FTC Staff Comment to the Hon. Quentin L. Kopp Concerning California S.B. 582 to Amend the Regulation of Vehicle Sales

V90001S
U~ITED STATES OF A~ERICA
FEDERAL TRADE COMMISSION
SAN FRA!KISCO REGIONAL OFFICE
10' Mat1<et SlrNl
Su~e 570
$an FrancISCo. CA "103
(~'51 7~·7920
The 	Honorable 	Quentin 	L. 	Kopp, 	Chairman
Senate 	Committee 	on 	Transportation
Room 	2195
State 	Capitol
Sacramento, 	CA 	95814
Dear Senator 	Kopp:
COMMISSION AUTHORIZED
January 	5, 	1990
The 	staff 	of 	the 	Federal 	Trade 	Commission's 	San 	Francisco
Regional 	Office 	and 	Bureau 	of 	Competition 	are 	pleased 	to 	respond
to 	your 	request 	for 	comments 	on 	Senate 	Bill 	582. 1 This 	bill
would 	eliminate 	provisions 	of 	the 	California 	Vehicle 	Code 	that
regulate 	vehicle 	sales 	by 	"lessor-retailers" 	and 	instead 	subject
them 	to 	the 	regulatory 	provisions 	applicable 	to 	vehicle 	dealers.
The 	bill 	would 	also 	amend 	the 	Vehicle 	Code 	to 	prohibit 	car 	sales
from 	temporary 	locations. 	We 	believe 	that 	the 	regulations 	would
likely 	raise 	the 	prices 	that 	California 	consumers 	pay 	for 	new 	and
used 	cars, 	reduce 	competition 	by 	limiting 	innovative 	automobile
marketing 	methods, 	and 	deprive 	consumers 	of 	the 	savings 	that 	they
could 	realize 	through 	such marketing 	methods.
INTEREST AND EXPERIENCE OF THE STAFF 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
methods 	of 	competition 	and 	unfair 	or 	deceptive 	acts 	or
These 	comments 	are 	the 	views 	of 	the 	staffs 	of 	the 	San
Francisco 	Regional 	Office 	and 	the 	Bureau 	of 	Competition 	of 	the
Federal 	Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views 	of
the 	Federal 	Trade 	Commission 	or 	any 	individual 	Commissioner.

The 	Honorable 	Quentin 	L. 	Kopp 	-- 	Page 	2
practices. 2 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
implications 	for 	competition 	and 	consumers 	of 	pending 	policy
issues. 	In 	enforcing 	the 	Federal 	Trade 	Commission 	Act, 	the
Commission 	has 	gained 	substantial 	experience 	in 	analyzing 	the
impact 	of 	both 	private 	and 	governmental 	restraints 	on
competition.
