Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19067

Specifically, Paragraph I of the order

requires the respondent to cease and

desist from failing to follow reasonable

procedures to assure the accuracy of the

information that respondent maintains

with respect to cardholder accounts that

respondent has acquired or acquires

from other retail sellers of consumer

goods or services and that respondent

provides to consumer reporting

agencies, including but not limited to

the accuracy of dates or relevant actions.

Paragraph II of the order requires

respondent, to the extent not already

accomplished, within ninety (90) days

of service of the order, to identify

current cardholders on whom, since

January 1, 1992, respondent has

reported incorrectly to any consumer

reporting agency derogatory information

related solely to the cardholder’s open

end credit plan account with an

acquired creditor. The respondent must

instruct each consumer reporting

agency, in writing, to remove or correct

any such derogatory information.

Paragraph III of the order requires

respondent, after written notice from a

consumer to its Bill Adjustment

Department in accordance with the Fair

Credit Billing Act of a failure by

respondent accurately to ascribe

charges, credits, payments, or other

activity to the correct account, to cease

collection activity as to the disputed

amount, either directly or through any

third party, or any outstanding balance

that is due, in whole or in part, to

respondent’s failure accurately to

ascribe charges, credits, payments, or

other activity to the correct account.

Paragraph IV of the order requires that

the respondent institute reasonable

procedures to train their collection

personnel in the obligations of the Fair

Credit Billing Act, and to further train

their collection personnel to inform

consumers who assert billing errors of

the correct address of respondent’s Bill

Adjustment Department.

Paragraph V of the order requires

respondent to cease and desist from

issuing credit cards to any person

except (1) in response to an oral or

written request or application for the

card; or (2) as a renewal of, or substitute

for, an accepted credit card.

Paragraph VI of the order requires the

respondent to make documents

demonstrating compliance with the

requirements of the order available to

the Federal Trade Commission for

inspection and copying.

Paragraph VII of the order requires

respondent for a period of five years to

deliver a copy of the order to all present

and future personnel, agents, or

representatives having responsibilities

with respect to the subject matter of the

order.

Paragraph VIII of the order requires

that the respondent promptly notify the

Commission at least thirty (30) days

prior to any proposed change in

respondent such as dissolution,

assignment, or sale resulting in the

emergence of a successor corporation,

the creation or dissolution of

subsidiaries or affiliates, or any other

change in the corporation that may

affect compliance obligations arising out

of the Order.

Paragraph IX of the order is a

provision terminating the order in

twenty years from the date of its

issuance, or twenty years from the most

recent date that the Untied States or the

Federal Trade Commission files a

complaint in federal court alleging any

violation of the order, whichever comes

later.

Paragraph X of the order requires

respondent within one hundred and

eighty (180) days of the date of service

of the order, to file with the

Commission’s Division of Enforcement,

a written report setting forth in detail

the manner and form in which it has

complied with the order.

The purpose of this analysis is to

facilitate public comment on the

proposed order, and it is not intended

to constitute an official interpretation of

the agreement and proposed order or to

modify in any way their terms.

Donald S. Clark,

Secretary.

[FR Doc. 96–10561 Filed 4–29–96; 8:45 am]

BILLING CODE 6750–01–M

Request for Comments Concerning

Disclosures in the Resale of Vehicles

Repurchased Due to Warranty Defects

AGENCY: Federal Trade Commission.

ACTION: Request for public comments.

SUMMARY: The Federal Trade

Commission (‘‘the Commission’’ or

‘‘FTC’’) is requesting public comment

and holding a public forum concerning

the practices of motor vehicle

manufacturers, their franchised dealers,

and other firms and individuals in the

resale of allegedly defective vehicles

previously repurchased from consumers

because of warranty defects. This notice

sets forth a statement of the

Commission’s reasons for requesting

public comment, a list of specific

questions and issues upon which the

Commission particularly desires written

comment, an invitation for written

comments, and an invitation to

participate in the public forum.

On November 8, 1995, the Consumers

for Auto Reliability and Safety and other

consumer groups (‘‘Consumer

Coalition’’ or ‘‘Petitioners’’) filed a

petition in which they requested that

the Commission initiate either a

rulemaking proceeding or an

enforcement action regarding the

alleged industry practice of reselling

vehicles repurchased due to defects

without disclosure of the vehicle’s prior

history to the subsequent purchaser.

The Commission is publishing this

petition without endorsing or

supporting the views expressed therein.

The Commission is seeking public

comment and holding a public forum on

the issues raised by the petition and on

other related issues.

DATES: Written comments will be

accepted until June 28, 1996.

Notification of interest in participating

in the public forum also must be

submitted on or before June 28, 1996.

The public forum will be held in

Washington, D.C. on July 15, 1996, from

9 a.m. until 5 p.m.

ADDRESSES: Five paper copies of each

written comment should be submitted

to the Office of the Secretary, Room 159,

Federal Trade Commission, Sixth Street

and Pennsylvania Avenue, N.W.,

Washington, D.C. 20580. To encourage

prompt and efficient review and

dissemination of the comments to the

public, all comments should also be

submitted, if possible, in electronic

form, on either a 51⁄4 or a 31⁄2 inch

computer disk, with a label on the disk

stating the name of the commenter and

the name and version of the word

processing program used to create the

document. (Programs based on DOS are

preferred. Files from other operating

systems should be submitted in ASCII

text format to be accepted.) Individuals

filing comments need not submit

multiple copies or comments in

electronic form. Comments should be

identified as ‘‘Vehicle Buybacks—

Comment. FTC File No. P96 4402.’’

