On October 9, 2024, a three-judge panel of the Fifth Circuit Court of Appeals in New Orleans heard oral arguments regarding the Petition for Review filed by the National Automobile Dealers Association (NADA) and the Texas Automobile Dealers Association (TADA) challenging the FTC CARS Rule (a.k.a. The Vehicle Shopping Rule). The case is National Automobile Dealers Association & Texas Automobile Dealers Association v. FTC, No. 24-60013, 5th Cir. (Jan. 5, 2024).
The FTC CARS Rule is a sweeping trade regulation rule that will introduce strict regulations for motor vehicle dealers. The Rule has numerous requirements that will affect all aspects of dealers’ sales operations including advertising practices, consumer disclosures, and recordkeeping, requiring dealerships to make substantial operational adjustments to comply. Although the Rule has been finalized, its implementation has been voluntarily “stayed” – meaning delayed – by the FTC pending the resolution of this legal challenge brought by NADA and TADA.
1. How Did We Get Here? Background on the Case and Legal Arguments
NADA’s Argument: In their challenge against the CARS Rule, NADA and TADA argue that the FTC failed to follow procedural regulations, in part, by bypassing a required Advanced Notice of Proposed Rulemaking (ANPRM). They also contend that the rule is arbitrary and capricious, as the FTC did not demonstrate widespread misconduct in the auto industry to justify such sweeping regulations. NADA and TADA also argue that the rule is redundant, targeting practices already prohibited under existing federal and state laws, such as the Truth in Lending Act. Furthermore, they criticize the FTC’s cost-benefit analysis, claiming it unreasonably downplays the compliance costs for dealers while overstating the rule’s consumer benefits. The associations seek to have the rule set aside or remanded for further consideration with additional evidence.
FTC’s Defense: In its defense of the CARS Rule, the FTC argues that it acted within its legal authority granted by Congress to implement the rule, and that it was not required to issue an ANPRM based on an alleged grant of authority under the Dodd-Frank Act. The FTC contends that the law exempts it from such requirements when addressing unfair or deceptive practices by auto dealers. The agency further argues that it was not obligated to prove widespread misconduct to justify the rule, as NADA claims, but points to the alleged persistence of deceptive practices like bait-and-switch tactics and hidden fees despite previous enforcement efforts. While NADA challenges the FTC’s cost-benefit analysis, the FTC maintains that its analysis demonstrates the rule’s consumer benefits far outweigh any costs to dealers. Moreover, the FTC emphasizes that the cost-benefit analysis is not subject to judicial review, urging the Court to deny NADA’s petition and allow the rule to stand.
NADA and TADA filed their petition for review directly with the Fifth Circuit Court of Appeal, petitions such as this that challenge agency rulemaking are directly filed with the appellate court, the challengers (petitioners) are not required to file it in the lower district court as would be required with a typical lawsuit.
2. Highlights from the Oral Argument
The oral argument largely revisited the points raised in the briefs, with extensive discussion on federal agency rulemaking. Specifically, the Court and parties debated whether this Rule was a trade regulation under Section 18 of the FTC Act (which requires an ANPRM) or if it was, as the FTC contends, issued pursuant to the authority under the Dodd-Frank Act (which does not require an ANPRM), and if the Rule separately required an ANPRM based on the FTC’s own internal rulemaking procedures. The judges asked several questions regarding appellate authority on these issues, the legislative history of the rulemaking process, and whether, if an ANPRM was required for the CARS Rule, the failure to issue an ANPRM was a “harmless error”—meaning the absence of an ANPRM did not cause any significant harm and would not invalidate the Rule. Several of the judges appeared receptive to NADA’s arguments, with NADA appearing better prepared to address the Court’s questions, while the FTC attorney at times hesitated and struggled to provide clear answers to some questions. At times, the judges expressed skepticism about both parties’ contentions on whether the court should or was empowered to act.
On the topic of “harmless error,” NADA argued that the error was not harmless, as NADA and dealers lacked sufficient time to respond to the numerous questions raised in the Notice of Proposed Rulemaking (NPRM) and to properly analyze the cost-benefit impacts. The lack of an ANPRM meant that the critical threshold question of whether a rule was needed at all was not open to comment. The FTC countered that NADA did fully engage in the rulemaking process and, when questioned by the Court, noted that the agency had revised its time-savings estimate (from 3 hours to 2 hours) based on NADA comments, and removed the requirement to provide a list of add-ons. As an aside, NADA had initially requested an extension to respond to the NPRM during the CARS Rule rulemaking process, but this request was denied by the FTC.
