit unions,
buying clubs 	and 	other organizers 	of discount 	new car 	sales
do 	not 	actually 	sell 	new cars, 	it 	seems 	unlikely 	that
manufacturers would 	contractually 	authorize 	them to 	do 	so.
In addition, 	both new and used 	car dealers 	are
required 	to maintain 	an 	"established of 	business," 	as 	defined
in 	the 	Illinois Vehicle 	Code, 	in 	order 	to 	qualify 	for 	a
license. 	Ch. 	95 	1/2, 	§§5-101(d)2, 	5-102(d). 	"Established
place of business" 	is 	defined 	in 	the 	Code 	as 	the 	place 	owned
or 	leased and 	regularly occupied by 	the 	dealer 	for 	the
"primary and principal 	purpose" 	of 	engaging 	in 	the 	business
of 	selling 	automobiles 	or 	automobile 	parts. 	See Ch. 	95 	1/2,
§5-100. 	It 	is 	difficult 	to 	imagine how an 	organization 	such
as 	a 	credit union, 	whose 	primary 	and principal 	business 	is
extending credit and which, 	in 	fact, 	does 	not 	sell 	any 	cars,
could have 	a 	regular 	or established place 	for 	the 	primary 	and
principal purpose 	of 	selling cars. 	In 	order 	to 	qualify 	for
car dealers' 	licenses, 	either the 	credit unions 	and.others
would have 	to 	alter their 	current business 	practices
significantly or the 	dealer 	licensing provisions 	of 	the 	Code
would 	have 	to 	be 	interpreted 	in 	a 	manner completely 	at 	odds
with 	the 	statutory 	language 	and 	spirit.

The Honorable Aldo A. 	DeAngelis
March 	21, 	1989
Page 	9
Conclusion
The 	proposed 	amendments 	would 	restrict 	the 	ability of
licensed car dealers 	to 	conduct 	automobile 	sales 	through
credit unions 	or buying 	clubs 	and 	to 	employ 	other 	innovative
marketing techniques 	that 	result 	in 	substantial 	savings 	to
consumers. 	We 	believe 	that 	the 	amendments 	to 	the 	Illinois
Vehicle 	Code 	provided 	for 	in Senate 	Bill 	1978 	are 	not 	likely
to 	benefit consumers 	or competition. 	Instead, 	this
legislation may 	limit 	competition among 	automobile 	dealers
and 	increase 	the 	prices 	that 	consumers 	pay 	for 	automobiles.
We 	appreciate 	the 	opportunity to 	comment.
C. 	Steven 	Baker
Director
CHICAGO REGIONAL OFFICE