Notification of interest in

participating in the public forum should

be submitted in writing to Carole I.

Danielson, Division of Marketing

Practices, Federal Trade Commission,

Sixth and Pennsylvania Ave., N.W.,

Washington, D.C. 20580. The public

forum will be held at the Federal Trade

Commission, Sixth and Pennsylvania

Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

Carole I. Danielson (202) 326–3115,

Division of Marketing Practices, Bureau

of Consumer Protection, Federal Trade

Commission, Washington, D.C. 20580.
19068 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

SUPPLEMENTARY INFORMATION:

Section A. Background

Traditionally, automobile

manufacturers have bought back

allegedly defective vehicles from

consumers in only the most exceptional

circumstances. Although the Uniform

Commercial Code gave buyers a right to

elect other remedies if a product was

seriously defective, the remedy

ordinarily available to consumers was

limited to repairs, as expressly provided

by the terms of the written warranty.

Buybacks were granted only rarely, and

usually on the basis of goodwill. This

situation changed with the advent of

state lemon laws. Beginning in 1982,

state legislatures began enacting ‘‘lemon

laws’’ to improve consumers’ remedies

for new vehicle problems. These laws

give consumers the right to a

replacement or a refund if their new

cars cannot be repaired under warranty.

Under these lemon laws, if a specified

number of repair attempts fails to

correct a major problem, or if a new car

has been out of service for repair for the

same problem for a cumulative period of

thirty days or more within the one year

following delivery of the vehicle, the

manufacturer must either replace the car

or refund the full purchase price, less a

reasonable allowance for the consumer’s

use of the car prior to reporting the

defect. All 50 states and the District of

Columbia now have enacted such

statutes. Since the state lemon laws

were enacted, consumers can more

easily obtain relief requiring

manufacturers to repurchased allegedly

defective vehicles.

Most state lemon laws require

consumers to notify the manufacturer of

their intention to assert their lemon law

rights before exercising those rights. In

addition, most states require the

consumer to submit the dispute to an

informal dispute settlement mechanism

before pursuing their lemon law rights

in court. This mechanism may be an

arbitration program established or

staffed by the state (such as the Florida

and Washington State arbitration

programs), offered by the manufacturer

(such as the Ford Consumer Appeals

Board or the Chrysler Customer

Arbitration Board), or offered through

third-party organizations (such as the

BBB’s AUTO LINE or the National

Automobile Dealers Association’s

AUTOCAP programs). After reviewing

the evidence submitted, these

arbitration programs may impose a wide

range of remedies, including requiring

the manufacturer or dealer to replace

the defective vehicle or refund the full

purchase price.

Some vehicles that have been

replaced or bought back (‘‘repurchased

vehicles’’ or ‘‘buybacks’’) under the state

lemon laws are resold to other

consumers as used cars. To protect

subsequent buyers, approximately 36

states and the District of Columbia have

enacted legislation requiring

manufacturers and dealers to disclose to

subsequent buyers that a used vehicle

was repurchased because it was found

to be defective or to have nonconformities under the state lemon law.

The state laws vary as to how this

disclosure is to be made. Some states

require the vehicle’s title to be branded;

others require that the consumer be

given a disclosure document at the time

of sale or that the disclosure be placed

on the vehicle. The state laws also vary

regarding which vehicles are subject to

the disclosure requirement. Some states

require disclosure on all buyback

vehicles, including those repurchased

under voluntary settlements, while

other states require disclosure on only

certain vehicles (e.g., where there was a

final arbitration decision). In addition,

some states prohibit reselling a

repurchased vehicle with a serious

safety defect within the state.

Despite these state laws, subsequent

buyers of repurchased vehicles may not

be receiving the intended disclosures. In

a petition dated November 8, 1995, the

Consumer Coalition requested that the

FTC either initiate a rulemaking

proceeding or an enforcement action in

connection with the industry practice of

allegedly reselling vehicles bought back

because of defects without disclosure to

the used car purchaser. The petitioners

allege that auto manufacturers, their

dealers and others are engaged in a

pattern of conduct (which the

petitioners term ‘‘lemon laundering’’)

intended to conceal from used car

buyers material information about the

vehicle’s safety and quality history. The

petitioners also allege that this pattern

of conduct often involves transporting

the repurchased vehicles across state

lines to avoid the operation of state law

protections. A copy of the petition is

appended to this Notice as Attachment

1.

Section B. Invitation To Comment

The Commission invites written

comments to assist it in ascertaining the

facts necessary to reach a determination

on the issues raised by the petition and

on Petitioners’ request. Written

comments must be submitted to the

Office of the Secretary, Room 159,

Federal Trade Commission, Sixth Street

and Pennsylvania Avenue, N.W.