During the discussion of the cost-benefit analysis, one judge cited the Truth in Lending Act (TILA) as an example, noting that it took 10–20 years of litigation before courts outlined with clarity the scope of the required disclosures and predicted a similar protracted process for this Rule.
A key clarification the FTC attorney made (which reiterates FTC commentary in the Rule) was that the “Offering Price” required under the rule is a ceiling, not a floor—meaning dealers can negotiate down from the offering price, but are not restricted to a fixed price.
An interesting exchange occurred when the FTC attorney stated that the CARS Rule would allow the agency to seek monetary penalties and consumer redress for violations. In rebuttal, the NADA attorney pointed out that such remedies are only available to the FTC if rulemaking procedures requiring an ANPRM are followed. This could potentially pose a challenge for the FTC if they prevail in this case but later seek to impose penalties or obtain consumer redress.
As expected, the Court took the matter under submission, and a written opinion will be issued at a later, unknown date.
3. What to Expect Next
The Fifth Circuit has a reputation of taking a more critical look at federal agencies’ rulemaking. This means the Court carefully scrutinizes whether agencies like the FTC are implementing policies that go beyond what Congress has authorized. For example, the Court has recently struck down certain agency actions, emphasizing the Court’s view that significant decisions affecting the economy or individual rights should be made by elected officials, not by agencies acting independently. As noted above, the CARS Rule case involves a somewhat technical argument that the FTC did not follow required rulemaking procedures, whereas the FTC argues that it followed the required rulemaking procedures.
There is no deadline for the Fifth Circuit to issue its written ruling, though typically decisions are issued within 2-6 months after oral argument. It is likely we will have the Court’s ruling by early 2025. Depending on the ruling, it is possible that a party may appeal to the US Supreme Court. If the ruling from the Fifth Circuit favors the FTC, however, the FTC may attempt to implement the CARS Rule pending any appeal to the Supreme Court.
4. Reading the Tea Leaves: the ComplyAuto Legal Team’s Predictions
It’s important to note that judges’ questions and demeanor during oral arguments can be deceiving, and any forecast of the Court’s final ruling remains largely speculative. Appellate judges are skilled at not tipping their hand, and it’s not unusual for them to direct tough or skeptical questions at the side they ultimately support, either to solidify their reasoning or to preemptively address arguments that other judges might make. Nevertheless, here are the predictions of the ComplyAuto legal team based on the oral argument in front of the Fifth Circuit:
Talar Coursey: “I think that NADA put up a very good fight, and after hearing the arguments, I think it’s more likely than not that two of the three judges on the panel will uphold NADA’s challenge and overturn the rule. I predict the majority of the panel (2-1) will side with NADA and find that the rule is fatally flawed substantively, and that the FTC failed procedurally. In the end, while I think NADA will win this case, it may be a short lived victory because the FTC can and I think will quickly rectify any errors and issue a rule consistent with its procedures. A delay of the Rule is an important, but ultimately a temporary victory.”
Brad Miller: “It is notoriously difficult to predict an outcome based on the tenor of the oral arguments alone, but NADA presented a clear, compelling argument that the FTC failed to follow its own procedures in issuing the Rule, and that the Rule itself fails to meet the standards for a rulemaking and is thus fatally flawed. While the justices expressed skepticism about some of the NADA arguments, I thought the questions posed by the panel to the FTC’s attorney highlighted even more starkly the weaknesses in the FTC’s position. This rule is clearly flawed and misguided, and while it’s still an uphill battle I believe the oral argument and feedback from the panel was quite positive for NADA’s chances. Hopefully the court sends the FTC back to the drawing board.”
Hao Nguyen: “The NADA did just enough to delay the CARS Rule, but I wouldn’t pop the champagne just yet. The heart of NADA’s argument appears to be based on the fact that the FTC failed to meet required procedures, including a failure to provide advanced notice (ANPRM) for the CARS Rule, which would allow members of the public time to comment on the proposed regulations and is required under FTC Act. In response, the FTC argued that it did not rely on the FTC Act to promulgate the CARS Rule, but, rather, it relied on the Dodd-Frank Act, which allowed the FTC to move forward without having to provide an ANPRM. I believe the FTC’s argument falls short but it is an untested area. Even if NADA wins on that point, I cannot overlook the FTC’s compelling arguments regarding harmless error and the current regulatory landscape. These issues the judges will have to review and can go either way. Rather than an outright dismissal, a delay of the CARS Rule seems like the more likely outcome.”