During 	recent 	years, 	the 	Commission 	has 	been 	involved 	in
issues 	relating 	to 	restrictions 	that 	might 	limit 	alternative
types 	of 	retailing 	beneficial 	to 	consumers. 	The 	Commission 	has
addressed 	the 	competitive 	implications 	of 	time 	and 	place
restrictions 	in various 	retail 	markets. 	For 	example, 	the
Commission 	has 	promulgated 	a 	Trade 	Regulation 	Rule 	on 	Ophthalmic
Services 	to 	eliminate 	restraints 	on 	the 	commercial 	practice 	of
optometry. 3 The 	Commission 	has 	also 	addressed 	restrictions
occurring 	in 	the 	auto 	industry. 	For 	example, 	the 	Commission
recently 	ruled 	that 	automobile 	dealers 	in 	the 	Detroit 	area
violated 	the 	antitrust 	laws 	by 	agreeing 	to 	limit 	their 	hours 	of
operation. 4 In 	addition, 	the 	Commission 	staff 	has 	conducted 	and
pUblished 	economic 	research 	concerning 	automobile 	marketing. 5
The 	Commission 	staff 	has 	recently 	submitted 	comments 	to 	a
number 	of 	state governmental 	bodies 	nationwide 	concerning 	various
legislative 	proposals 	to 	restrict 	certain 	types 	of 	competition
among 	automobile 	marketers. 	The 	Commission 	staff 	commented 	on
two 	Wisconsin 	legislative 	proposals: 	one 	that 	would 	curtail
2 See 	15 U.S.C. 	§ 	41 	et 	seg.
3 See 	Trade 	Regulation 	Rule 	on 	Ophthalmic 	Practice, 	54
Fed. 	Reg. 	10285 	(March 	13, 	1989). 	(The 	rule 	bans 	restrictions 	on
the 	practice 	of optometry 	such 	as 	limitations 	on 	branch 	offices,
prohibitions 	on 	lay 	associations, 	prohibitions 	on 	commercial
locations 	and 	bans 	on 	trade 	names).
Inc., 	FTC 	Docket 	9189
decided 	that 	an 	agreement
operation 	unreasonably
4 Detroit Auto 	Dealers 	Ass'n,
(February 	22, 	1989). 	(The 	Commission
by 	area 	dealerships 	limiting 	hours 	of
restricted 	competition.)
5 	~ 	Robert 	P. 	Rogers, 	The 	Effect 	of State 	Entry
Regulation 	on 	Retail 	Automobile Markets, 	Federal 	Trade
Commission, 	Bureau 	of 	Economics 	Staff 	Report 	(January 	1986).
(The 	Report 	concluded 	that 	state 	laws 	restricting 	the 	number 	of
automobile 	dealers 	in 	a 	given 	area 	were 	costly 	to 	consumers.)

6
7
8
'0
"
The 	Honorable 	Quentin 	L. 	Kopp 	-- 	Page 	3
automobile 	dealers' 	participation 	in 	off-site 	car 	sales,6 	and 	one
that 	would 	have 	amended 	the 	state's 	fair 	dealership 	law 	to 	make
it 	difficult 	for 	a 	grantor 	of 	dealerships 	to 	terminate 	dealers 	in
response 	to 	changes 	ip 	demand 	for 	products 	or 	to 	improve
distribution 	systems. 	The 	Commission 	staff 	submitted comments
on 	an 	Illinois 	bill 	that 	would 	have 	strengthened market 	area
restrictions 	on 	franchised 	automobile 	dealerships 	and 	that 	would
have 	extended 	those 	restrictions 	to manufacturer-franchised 	auto
service 	centers;8 a 	bill 	that 	would 	have 	prohibited brokers 	from
selling 	new 	and 	used 	cars 	and 	that 	would 	have 	expanded 	Illinois's
dealer 	licensing 	provisions;9 	and 	a 	bill 	that would 	have
prohibited 	car dealers 	from 	holding 	sales 	outside 	of 	their 	local
markets.'o 	We 	have 	also 	submitted comments 	on 	other 	states'
legislative 	initiatives 	concerning 	automobile 	sales."
Letter 	from 	C. 	steven 	BaK~~, 	~~rector, Chicago 	Regional
Office 	of 	the 	Federal 	Trade 	Commission, 	to 	Thomas 	L. 	Gais,
Wisconsin 	Department 	of 	Transportation 	(November 	3, 	1989).
Letter 	from 	Jeffrey 	I. 	Zuckerman, 	Director, 	FTC 	Bureau
of 	competition, 	to 	the 	Honorable 	William 	P. 	TeWinkle, 	Wisconsin
Senate 	(February 	19, 	1988J.
Letter 	from 	C. 	Steven 	Baker, 	Director, 	Chicago 	Regional
Office 	of 	the 	Federal 	Trade 	Commission, 	to 	the 	Honorable 	James 	R.
Thompson, 	Governor 	of 	Illinois 	(September 	8, 	1989). 	Governor
Thompson 	amendatorily 	vetoed 	the 	provisions 	of 	the 	legislation
relating 	to 	car 	dealerships 	and 	automobile 	service 	centers.
9 	Letter 	from 	C. 	Steven 	Baker, 	Director, 	Chicago 	Regional
Office, 	to 	the 	Honorable 	Aldo 	A. 	DeAngelis, 	Illinois 	Senate
(March 	21, 	1989). 	That 	legislation was 	vetoed.