Washington, D.C. 20580, on or before

June 28, 1996. Comments submitted will

be available for public inspection in

accordance with the Freedom of

Information Act (5 U.S.C. 552) and

Commission regulations, on normal

business days between the hours of 8:30

a.m. and 5 p.m. at the Public Reference

Section, Room 130, Federal Trade

Commission, Sixth Street and

Pennsylvania Avenue, N.W.,

Washington, D.C. 20580.

Section C. Public Forum

The FTC staff will conduct a Public

Forum to discuss the written comments

received in response to the Federal

Register notice. The purpose of the

forum is to afford Commission staff and

interested parties a further opportunity

to openly discuss and explore issues

raised in the petition and in the

comments, and, in particular, to

examine publicly any areas of

significant controversy or divergent

opinions that are raised in the written

comments. The conference is not

intended to achieve a consensus

opinion among participants or between

participants and Commission staff with

respect to any issue raised in the

comments. Commission staff will

consider the views and suggestions

made during the conference, in

conjunction with the written comments,

in formulating its final recommendation

to the Commission concerning what

action, if any, to take in response to the

petition.

Commission staff will select a limited

number of parties, from among those

who submit written comments, to

represent the significant interests

affected by the petition. These parties

will participate in an open discussion of

the issues, including asking and

answering questions based on their

respective comments. In addition, the

forum will be open to the general

public. The discussion will be

transcribed and the transcription placed

on the public record.

To the extent possible, Commission

staff will select parties to represent the

following interests: Auto manufacturers,

new and/or used auto dealers, operators

of auto auctions, consumer groups,

Federal, State and local law

enforcement and regulatory authorities;

and any other interests that Commission

staff may identify and deem appropriate

for representation.

Parties who represent the abovereferenced interests will be selected on

the basis of the following criteria:

1. The party submits a written

comment during the 60-day comment

period.

2. The party notifies Commission staff

of its interest by June 28, 1996.
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19069

1 15 U.S.C. Sec. 45.

3. The party’s participation would

promote a balance of interests being

represented at the forum.

4. The party’s participation would

promote the consideration and

discussion of a variety of issues raised

in the petition.

5. The party has expertise in activities

affected by the petition.

6. The number of parties selected will

not be so large as to inhibit effective

discussion among them.

The forum will be held on July 15,

1996. Parties interested in participating

in the forum must notify Commission

staff by June 28, 1996. Prior to the

forum, parties selected will be provided

with copies of the comments received in

response to this notice.

Section D. Issues for Comment

The Commission seeks comments on

various issues raised by the petition.

Without limiting the scope of the issues

it seeks comments on, the Commission

is particularly interested in receiving

comments on the questions that follow.

Responses to these questions should be

itemized according to the numbered

questions below, to which they

correspond. In responding to these

questions, include detailed, factual

supporting information whenever

possible.

1. How many vehicles are

repurchased each year by

manufacturers? How many vehicles are

repurchased each year by dealers? What

is the disposition of these vehicles?

How many are resold to consumers?

How many are resold within the same

state? How many are transported to

another state and resold. What happens

to those not resold?

2. How many of the repurchased

vehicles are successfully repaired after

they are bought back? Are there studies

showing whether subsequent purchasers

of these repurchased vehicles encounter

a frequency of repair that is greater than,

equal to, or less than that of purchasers

of non-repurchased used cars of like

models and model years?

3. At what stage should a car be

considered a buyback for the purposes

of imposing a disclosure requirement?

Should any car that is taken back by the

manufacturer at any stage in a dispute

over alleged defects be considered a

buyback? If not, under what

circumstances should a vehicle be

considered a buyback? Should only

those vehicles in which there has been

an impairment of value be considered a

buyback? If so, how should

‘‘impairment in value’’ or any similar

limiting term be defined? Since

manufacturer buybacks are only one

segment of the buyback market, how can

defective vehicles bought back by the

dealer and/or traded in by consumers be

identified?

4. If ‘‘buybacks’’ are defined to

include those repurchased prior to the

initiation of arbitration or litigation,

would disclosure laws cause a chilling

effect on manufacturers’ willingness to

make such ‘‘goodwill’’ repurchases? On

the other hand, would disclosure laws

that only cover cars that were the

subject of a formal arbitration or

litigation proceeding lead manufacturers

to buy back more vehicles under the

heading of ‘‘goodwill’’ in order to avoid

the disclosure requirement?

5. How long should a vehicle be

considered a‘‘buyback’’? Permanently?

Until successfully repaired? Some other

time period? How can it be determined

whether a vehicle has been successfully

repaired prior to reselling it?

6. What are the current practices of

auto manufacturers, auction companies,

and dealers regarding disclosure of the

fact that a vehicle is a buyback to

subsequent purchasers? What types of

disclosures are given? Are these

disclosure methods effective? Are

consumers receiving the disclosures?

Who is responsible for ensuring that

disclosures are made to the consumer?

Are the disclosures specific enough to

identify or reveal the vehicle’s previous

history and the repairs performed? What

are the costs and/or benefits of these

disclosure methods to manufacturers?

To auction companies? To dealers? To

consumers? To other parties?

7. What methods are or would be

most effective in getting information

about a vehicle’s history and prior

repairs to consumers before they buy the

vehicle? Title branding? Disclosure

documents to be given to consumers?

