FTC Staff Comment to the Hon. Rodney T. Berry Concerning West Virginia H.B. 2297 to Prohibit Auto Brokering

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
CLEVELMID REGIONAL OFFICE
SUlle 520-A
The Atrium Building
668 Euclid Avenue
Cleveland, Ohoo 44114
(216) 522-4207
April 7, 1989
The Honorable Rodney T. Berry
House Judiciary Committee
House of Delegates
West Virginia Legislature
State Capitol
Charleston, West Virginia 	2530$
Dear Delegate Berry:
V890047
COMMISSION AUTHORIZED
i
The staff of the Federal Trade Commis~ion's Cleveland Regional Office and
Bureau of Competition are pleas~d to respond to your letter of March 1, 1989,
requesting our comments on Hou~e Bill 2297.1 	This bill would prohibit the
~usiness of aut?mobilt? brokering. i ~f pa,ssed, it may reduce competition and
mcrease the pnces paId by West VIrgInIa consumers, for new and used cars. 	We
believe that consumers will be best served if competition in the sale of
automobiles in West Virginia is not restricted unnecessarily.
The proposed legislation makes a change in West Virginia law that is likely
to prohibit innovative forms of competition in automobile sales. 2 	The bill
provides that it is unlawful to be a broker and specifies criminal penalties for
violation. 	''Broker'' is defined to include anyone other than a licensed dealer, a
distributor or their employees, or the owner of the automobile. 	The prohibition
includes any form of arranging or offering to arrange the sale of a motor
vehicle for any consideration.3 	Thus, the legislation would prohibit the
1 	These comments are the views of the staff of the Cleveland Regional Office
and the Bureau of Competition of the Federal Trade Commission. 	They are not
necessarily the views of the Commission or any individual Commissioner.
2 	SB 2297 amends Article 6 of the West Vir~inia Code by adding a new
. section: 174-6-1a (Unlawful to be a broker; defmition; criminal penalties).
~ 	Obviously, what constitutes consideration is a matter for the courts to
decide.

The Honorable Rodney T. Berry
March 28, 1989 2.
practices of credit unions and buying clubs that assist consumers in locating a
licensed automobile dealer willing to sell at a substantial discount.4
INTERFSf 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
protectinf consumers from unfair competition and unfair and deceptive
practices. 	In fulfilling this mandate, the staff of the Federal Trade
Commission often submits comments, upon request, to federal, state, and local
~overnmental bodies to hell? assess the competitive and consumer welfare
Implications of pending polley 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 these restraints.
Moreover, during recent years, this agency has been actively involved in
issues relatin~ 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 ri~hts and to
prevent the injury that can be caused by oral misrepresentation 10 used-car
transactions.6 	The Commission has also recently ruled that automobile dealers
.;
4 	In such cases the sales transaction is completely between the consumer
and the car dealer, with the credit union or buying club simp'ly acting as a
broker. 	Credit unions that sponsor such sales allow automobl1e 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. 	Some credit unions receive finder's fees for
organizing the sales.
s 	15 U.S.c. § 45.
6 	16 C.FR. § 455 (l988~

The Honorable Rodney T. Berry 	3.
March 28, 1989
in the Detroit area violated the antitrust laws by agreeing to limit their hours
of operation and has settled similar allegations involving Cleveland area
automobile dealers.' 	The Commission staff has also conducted economic
research concerning automobile marketing.8
In addition, the Commission staff has commented on ·the costs and benefits
of legislation similar to that at issue in West Vir~inia. 	For instance, the staff
recently voiced concern that proposed legislation In Michigan 9 and in Illinois 10
prohibiting automobile brokering would reduce competition and increase the
prices that consumers pay for automobiles. 	During the past two years, the
staff has submitted comments to other states on issues similar to those raised
by H.B. 2297.11 	In each case we concluded that the legislative initiative could
have resu.ted in raising the prices that consumers paid for new and used cars.
: I
I!
, 	Detroit Auto Dealers Ass'n, Inc., FTC Docket 9189 (February 22, 1989);
Cleveland Automobile Dealers Ass'n, C-3247 (March 2, 1989~
8 	The Commission's Bureau of Economics completed a study concluding that
state laws restricting the number of automobile dealers in an area increase
costs to car buyers of 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).
9 	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~ 	The bill did not pass.
Howev~r, the Michigan bill did not include "auction dealers, persons employed
by a licensed new vehicle dealer, used vehicle dealer, or used vehicle parts
dealer" in the definition of ''broker.''
10 	Comments of the Chicago Regional Office and Bureau of Competition staffs
of the Federal Trade Commission on Illinois Senate Bill 1978 by C. Steven
Baker, Director, Chicago Regional Office (March 21, 1989~ 	The governor
vetoed the bill
11 	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, 1987);
letter from the FTC staff to the Governor of Texas (June 1, 1987).