Letter 	from 	John M. 	Peterson, 	Director, 	Chicago
Regional 	Office 	Trade 	Commission, 	to 	the 	Honorable Woods 	Bowman,
Illinois 	House 	of 	Representatives 	(April 	24, 	1987). 	That
legislation 	was 	vetoed.
~ 	Letter 	from 	Mark 	Kindt, 	Director, 	Cleveland
Regional 	Office, 	to 	the 	Honorable 	Dick 	Posthumus, 	Michigan 	Senate
(September 	29, 	1988); 	letter 	from 	Paul 	Davis, 	Director, 	Atlanta
Regional 	Office, 	to 	the 	Honorable 	Gwen 	Margolis, 	Florida 	Senate
(March 	29, 	1988); 	letter 	from 	the 	Paul 	Davis, 	Director, 	Atlanta
Regional 	Office, 	to 	the 	Honorable 	David 	C. 	Waldrop, 	Jr., 	South
Carolina 	House 	of 	Representatives 	(March 	21, 	1988); 	letter 	from
Marcy 	Tiffany, 	Director, 	Los 	Angeles 	Regional 	Office, 	to 	the
Honorable 	Richard 	Katz, 	California 	State Assembly 	(January 	29,
1988); 	letter 	from 	Jim 	Moseley, 	Director, 	Dallas 	Regional 	Office,
to 	the 	Honorable 	William 	P. 	Clements, 	Jr., 	Governor 	of 	Texas
(June 	1, 	1987).

The 	Honorable 	Quentin 	L. 	Kopp 	-- 	Page 	4
SUMMARY 	OF THE 	PROPOSED LEGISlATION
California 	law 	currently 	permits 	automobile 	lessor-
retailers 12 	and 	dealers 13 	to 	conduct 	off-site 	automobile 	sales 	on
property 	they 	neither 	own 	nor 	lease. 	Moreover, 	lessor-retailers
and 	dealers 	may use 	temporary 	structures. 	sa 	582 	would 	eliminate
off-site 	automobile 	sales 	by 	requiring 	that 	all 	automobile 	sales
be 	held 	on 	property 	that 	is 	owned 	or 	leased 	by 	the 	seller 	and
that 	the 	site 	include 	permanent 	offices 	and 	other 	sales-related
buildings.
AUTOMOBILE MARKETING METHODS
Various 	techniques 	can 	be 	used 	to 	assist 	consumers 	in
finding 	licensed 	automobile 	dealers 	willing 	to 	sell 	at 	discounts.
C.le 	source 	is 	credit 	unions 	that 	sponsor 	automobile 	sales
conducted 	through 	licensed 	dealers.1~ 	The 	credit 	unions
encourage 	these 	sales 	to 	obtain 	opportunities 	to 	provide
automobile 	financing. 	Since 	cars 	are 	sold 	in volume, 	the 	credit
unions 	can 	obtain 	substantial 	savings 	for 	their 	members. 15
Finally, 	credit union 	sponsored 	fleet 	sales 	may 	in 	some 	cases
stimulate 	business 	for 	existing 	dealerships.16
12
13
~ 	Cal. 	Veh. 	Code 	§§ 	11600 	et 	seg.
~ 	Cal. 	Veh. 	Code 	Ii 	11700 	et 	seg.
14
15
16
A credit 	union 	representative 	familiar 	with 	these 	kinds
of 	sales 	indicated 	that 	an 	individual 	credit 	union 	generally
sponsors 	no 	more 	than 	one 	sale 	per 	year.
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. 	The Michigan 	Credit Union 	League
asserts 	an 	estimated 	average 	savings 	of 	$900 	per 	vehicle. 	Hertz
Corporation 	asserts 	an 	estimated 	savings 	of 	approximately 	$1,000
per 	car 	in 	1987.