Other methods? If disclosure laws are

the most effective method, then what

type of disclosure requirement should

be imposed? What are the costs and/or

benefits of these various methods?

8. What methods have been adopted

by the various States to ensure that

subsequent purchasers are advised that

vehicles are buybacks? How effective

have these methods been? What have

been the costs and benefits of these

State requirements to manufacturers? To

auction companies? To dealers? To

consumers? To the States?

9. If disclosure or title branding laws

are or would be most effective, how

should any such disclosure or title

branding rules be enforced? By FTC

regulation? By model State law? By a

national databank of VIN numbers? By

other means?

10. Uniformity in the disclosure and

labeling of repurchased vehicles might

resolve the problem of interstate

shipment of vehicles to avoid individual

state requirements. What are the costs

and/or benefits of diverse State

requirements versus those of

uniformity? Would a uniform national

standard be an effective method to get

buyback information to subsequent

purchasers? What would be the costs

and/or benefits of a national standard?

List of Subjects

Used cars, Warranties, Trade

practices.

By direction of the Commission.

Donald S. Clark,

Secretary.

Attachment I

Consumers for Auto Reliability and Safety

Advancing Auto Reliability and Safety Since

1979

November 8, 1995

Donald S. Clark, Secretary,

Federal Trade Commission, 6th &

Pennsylvania Ave., NW., Washington,

DC 20580

Re: Petition for Investigation of ‘‘Lemon’’

Motor Vehicle Resale Practices

Dear Secretary: Petitioners submit this

petition to the Federal Trade Commission

(hereinafter, ‘‘FTC’’, or ‘‘Commission’’),

requesting an investigation of certain

practices of new motor vehicle

manufacturers, their franchised dealers, and

others in the resale of defective vehicles.

Petitioners request that the Commission

initiate either rulemaking proceedings or an

enforcement program under Section 5 of the

FTC Act,1 to stop the industry practice of

reselling ‘‘lemon’’ cars without disclosure to

the used car purchaser.

Petitioners contend that these practices are

deceptive and unfair, and that they are

carried out in knowing disregard of the laws

and policies of many states that regulate the

resale of vehicles which have been deemed

‘‘lemons.’’

Over the last several years, investigations

conducted by state law enforcement officials

and by reporters for national news bureaus

have uncovered a pattern of conduct in the

resale of defective vehicles, conduct which is

intended to conceal from used car buyers

material information about the vehicle’s

safety and quality history. These practices

evidence a pattern of deception that

substantially injures consumers, passing on

to the second retail purchaser the very losses

that lemon laws were designed to prevent.

Often these practices involve the transport of

vehicles across state lines to avoid the

operation of state law protections.

Petitioners consider this practice, known

as ‘‘lemon laundering,’’ to be an unfair and

deceptive trade practice under Section 5 of

the FTC Act. Because the practices

necessitate the use of interstate commerce to

subvert the operation and purpose of state

laws designed to protect used car buyers,

Commission action is both appropriate and

necessary.
19070 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

2 ‘‘Top 10 Consumer Complaint List’’, National

Ass’n of Attorneys General, Washington, DC, April,

1994.

3 ‘‘Fourth Annual Survey of Consumer Protection

Agencies,’’ National Ass’n. of Consumer Agency

Administrators and Consumer Federation of

America, Washington, DC, October, 1995.

4NAAG Resolution, ‘‘Mandatory Disclosures in

the Resale of Lemon Vehicles’’, adopted at Winter

Meeting, Ft. Lauderdale, FL, December, 1991.

5 15 U.S.C. Sec. 2310.

6Center for Auto Safety letter to NAAG, May 1,

1995.

7 Disclosure forms required in some states are

presented at the time of sale, along with a raft of

other forms to sign, and are easily overlooked.

Disclosures on the vehicle title may not be seen at

all by the used car purchaser financing the

purchase, as the title goes directly to the finance

company.

8 ‘‘Do You Own a Lemon?’’, Palm Beach Post,

June 18, 1995, 1A. (The Florida AG’s office declines

comment on this account as its investigation is

pending.)

9Letter from Paul N. Corning, Lemon Law

Administrator, State of Washington, October 27,

1995.

Background

No consumer product generates more

consumer complaints, or more economic

injury, than the automobile. The National

Association of Attorneys General’s

nationwide survey of consumer complaints,

released in April, 1994, listed automobilerelated complaints at the top.2 This finding

is echoed by the survey report issued by the

Consumer Federation of America and the

National Association of Consumer Agency

Administrators 3: no doubt the FTC’s

experience confirms the accuracy of this

finding.

In 1991, the National Association of

Attorneys General (NAAG) adopted a

resolution calling for mandatory disclosures

in the resale of ‘‘lemon’’ vehicles. NAAG’s

statement reads, in part, as follows:

‘‘At least 50,000 vehicles with serious

safety defects or non-conformities are

repurchased by manufacturers or dealers

annually through arbitration, litigation or

through settlements as a result of the various

state lemon laws, representing a potential

$750 million loss.

‘‘Many of those vehicles are subsequently

resold at auction or by used car dealers and

thus recycled back into the marketplace, back

onto the streets, and back into repair shops.

