Yesterday, the U.S. Court of Appeals for the Fifth Circuit issued a significant opinion vacating the Federal Trade Commission’s (FTC) Combating Auto Retail Scams Trade Regulation Rule (CARS Rule). The decision came in response to a petition filed by the National Automobile Dealers Association (NADA) and the Texas Automobile Dealers Association (TADA), challenging the procedural validity of the rule. The petitioners argued that the FTC violated its own regulations by failing to issue an advance notice of proposed rulemaking (ANPRM) before promulgating the CARS Rule. They also contended that the FTC’s cost-benefit analysis was arbitrary and capricious.
The CARS Rule, promulgated by the FTC, aimed to address perceived deceptive practices in the motor vehicle sales industry, including bait-and-switch tactics and “junk fees.” The rule included four main provisions: a prohibition on specific kinds of misrepresentations; a series of disclosure requirements; a prohibition on valueless “add-ons”; and a requirement to obtain express, informed consent from consumers before charging for any item.
The Court’s Decision
The court ruled that the FTC’s statutory authority for the CARS Rule stems from § 18(a)(1)(B) of the FTC Act, which requires an ANPRM under the FTC’s internal regulations, rather than § 1029(d) of the Dodd-Frank Act, which does not require an ANPRM. The court was “persuaded that the substantive authority for the CARS Rule arises from § 18(a)(1)(B) of the FTC Act and that subpart B procedures apply.”
Accordingly, the FTC violated its own regulations by not issuing an ANPRM. The court emphasized that agencies must follow their own regulations, noting, “[i]t is a given of administrative law that agencies must follow their own regulations.”
The court rejected the FTC’s argument that its failure to issue an ANPRM was harmless error, ruling that the petitioners had demonstrated sufficient prejudice. The lack of an ANPRM deprived the petitioners of a procedural benefit and drew into question the substance of the FTC’s ultimate decision. The court explained, “NADA has shown that it is far from ‘clear’ that the failure to issue an ANPRM ‘had no bearing on the procedure used or the substance of decision reached.’ This was not harmless error.”
Dissenting Opinion
Judge Higginson dissented, arguing that the petitioners had ample opportunity to participate in the rulemaking process through public roundtables and comments. Higginson contended that the lack of an ANPRM did not prejudice the petitioners and that the FTC’s rulemaking process was not arbitrary or capricious. “I dissent because the Rule was promulgated in 2022, after a decade of roundtables, comments, and over 100,000 consumer complaints, many leading to federal and state law enforcement actions against unfair and deceptive dealer practices. Petitioners participated in those public roundtables and submitted several of those comments.” Judge Higginson also found that petitioners failed to meet their burden in showing that the lack of a formal advance notice of rulemaking prejudiced them.
Conclusion
The CARS Rule now heads back to the FTC, where a new Chairman may have a different agenda for the agency.