Credit 	unions 	may 	offer 	special 	financing 	terms 	and
rates 	for 	a 	fleet 	sale. 	Credit 	unions 	may 	pre-approve members
for 	the 	financing 	terms 	and 	typically 	keep 	these 	terms 	open 	for
thirty 	days 	after 	a 	fleet 	sale. 	Consumers 	are 	given 	the 	option
to 	purchase 	a 	car 	that 	was 	not 	available 	at 	the 	fleet 	sale 	from 	a
dealership 	under 	the 	sale's 	financing 	terms. 	In 	Wisconsin, 	one
credit 	union 	noted 	that, 	at 	a 	recent 	sale, 	approximately 	92
members 	were 	pre-approved 	for 	the 	fleet 	sale. 	Approximately 	42
(continued ... )

17
18
The 	Honorable 	Quentin 	L. 	Kopp 	-- 	Page 	5
Car 	rental 	companies, 	such 	as 	Hertz 	and 	Avis, 	are 	a 	primary
source 	of 	automobiles 	for 	sales 	conducted 	on 	credit 	union
premises. 	The 	fleet 	dealers 	are 	seeking 	a 	means 	of 	sellin~ thelr
used 	rental 	cars. 	Low 	overhead 	sales 	offered 	in 	conjunction 	with
credit 	unions 	enable 	fleet 	dealers 	to 	turn 	over 	their 	inventories
efficiently.
Innovative marketing 	techniques 	may 	in 	some 	cases 	provide
cost 	savings 	and 	services 	for 	consumers. 	For 	example, 	consumers
who 	purchase 	used 	cars 	at 	fleet 	sales 	may 	be 	able 	to 	obtain
benefits 	that 	may 	not 	be 	available 	to 	other used 	car 	purchasers.
Cars 	purchased 	at 	fleet 	sales 	generally 	carry 	a 	12-month or
12,000 	mile 	power-train warranty.'7 	other 	used 	cars may 	carry
shorter 	term warranties 	or 	none 	at 	all. 	Some 	fleet 	dealers 	have
national 	service 	networks 	through which 	consumers 	can have 	the
purchased 	cars 	repaired. '8 	In 	addition, 	some 	fleet 	dealers
contract 	with 	local 	dealerships 	and 	automotive 	repair 	firms 	to
perform 	service under 	these 	warranties.
OFF-SITE 	SALES 	RES~CTIONS
The 	regulations 	proposed 	in 	SB 	582 	would 	eliminate 	off-site
automobile 	sales. 	If 	that 	occurs, 	consumers 	could 	be 	unable 	to
realize 	the 	savings 	that 	otherwise might 	have 	been 	available
without 	the 	proposed 	restrictions.
The 	contemplated 	restrictions 	would 	eliminate 	car 	sales
events 	in markets 	not 	served 	by 	permanent 	dealerships, 	depriving
consumers 	in 	these 	markets 	of 	the 	opportunity 	to participate 	in
such 	sales 	events 	locally. 	Off-site 	sales 	on 	credit union
16 	i	( •.• cont 	nued)
of 	these 	members 	purchased 	a 	car at 	the 	fleet 	sale. 	Of 	the
remaining 	50 	members, 	15 	exercised 	the 	option 	and 	purchased 	a 	car
from 	a 	dealer.
Fleet dealers, 	like 	car dealerships, 	have 	an 	interest
in 	maintaining good 	consumer 	relations 	in 	the 	communities 	in
which 	they 	hold 	sales. 	Fleet 	dealers 	have 	an 	ongoing 	need 	to
turn 	over 	their used 	rental 	car 	inventory 	and 	thus 	have 	an
incentive 	to 	provide 	favorable 	services 	to 	consumers 	in 	order 	to
ensure 	a 	supply of 	customers. 	We 	understand 	that 	Hertz
Corporation, 	for 	example, 	provides 	a 	30-day 	warranty 	on
mechanical 	problems 	in 	addition 	to 	the 	typical 	12-month 	or 	12,000
mile 	power-train warranty.
A national 	network 	is 	especially valuable 	to 	a 	consumer
who 	needs 	service 	work while 	travelling 	far 	from 	the 	place 	of
purchase.