‘‘Many states do not have adequate legal

protection for the unwitting consumer

purchasers of lemon law ‘buyback’

vehicles.’’ 4

Even with statutory protections in some

states, the practices continue to be

widespread, in large part due to the ease with

which vehicles can be moved to or through

states with weak or no protections for used

car buyers. This enables sellers to remove the

‘‘lemon’’ label from the used car transaction.

It is this particular practice which constitutes

‘‘lemon laundering.’’

The national scope of the problem is

brought into clearer focus when the safety

implications are considered. Many new car

‘‘lemons’’ resold in the used car market have

severe safety defects, which were not

addressed by safety recalls. Undoubtedly

these unsafe used car ‘‘lemons’’ contribute to

the enormous economic and human toll

exacted by motor vehicle crashes. It is well

documented that motor vehicle crashes are

the leading killer of Americans under the age

of 35, and the leading cause of head injuries,

epilepsy, quadriplegia, paraplegia, and facial

injuries, as well as a significant cause of

blindness.

It is petitioners’ contention that consumers

purchasing used cars are entitled to full, clear

and timely disclosure of the status of vehicles

deemed ‘‘lemons,’’ if not under state laws

then under the Uniform Commercial Code

provisions against unconscionability, under

Section 5 of the FTC Act, and as a matter of

public policy.

Federal and State ‘‘Lemon’’ Laws Primarily

Protect New Car Buyers

After the passage in 1976 of The

Magnuson-Moss Warranty Act with its

Federal private right of action for products

covered by a ‘‘full’’ warranty,5 all 50 states

and the District of Columbia enacted new car

‘‘lemon laws’’ to protect new car buyers.

Typically these statutes denominate a vehicle

as a ‘‘lemon’’ by the number of times a repair

is attempted without success, or by the

period of time a vehicle is out of service for

warranty repairs. The statutes generally

create a private cause of action with remedies

of replacement or refund of the purchase

price, incidental costs, and, in many states,

attorney fees. Many state laws encourage

settlements through state-sponsored or statecertified arbitration.

The measure of success of these laws and

programs is their widespread use: The Center

for Auto Safety estimates that over 50,000

vehicles are repurchased annually by

manufacturers as a result of arbitration

decisions or legal settlements.6 Thus,

substantial economic losses to many new car

buyers are prevented by the ‘‘lemon’’ laws.

In the wake of the success of these state

laws is the secondary harm to consumer

buyers in the used car market. Petitioners see

continuing consumer injury to used car

buyers who have no way to distinguish

between ordinary used cars and those that

have had defects that the manufacturer was

unwilling or unable to repair, defects which

are so severe as to warrant their repurchase

under state laws.

Manufacturers and dealers frequently

mislead consumers by characterizing

defective ‘‘lemon’’ vehicle buybacks as

‘‘goodwill’’ or ‘‘customer satisfaction’’

repurchases, particularly when the

repurchase is made as settlement to a

potential or actual lawsuit. The National

Association of Attorneys General Working

Group on Resold Lemons examined this issue

and concluded that vehicles repurchased

through such voluntary agreements should be

designated as ‘‘Defective Vehicle Buybacks,’’

just as are all adjudicated ‘‘lemons.’’ The

group’s report goes on to note that, otherwise,

‘‘If voluntary buybacks were not included

in this definition, manufacturers would be

able to avoid the disclosure requirements by

entering into voluntary agreements with

consumers to buy back or replace those

vehicles which are most seriously defective

and would most likely be adjudicated as

lemons. Subsequent consumer purchasers

would then have no knowledge of the

‘lemon’ history of these vehicles.

‘‘Some manufacturers may argue that the

use of the phrase ‘Defective Vehicle Buyback’

is not fair or accurate because vehicles are

also bought back on a ‘goodwill’ basis which

are not defective. The Working Group is not

convinced that vehicles which are free from

any alleged defects are routinely repurchased

by manufacturers and dealers. If there are

goodwill repurchases, the numbers are not

significant.’’ NAAG Working Group Report

Summary, November 1, 1990.

It is important to understand the typical

distribution channels for new car ‘‘lemon

buybacks,’’ as they are known. State laws

require that the manufacturer who gives the

warranty. and not the dealer, repurchase the

car. As noted above, many ‘‘lemon buybacks’’

are disguished by the manufacturer and

dealer, working in concert, who arrange for

the transaction to appear as a trade-in or, as

they are known in the industry, ‘‘trade

assists.’’ When manufacturers do repurchase

vehicles as prescribed in the ‘‘lemon laws’’,

they reintroduce the vehicle into the used car

wholesale market typically through ‘‘closed’’

auctions, where only franchised dealers for

that same make of vehicle are invited. The

vehicle may be sold on the used car lot of the

dealer purchaser at auction, or the title may

change hands several times before being

resold to the public.

On the used car lot of a franchised dealer,

the car will be shown alongside other late

model, low mileage cars. These may be

recent trade-ins, or cars returned to the dealer

after a period of use as a daily rental,

salesperson’s demonstrator, manufacturer

executive vehicle, or dealer ‘‘loaner’’ car.