The Honorable Rodney T. Berry
March 28, 1989
AUTOMOBILE MARKETING METHODS.
4.
Several innovative methods are available to steer consumers to licensed
automobile dealers willing to sell at a discount 	For instance, credit unions
often sponsor automobile sales (by licensed dealers) on their premises. 	Credit
unions encourage these sales because they give the credit UnIons an opportunity
to offer automobile financing. 	Since cars are sold in volume, the credit unions
can obtain substantial savings for their members.
Fleet dealers, such as Hertz and A vis, are a principal source of
automobiles for sales conducted on credit union premises. 	The fleet dealers are
seekin~ 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.
Credit union fleet sales save 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.u 	The Michigan Credit
Union League estimated that consumers purchasing cars at its members' sales
pay an average of $900 less per vehicle.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 picked14
U 	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"
13 	The Michigan Credit Union League asked its members to fill out a survey
which asked how much. credit union customers saved at the sales.
14 	"Taking the Hassle out of Car-Buying," 	Changing Times, August 1988,
at 37.

The Honorable Rodney T. Berry
March 28, 1989
5.
. 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
mdependent Amway distributors to persons paying a suggested annual fee of
$24.95. 	The Amway Auto Network .IS currently available in thirty states, the
District of Columbia and the United States Virgin Islands. 15 	This type of
program appears to offer consumers substantial benefits.
fROHIBITIONS ON ''BROKERING'' AUTOMOBILE SALES.
H.B. 2297 would prohibit credit unions, buying clubs, or the like from
'acting as "brokers" in sales of new or used automobiles,16 and thus would ban
,the practices described above. 	It is difficult to see how this chan~e will
~enefit consumers or competitionP 	We have no reports of significant or
I
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 distributor or distributor's employee, or the owner of
the car being sold 	Brokers, as defined in the Bill, may not sell new cars or
used cars. 	W. Va Code § 17A-6-1a
, 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 	The' 'purpose of liB. 2297's prohibition of automobile brokering may be to
protect dealer's investments in showrooms, lots, and other items necessary for
the car dealer business from "free-riding" by other sellers. 	This rationale would
apparently be based upon the assumption that a significant number of car
buyers choose their preferred cars at a full service dealer's showroom and then
purchase that car from a low overhead automobile broker. 	This "free-riding"
may be a serious concern, especially regarding the sale of new cars, but
prohibition of automobile brokering by the state might not be the optimal
response. 	Private contractual restraints between dealers and manufacturers
might be able to resolve the problem. 	These restraints, if properly drafted,
would not necessarily raise serious antitrust concerns. 	MQreover, many of the
automobiles sold through brokers are used vehicles. 	To the extent that buyers
are concerned with characteristics unique to each used car, such as mileage,
age, and general condition, free-riding would be less of a problem.

The Honorable Rodney T. Berry
March 28, 1989
6.
extensive fraud or deception that has injured consumers who participate in
these discount sales programs, and current law may already provide meaningful
protection to the public. 	For instance, automobile sales are covered by the
West Virginia Consumer Credit and Protection Act,t8 and the Commission's Used
Car Rule helps protect consumers' warranty rights when purchasing used cars.1 9
In addition, all automobile dealers in West Virginia must be licensed by the
State.20 	H.B. 2297 does not appear to provide benefits to the public that are
not already available under current law.
On the other hand, the anti-brokering amendments in H.B. 2297 appear
likely to injure West Virginia consumers by restricting competition in the new
and used car markets. 	Such a restriction may in turn result in higher prices
for consumers. 	Preventing credit unions, buying clubs and referral serVIces
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.
CONCLUSION.
The proposed bill 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 provisions of HB 2297 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
Mark D. Kindt
Director
Cleveland Regional Office
18 	W. Va. Code § 46-A-6-102 (1988).
19 	Supra note 5.
~ 	W. Va. Code § 17-A-6-3(a) (1988). 	Although we recognize this specific
potential benefit of licensing, we express no opinion on whether the licensing
requirement provides overall benefits to consumers exceeding the overall .costs
of licensing.