Mark Sanborn: “I predict the Fifth Circuit will not vacate the CARS Rule but will likely issue a “remand without vacatur,” sending it back to the FTC for further review, similar to the ANPRM process. One judge specifically mentioned this as a potential solution, and the NADA attorney supported it as a middle ground. Since the FTC’s authority to issue the Rule isn’t in question, I don’t think the Court will vacate it and force the FTC to restart the process. The Court appeared receptive to NADA’s procedural arguments about the need for an ANPRM and seemed more skeptical of the FTC’s defense. The judges were also hesitant about applying the harmless error doctrine, out of concern that it could undermine the ANPRM requirement. They also seemed receptive to the NADA’s argument that additional studies and information provided in response to an ANPRM could have influenced the final Rule. I predict the Court will require the FTC to correct any procedural errors before enforcing the Rule.”
Chris Cleveland: “I believe the FTC will ultimately prevail, and the rule will be upheld. While NADA presented a strong case and came better prepared with thorough arguments, especially on procedural grounds, the “harmless error” standard will likely be the deciding factor. In my view, this is clearly a trade regulation, and the FTC should have adhered to its own procedural rules, including the advance notice requirement. NADA’s arguments on this point are persuasive. However, they face an uphill battle in demonstrating that the lack of an ANPRM had a material impact under the Shinseki v. Sanders test. NADA’s extensive participation during the comment process and the FTC’s responsiveness to those comments weaken their claim of harm. Without clear evidence or specific examples showing that the rule would have turned out differently had they received advance notice, it will be difficult to argue that the procedural violation was anything more than harmless. As a result, I expect the Court to conclude that, despite the FTC’s failure to follow its own rules, the error was ultimately harmless and did not affect the outcome of the rulemaking process.”
5. What Dealers Should Do in the Meantime
Although the legal challenge to the Rule might succeed, requiring the FTC to revisit its approach and even potentially start the rulemaking process over, the reality is that complying with the Rule’s broad and complex requirements will demand a considerable amount of time, effort, and resources and place a significant strain on dealership staff. As a result, it is essential for dealers to take proactive measures now to be prepared if the Rule becomes effective. Furthermore, according to the FTC, many of the Rule’s prohibitions and requirements are simply formalizing existing regulations. In other words, regardless of the CARS Rule’s final outcome, dealers must review and adjust their advertising, F&I, and related practices accordingly because many of these requirements already exist in different forms. Indeed, recent enforcement actions against dealers initiated by the FTC and state attorneys general demonstrate that regulatory enforcement will continue and increase regardless of whether the CARS Rule becomes effective.
Dealerships should proactively prepare for the CARS Rule by reviewing their advertising practices to ensure compliance. This includes preparing to clearly display the “Offering Price” in all advertisements for specific vehicles or those referencing monetary amounts or financing terms. The Offering Price is the all-in cash price that a dealer will sell a vehicle to any buyer excluding only charges imposed by the government. Under the CARS Rule dealers must also disclose the total of all payments if a monthly payment is mentioned and avoid any misrepresentations. Establishing comprehensive disclosure processes is essential; employees should be trained to provide mandatory disclosures both in writing and verbally during initial communications with consumers, whether in person, online, or over the phone. Additionally, dealerships need to plan for obtaining and documenting express informed consent before charging for any items, including optional add-ons, and upgrade their recordkeeping systems to meet the Rule’s 24-month requirement.
Employee training on the new compliance standards is important for successful implementation. Staff must understand the requirements around disclosures, advertising, and recordkeeping, particularly the necessity to disclose the Offering Price in the first response to any consumer inquiry about a specific vehicle or financing terms. Dealers should also review and update vendor contracts to ensure all third-party services are compliant with the Rule.
Tools like ComplyAuto’s Guardian can assist dealerships by automating compliance checks, scanning advertisements, and conducting deal jacket audits. Guardian’s AI-based technology is designed to help dealers meet both current and future CARS Rule compliance requirements, offering an efficient way to address federal and state regulations while ensuring thorough and accurate compliance practices across all aspects of the dealership’s operations.
For more in-depth analysis of the CARS Rule, NADA members are encouraged to consult the recently-published Driven publication called “A Dealer Guide to the FTC Vehicle Shopping Rule“ which was co-authored by ComplyAuto.
6. Conclusion
The Fifth Circuit’s forthcoming decision on the FTC’s CARS Rule will have significant implications for both new and independent motor vehicle dealerships across the country. Regardless of the outcome, dealers must prepare now for potential compliance by reviewing their advertising practices, training staff on disclosure requirements, and reviewing recordkeeping processes. The complexities of the Rule require early action, as even if the Rule is remanded or modified, many of its core principles reflect existing regulatory obligations. Tools like ComplyAuto’s Guardian can also provide vital support, helping to automate compliance and ensuring adherence to both existing and new regulations.