There is nothing in the appearance of lemon

buybacks that would make them identifiable

to the used car buyer.

To address the ‘‘downstream’’ problem of

the resale of ‘‘lemons’’, thirty six states and

the District of Columbia have enacted

disclosure laws. These take various forms,

but can include requirements for one or more

of the following disclosures: an on-vehicle

sticker; a special form that must be

acknowledged by the used car buyer at the

time of purchase; or a ‘‘branding’’ of the

vehicle title. Five states forbid the resale in

that state of lemons found to have had

serious safety defects. The effect of these

various state laws, though, is to create a great

incentive for manufacturers and dealers to

move the cars out of the state in which they

are determined to be ‘‘lemons’’ and into a

non-disclosure state, or at least into another

state where dealers find the disclosures nonthreatening, (i.e., ineffective in warning

buyers).7

The practice of moving ‘‘lemon buybacks’’

to other states is extensive. Public accounts

of a State of Florida investigation still

underway shows that about 60 percent of

buybacks in the state are resold in other

states.8 Documentation of buybacks by the

Lemon Law Administrator for the State of

Washington shows that over a 5 year period,

324 of the 452 buybacks, or 71 percent, were

next titled in another state, mostly in Oregon

and Utah, but also as far away as North

Carolina, Virginia, and New Jersey.9
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19071

10See Statement of Basis and Purpose, Trade

Regulation Rule, Sale of Used Motor Vehicles, 49

Fed. Reg. 45696–45700 (1984).

11 Id., at 45703. The Commission’s authority

derives from its general Section 5 authority, as well

as a specific grant of power to regulate used car

sales by rulemaking in Title I of the MagnusonMoss Act, 15 U.S.C. 2309(b).

12 Ford Motor Co., 96 F.T.C. 362 (1980); General

Motors Corp., 102 F.T.C. 1741 (1983).

13 94 F.T.C. 263 (1974) (see also companion cases

at pp. 236–289). Petitioners note that the

beneficiaries of the Commission’s actions here were

primarily large industrial and truck freight firms.

14 86 F.T.C. 1532 (1975), aff’d 553 F.2nd 97 (4th

Cir., 1977).

The used car buyer of a ‘‘laundered’’ lemon

not only pays too much for the car due to the

deceptive non-disclosure of the car’s history,

but that buyer also enjoys few of the legal

protections that work for new car buyers.

Many state lemon laws do not apply at all;

others offer only some of the protections

accorded new car buyers. Even so, it is not

clear there is any practical way for the used

car buyer to look back into the vehicle’s

history and to discover the deception, unless

the consumer could somehow gain access to

state motor vehicle records in the state of

original sale.

Moreover, even if a used car buyer were to

later discover the deception in the sale of

their vehicle without the state-mandated

disclosure, their remedies are rarely

equivalent to those accorded the new car

‘‘lemon’’ buyer. Individual actions for fraud

under state law are difficult to sustain, absent

statutory provisions for special remedies and

attorneys fees recovery. Faced with the high

cost of waging suit for fraud or deception, the

aggrieved used car buyer is more likely to

resell or trade in the car at a substantial loss.

While understandable, this only passes the

problem on to the next used car buyer.

‘‘Lemon Laundering’’ Imposes an Economic

Injury on the Used Car Buyer

The model intended by the state lemon

laws is that the new car buyer is made whole

by recovering the original value of the

bargain, either through a refund or

replacement with a new vehicle, plus the

costs associated with enforcing the right.

Under the model, these costs are returned to

the manufacturer, where they should be

borne. (The costs are not a penalty, but an

incentive to manufacturers to produce fewer

lemons, and to provide good warranty service

to correct defects as they arise.) The

manufacturer’s costs, then, are the difference

between the refunded original retail price of

the car, and the depreciated price paid for the

vehicle at auction. One would reasonably

expect the auction price to reflect the fact

that the ‘‘lemon’’ disclosure will depress the

vehicle’s resale value on the used car lot—

that is, if the label does in fact appear there.

‘‘Lemon laundering’’ allows the manufacturer

to avoid this rather significant portion of

these costs, thus undermining the marketperfecting incentives on which the lemon

laws are premised.

The economic loss can only be avoided by

the used car buyer care who sees an effective

‘‘lemon’’ label, and who can then secure a

reduced price or negotiate for warranty or

service contract protection against a

reoccurrence of the ‘‘lemon’’ problem. When

the label is removed (or effectively

concealed), the apparent value of the vehicle

is increased, and the vehicle can be resold as

if that car never had any severe safety or

quality defects. Since the manufacturer and

the dealer at the wholesale auction both

implicitly understand that ‘‘laundering’’ the

label is possible (perhaps with only the cost

of moving the car to another state), the

manufacturer can realize nearly the full

wholesale price. Even where the

manufacturer complies with a state

disclosure law, the temptation of a dealer to

‘‘launder’’ the lemon disclosure is great—

when resold in a non-disclosure state at a

higher price, the dealer realizes an extra

profit in the transaction. In either case, with

or without manufacturer collusion, the loss is

shifted to the consumer used car buyer.

