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Be Careful Selling Warranties and Service Plans

A Pennsylvania dealership sold and leased cars with a manufacturer's warranty for 36 months or 36,000 miles. It also offered retail and lease customers a product it called a “warranty,” but this may have been an extended service plan. The product excluded manufacturer's warranty claims. 
The Pennsylvania attorney general pounced on the dealership, alleging that the product “failed to provide any meaningful value relative to the consideration paid by the consumer.” The AG's press release was blunter—the headline said the dealership sold “valueless warranties.” In colorful language, the AG is quoted as saying, “This dealership took its customers for a ride” and “bilked customers out of their hard-earned money.” Ouch

Was this dealership's voluntary protection product worthless? A service plan that only duplicates a manufacturer's warranty would seem to offer no value. Is that what happened here? It is hard to tell from either the press release or the Assurance of Voluntary Compliance that the AG filed in state court.

But we have a clue. Although the dealership sold this product to both purchase and lease consumers, the AVC alleged a problem only for the product bought in connection with 36-month leases. That's the limit of the manufacturer's warranty. This fact suggests to us that the dealership's product provided service beyond the manufacturer's warranty. If so, only consumers who leased cars for 36 months—the limit of the manufacturer's warranty—would not benefit.

Many dealers would look at their service plan and focus on the value it provides for most customers, without thinking about who may not benefit. Perhaps that's what happened here. The dealer just didn't think about whether the service plan would be valuable to a customer who turned in the leased car when the manufacturer's warranty expired. Or maybe the dealer assumed customers would figure this out for themselves.
This AVC hit the dealership in its pocketbook. The AG invited customers to complain to his office and required the dealership to make restitution to those complainants “to the satisfaction of the Commonwealth.” And it looked like the dealership already had made restitution to complaining customers. Finally, the AVC required the dealership to pay a civil penalty of $5,000 and another $5,000 to the AG's office for the investigation's cost.
The toughest part of this AVC may be neither the reputational harm nor the financial cost. The AVC enjoins the dealership from engaging in any “fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding.” This prohibition lasts forever. A future violation entitles the AG to a civil penalty up to $5,000 per violation. Pennsylvania law also includes a “nuclear option” - for the violation of an injunction, the AG can ask the court to revoke the dealership's right to do business and appoint a receiver of the dealership's assets.

Courtesy of Nicole F. Munro and Thomas B. Hudson of Hudson Cook, LLP  (410) 865-5411

https://www.hudsoncook.com/index.cfm

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