Fifth Circuit Strikes Down FTC's Auto Retail Scam Rule: Key Implications for Dealers

The U.S. Court of Appeals for the Fifth Circuit on Jan. 27, 2025, vacated the Federal Trade Commission's (FTC) Rule on Combating Auto Retail Scams (CARS Rule) before it could take effect, finding that the FTC failed to follow its own regulations in promulgating the CARS Rule. This decision halts the FTC's efforts to impose new regulations on auto dealerships and spares dealers nationwide from additional compliance burdens regarding advertising, pricing transparency and financing disclosures.

Background

The CARS Rule, proposed in 2022 and finalized in January 2024, was designed to combat bait-and-switch tactics and hidden fees in auto sales. The CARS Rule addressed misrepresentations across 16 categories related to motor vehicle transactions, focusing on issues such as financing terms, the cost of add-ons, vehicle availability and non-universal rebates or discounts. The CARS Rule also required auto dealers to clarify that add-ons are optional and provide the total cost of a vehicle upfront. Finally, it prohibited charges for unnecessary add-ons and required express, informed consent from consumers for any additional fees or charges.

The CARS Rule was originally set to take effect on July 30, 2024. However, the FTC postponed the effective date to Sept. 30, 2025.

Fifth Circuit Decision

On the same day the final CARS Rule was published, the National Automobile Dealers Association (NADA) and Texas Automobile Dealers Association (TADA) petitioned the Fifth Circuit for review to challenge the CARS Rule. They challenged the rule's adoption on several grounds, including:

1. The FTC failed to issue an Advance Notice of Proposed Rulemaking (ANPRM) as required by its own procedural regulations under Section 18(b) of the FTC Act.
2. The FTC lacked a reasonable basis for the CARS Rule and its cost-benefit analysis, both of which the petitioners argued were arbitrary and capricious in violation of the Administrative Procedure Act, 5 U.S.C. § 706.

On Jan. 27, 2025, the Fifth Circuit ruled 2-1 to vacate the CARS Rule on procedural grounds. The court determined that the FTC had violated its own regulations under Section 18(b) of the FTC Act, which requires the additional step of issuing an ANPRM when establishing regulations that declare certain acts or practices unfair or deceptive. The court rejected the FTC's argument that it had promulgated the CARS Rule under the Dodd-Frank Act, finding instead that "the Dodd-Frank Act does not grant the [FTC] any substantive authority separate from § 18(a)(1)(B) of the FTC Act."

The Fifth Circuit emphasized that procedural compliance is "essential to the legitimacy of administrative rulemaking" and held that the FTC's failure to meet this requirement was not a harmless error. The court found that the petitioners had been prejudiced because they were denied the opportunity to participate more fully and earlier in the rulemaking process, which, in the majority's view, could have influenced the final outcome of the CARS Rule. The Fifth Circuit did not evaluate the validity of the CARS Rule's substantive provisions or the FTC's authority to classify those practices as unfair or deceptive.

Judge Stephen Higginson dissented, arguing that the petitioners were not harmed by the FTC's failure to issue an ANPRM. He noted the FTC's extensive public outreach efforts, which included roundtables, comment periods and a review of more than 100,000 consumer complaints, many of which resulted in federal and state enforcement actions against auto dealers. Although it is still uncertain whether the FTC will appeal the decision, the Fifth Circuit, known for limiting and overturning federal agency regulations, emphasized the importance of procedural compliance in administrative rulemaking.

Next Steps

As the CARS Rule is effectively nullified, the FTC must now revisit the rulemaking process. The FTC has not yet commented on the CARS Rule's future but may pursue a different agenda under its new chair, Andrew Ferguson, who was appointed just days before the decision.

Nevertheless, motor vehicle dealers should anticipate ongoing scrutiny from the FTC, especially in collaboration with state authorities, given the FTC's track record. For example, a January 2024 joint action by the FTC and the state of Connecticut against Manchester City Nissan – discussed on an episode of Holland & Knight's Clearly Conspicuous podcast – highlighted that vigilance must be maintained to avoid similar scrutiny. The FTC has recently targeted dealers for deceptive practices such as misleading financing terms, hidden add-on charges and bait-and-switch tactics, including advertising low prices only to steer consumers toward higher-priced vehicles.

Accordingly, to minimize the risk of enforcement actions from federal and state authorities, dealers should proactively follow transparent advertising guidelines to ensure that their marketing is clear and accurate and fully discloses all material information to consumers.

How We Can Help

Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust FTC practice, with experienced attorneys who are recognized as thought leaders in the field. The firm has represented dozens of companies and individuals in federal and state investigations concerning advertising, marketing practices, privacy and data security, consumer credit, telemarketing and debt collection, saving clients from significant financial loss, public scrutiny and having to make changes to their core business operations.

If you have any questions about the impact of the FTC and state authorities' scrutiny on your business, please contact the authors or another member of the Consumer Protection Defense and Compliance Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.