The warranty that comes with the used

vehicle will likely be of little value—the

seller will be sure to offer only a very

restrictive warranty or, as the Commission

found in the course of its Rulemaking,10 the

vehicle may be sold ‘‘as is,’’ or with a

warranty that requires substantial and

unlimited buyer co-payments for repairs (socalled ‘‘50-50 warranties,’’ wherein 50 per

cent of the repair costs, as computed by the

seller, are assessed to the buyer).

The Commission Can Augment State

Protections for Used Car Buyers, Without

Preempting Them

The Commission’s jurisdiction over used

car sales is self-evident.11 The remaining

question, then, is why the FTC should enter

this area when some states have addressed

the problem through disclosure laws. The

commission should act for the same reasons

the Commission acts in so many areas

touched on by state consumer protection

laws: certain aspects of the problem can only

be addressed by a Federal action, because

state laws can be defeated by moving the

transaction out of the jurisdiction, and

because varying state standards allow a type

of ‘‘forum-shopping’’ that defeats statutory

protections.

In the used car market, vehicles move

about the wholesale market through a web of

brokers, auctions, and even through multistate chain franchisees. This interstate nature

of the market enable ‘‘lemon laundering’’ to

persist even though the practice is

circumscribed in some states.

Petitioners believe that Federal protections

fashioned by the Commission can

supplement and complement state laws, and

need not preempt them.

There are several areas of potential action

by the Commission. One would be a reexamination of the Used Motor Vehicle Trade

Regulation Rule (‘‘TRR’’), with the possible

addition of a disclosure on the Federal

window sticker that would recognize the

‘‘lemon’’ label from any jurisdiction.

Alternatively, we believe an FTC

investigation, in conjunction with

knowledgeable state officials, will uncover

the methods by which manufacturers in

concert with dealers and auction firms

‘‘launder’’ lemon disclosures through

transactions whose primary purpose is to

defeat the protections of state disclosure

laws. This practice should be declared an

unfair or deceptive trade practice through

litigation. Commission cases against dealers

and dealer chains are a valuable tool for

enforcement and a strong deterrent; the

Commission’s own enforcement ‘‘sweeps’’ of

use car dealers for TRR violations are an

effective example of Federal enforcement,

one that should be applied to lemon

laundering practices. Petitioners are

confident the Commission can fashion a nonburdensome disclosure and record-keeping

scheme that will put an end to the practice.

There is Ample Precedent for FTC

Intervention in Matters That are Partly

Addressed Under State Law, but Where the

Remedies are Insufficient To Protect

Consumers

Considerable Commission precedent exists

for FTC action here. Petitioners note that the

Commission historically has actively engaged

issues which have been partly, but not

altogether successfully, addressed by state

consumer protection laws.

Petitioners refer to the Commission to its

actions against automobile manufacturers in

the so-called ‘‘secret warranty’’ cases,12

where disclosure schemes were erected to

make sure that vehicle owners received from

manufacturers material information regarding

non-safety defects and warranty extensions.

Once disclosed, the information enabled

consumers to protect themselves in two

ways. In some cases, consumers were able to

prevent damage to their cars by seeking early

repairs. In others, they were able to have the

costs of repair borne under manufacturer

extend warranty policies, which before the

Commission’s orders had been closely

guarded and allowed by the manufacturers in

only selective cases. The Section 5 theory

relied upon by the Commission in those

actions applies equally to the matter at hand.

Petitioners also cite the Commission’s

actions against Paccar, Inc. and other large

truck manufacturers to remedy the harmful

effects of deception in vehicle sales.13 In the

order entered in Paccar and companion

cases, the Commission ended a practice of

truck manufacturers who, at the end of a

‘‘model year,’’ applied to state titling

authorities (where not prohibited by state

policies) to redesignate the title of unsold

vehicles to show a new, updated model year.

This had the effect of avoiding the drop in

sale value of older unsold trucks on dealer

lots when the new model year units are also

for sale. The Commission took the position

that the practice was deceptive. This closely

parallels the situation in lemon laundering:

critical information is concealed (model year,

or lemon status) from the buyer, leading the

buyer to make inaccurate assumptions about

the value of the vehicle. Petitioners hasten to

point out that here, too, the Commission’s

action was taken despite the fact that some

states had addressed the problem.

Most relevant to the lemon laundering

practice is the Commission’s reasoning in

Peacock Buick.14 There the Commission

found it to be deceptive for a car dealer to

offer cars for sale as ‘‘new’’ alongside other

unquestionably new cars, absent some

explicit disclosure, when in fact the cars had

been previously used and in some cases
19072 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

15Letter to Hon. John Dingell, October 14, 1983;

incorporated in the Commission’s decision in

Cliffdale Associates, 103 F.T.C. 110 (1984).

damaged and repaired. The Commission’s

decision notes in part,

‘‘Even in the absence of affirmative

misrepresentation, it is misleading for the

seller of late model used cars to fail to reveal

the particularized uses to which they have

been put * * * When a later model car is

sold at close to list price * * * the

assumption likely to be made by some

purchasers is that, absent disclosure to the

contrary, such car has not previously been

used in a way that might substantially impair

its value.’’, at 1557–8. ‘‘Absent a clear and

early disclosure of the prior use of a late

model car, deception can result from the

setting in which a sale is made and the

expectations of the buyer * * *’’ at 1555.