The 	Honorable 	Quentin 	L. 	Kopp 	-- 	Page 	6
property 	or 	at 	other 	temporary 	locations 	may 	be 	held 	for 	several
reasons. 	A fleet 	dealer 	such 	as 	a 	car 	rental 	company 	may 	need 	to
hold 	such 	sales 	to 	turn 	over 	inventory. 	A traditional 	dealer 	may
wish 	to 	hold 	an 	off-premises 	sale 	to 	reduce 	inventory 	of
overstocked 	cars. 	An 	off-premises 	sale may 	also 	be 	desirable 	if
customers 	are 	supplied 	to 	the 	seller 	-- 	such 	as 	credit 	union
members 	at 	a 	credit 	union-sponsored 	sale. 	Off-premises 	sales
provide 	a 	low-overhead 	mechanism 	for 	bringing 	sellers 	and
customers 	together, 	and 	the 	reduced 	overhead 	costs 	can 	result 	in
savings 	for 	consumers. 	The 	advantages 	of 	selling 	cars 	in markets
without 	permanent 	dealers 	may 	not 	be 	substantial 	enough 	to
justify 	the 	costs 	associated 	with 	establishing and 	maintaining 	a
permanent 	dealership. 	Some 	communities 	are 	probably 	simply 	too
small 	to 	support permanent 	dealerships, 	and 	temporary 	off-site
sales 	may 	provide 	local 	~onsumers with 	a 	rare 	opportunity 	to
purchase 	a 	less 	expensive 	automobile.
The 	proposed 	legislation 	may 	also 	reduce 	competition 	in 	some
locales. 	Off-premises 	sales 	conducted 	in 	some 	small 	communities
may 	provide 	the 	only 	effective 	alternative 	to 	local 	dealers.
Under 	sa 	582, 	the 	local 	dealers 	would 	be 	insulated 	from 	this 	form
of 	competition. 	As 	a 	result, 	California 	consumers 	in 	these
communities 	may 	face 	higher 	prices 	for 	new 	and 	used 	cars.
Moreover, 	laws 	prohibiting 	off-site 	sales 	may 	harm 	consumers
in 	the 	rental 	car market 	as 	well. 	Fleet 	sales 	benefit 	this
market 	by 	enabling 	car 	rental 	companies 	to 	turn 	over 	their
inventories 	more 	efficiently. 	By 	restricting 	fleet 	sales, 	sa 	582
may 	tend 	to 	increase 	the 	cost 	of 	car 	rentals 	in 	California. 19
The 	apparent 	purpose 	of 	sa 	582 	is 	to 	protect 	consumers 	from
"fly-by-night" 	operators. 	The 	California 	vehicle 	code 	already
addresses 	this 	concern. 20 It 	requires 	lessor-retailers
participating 	in 	off-site 	sales 	to 	maintain 	a 	principal 	place 	of
business 	and 	to 	obtain 	and 	post 	a 	license. 	The 	licensing
procedure 	includes 	an 	inquiry 	into 	the 	applicant's 	personal
history 	and 	requires 	posting 	of 	a 	bond. 	Existing 	law 	also
prohibits 	dealers 	from 	engaging 	in 	certain unfair 	or 	deceptive
acts. 21 Thus, 	California 	consumers 	presently 	are 	protected 	from
unscrupulous 	persons who 	might 	operate 	off-site 	car 	sales.
19
20
21
~ 	G. 	Stigler, 	The 	Theory 	of 	Price, 	4th 	Edition 	(1987).
Cal. 	Veh. 	Code 	§§ 	11600 	et 	seg.
~ 	Cal. 	Veh. 	Code 	§ 	11614.

The 	Honorable 	Quentin 	L. 	Kopp 	-- 	Page 	7
CONCLUSION
We 	believe 	that 	unjustified 	limitations 	on 	off-site 	sales 	by
automobile 	dealers 	and 	lessor-retdilers 	are 	likely 	to 	increase
their 	costs 	and 	decrease 	competition. 	This, 	in 	turn, 	could 	well
increase 	the 	prices 	consumers 	pay 	for 	automobiles. 	For 	these
reasons, 	we 	believe 	that 	sa 	582 	would 	harm 	consumers.
We 	appreciate 	having 	had 	this 	opportunity 	to 	provide 	our
views 	on 	this 	SUbject.
Very 	truly 	yours,
~ 	~.b'¥-~~'!Z~	"=-' 	17
Jeffrey 	Klurfeld
Acting 	Director
San 	Francisco 	Regional 	Office