The facts in the typical ‘‘lemon

laundering’’ situation clearly conform to the

Commission’s Policy Statement on

Deception.15 The misrepresentation in

question is committed by omission; it is

likely to mislead consumers acting

reasonably under the circumstances; and it is

material, in that it is important, it is likely

to affect the consumer’s choice of a product,

and its omission is likely to cause the

consumer to suffer injury.

Summary

The practice of ‘‘lemon laundering’’

presents a compelling case for deception and

consumer injury. The type of deception

evidenced by the practice is similar to that

addressed in Commission precedents, and

conforms to the Commission’s stated Policy

on Deception. The problem demands a

remedy from the Commission, with its

expertise in fashioning effective consumer

disclosures. Petitioners are confident the

Commission can fashion a remedy, through

rulemaking or enforcement proceedings, that

will preserve state laws protections and will

bring effective consumer protection to all

used car buyers.

Petitioners stand ready to assist the

Commission to develop the factual record of

these practices and to fashion appropriate

remedies.

Respectfully submitted,

Lawrence Kanter,

Counsel.

The following organizations join as Copetitioners in this matter:

Consumers for Auto Reliability & Safety,

Sacramento, CA

Consumer Federation of America,

Washington, DC

U.S. Public Interest Research Group,

Washington, DC

Consumer Action, San Francisco, CA

New York Public Interest Research Group,

New York, NY

Florida Public Interest Research Group,

Tallahassee, FL

Oregon State Public Interest Research Group,

Portland, OR

Center for Auto Safety, Washington, DC

Public Citizen, Washington, DC

Virginia Citizens Consumer Council,

Yorktown, VA

California Public Interest Research Group,

Los Angeles, CA

Connecticut Public Interest Research Group,

Hartford, CT

Massachusetts Public Interest Research

Group, Boston, MA

[FR Doc. 96–10562 Filed 4–29–96; 8:45 am]

BILLING CODE 6750–01–M

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Centers for Disease Control and

Prevention

[INFO–96–15]

Proposed Data Collections Submitted

for Public Comment and

Recommendations

In compliance with the requirement

of Section 3506(c)(2)(A) of the

Paperwork Reduction Act of 1995 for

opportunity for public comment on

proposed data collection projects, the

Centers for Disease Control and

Prevention (CDC) will publish periodic

summaries of proposed projects. To

request more information on the

proposed projects or to obtain a copy of

the data collection plans and

instruments, call the CDC Reports

Clearance Officer on (404) 639–7090.

Comments are invited on: (a) Whether

the proposed collection of information

is necessary for the proper performance

of the functions of the agency, including

whether the information shall have

practical utility; (b) the accuracy of the

agency’s estimate of the burden of the

proposed collection of information; (c)

ways to enhance the quality, utility, and

clarity of the information to be

collected; and (d) ways to minimize the

burden of the collection of information

on respondents, including through the

use of automated collection techniques

for other forms of information

technology. Send comments to Wilma

Johnson, CDC Reports Clearance Officer,

1600 Clifton Road, MS–D24, Atlanta,

GA 30333. Written comments should be

received within 60 days of this notice.

Proposed Projects

1. National Survey of Ambulatory

Surgery—(0920–0334)—Extension

The National Survey of Ambulatory

Surgery (NSAS) has been conducted

annually since 1994 by the National

Center for Health Statistics, CDC. It is

the only source of clinical information

nationally on utilization of ambulatory

surgery. It complements surgery data

obtained in another NCHS survey, the

National Hospital Discharge Survey

(NHDS), which provides annual data

concerning the nation’s use of inpatient

medical and surgical care provided in

short-stay, non-Federal hospitals. These

NHDS data have been used for more

than two decades to analyze the types

of surgical treatment provided to

hospital inpatients. However, due to

advances in medical technology, many

surgical treatments and diagnostic

procedures are now provided in

ambulatory settings which are outside

the scope of the NHDS. The NSAS, a

national probability sample of hospitalbased and freestanding ambulatory

surgery centers in the U.S., has been

designed to provide valid data about

medical and surgical care received in

ambulatory surgery locations. Data for

the NSAS are collected annually on

approximately 120,000 ambulatory

surgery cases. The data items which are

abstracted from medical records are the

basic core of variables from the Uniform

Hospital Discharge Data Set (UHDDS) as

well as surgery times, total charges and

information on anesthesia. These NSAS

data will be used for a variety of

planning, administrative, and

evaluation activities by government,

professional, scientific, academic, and

commercial institutions. Data collected

through the NSAS are essential for

evaluating health status of the

population, for the planning of

programs and policy to elevate the

health status of the Nation, for studying

morbidity trends, and for research

activities in the health field. For

example, selected government agencies

are interested in specific NSAS data to

track the incidence of selected

ambulatory procedures, e.g., estimates

of tubal sterilization, estimates of

endoscopies and related digestive tract

procedures, and estimates of endoscopic

removal of pre-cancerous polyps. In

addition, NSAS data will provide

annual updates for numerous tables in

the Congressionally-mandated NCHS

report, Health, United States. The total

cost to respondents is estimated at

$256,000.