KANSAS AUTOMOBILE DEALERS ASSOCIATION

IMPORTANT NOTICE: Brokering Prohibition – True Car/ZAG

To:      The Members of the Kansas Automobile Dealers Association

From:  Don L. McNeely, President

Various models for motor vehicle sales programs have brought increased attention on marketing practices in Kansas and across the country.  Commentators have most recently focused upon such programs as that offered by TrueCar/ZAG though there are many forms under which a dealer may be functioning, particularly in online arrangements.  This comment will focus upon how such programs can actually unwittingly or otherwise set you up for possible violations of the Kansas Dealers and Manufacturers Licensing Act, particularly those declaring motor vehicle brokering illegal in Kansas.

It is KADA’s opinion that the manner in which programs such as that offered by the True Car program as it is currently structured and being offered in our state do in fact violate the Kansas brokering prohibition.  This is particularly so as it relates to a dealership paying a direct marketing fee, which can be likened to a commission, for each vehicle sold. While it is not unlawful to pay an annual or monthly advertising or subscription fee for vehicle leads, it is a violation of the Kansas brokering law to pay a third party a fee—or other benefit--for bringing buyer and seller together. 

It is our understanding that a number of Kansas franchised new car and truck dealers are currently doing business utilizing the TrueCar/Zag format.  It is also our understanding that several formal complaints have been filed with the Kansas Department of Revenue’s Division of Motor Vehicles requesting an investigation of those dealers who have been identified.

As a reminder, the Kansas broker prohibition statute was enacted in 1990 and was ultimately upheld by the Kansas Supreme Court in 1992 (Blue v. McBride).  K.S.A. 2010 Supp. 8-2404 (q), (r), and (u) which respectively pertain to new and used vehicle brokering describe prohibited and allowed practices and exceptions (display, advertising, soliciting and acting as a broker).  These are also discussed and tempered in the McBride case to allow for the free exchange of information, but one must still keep in mind that brokering practices are squarely prohibited. 

You have to pay attention to the laundry list set forth in the law.  It defines a broker to be any person who, for a fee, commission, money, other thing of value, valuable consideration or benefit, either directly or indirectly, arranges or offers to arrange a transaction involving the sale of a vehicle, or is engaged in the business of (1) selling or buying vehicles for other persons as an agent, middleman or negotiator; or (2) bringing buyers and sellers of vehicles together, unless excepted.  (See K.S.A. 2010 Supp. 8-2401(x).)  As you can see the arrangements that are prohibited forms of brokering describe many elements of the TrueCar program which you should review carefully before engaging in such practices.

Another thing we have heard expressed about marketing arrangements are concerns related to legal issues of privacy, data use and ownership, as well as data access, particularly where a dealer has given outside access by a unrelated third party to its DMS system.  The TrueCar/ZAG structure serves as a significant example of the issue.  It collects transactional data from supposedly various sources to determine “the right price” to pay for a car.  Vehicle pricing points aren’t necessarily the only issue, though.  KADA is of the opinion that this can be very risky for TrueCar/ZAG, for consumers and for dealers. This is because the information is only as good as the data at hand and consumers may tend to rely on it as if it is gospel. When the information turns out to be inaccurate or misleading, the dealer is left holding the bag.

Additionally, it would seem this type of arrangement could also lead to unintended and unwelcome data access or greater dealer information system access, including injecting security flaws.  We have all heard about the employee who inadvertently released data or lost a laptop full of it.  Can you be sure that you have covered such risks with this type of arrangement?  The law of unintended consequences should be well reviewed here.  Seemingly simple expediency or the latest ‘science experiment’ may deliver liability exposure neither anticipated or intended, but nonetheless foreseeable.

Dealers should be aware of what information is being mined from them.  For example, if direct access to your DMS is in place, how can you be sure your customer doesn’t retain rights in the information taken or shared from it, or that your privacy notice sufficiently covered the use of the data when you aren’t part of that decision?  While you may control its security, who controls the security practices of others?  Again, keep in mind that when you allow your dealership to be used as an open portal for data mining, you may also find yourself drawn into a complaint about data misuse.

Dealers should decide for themselves whether it is a good idea to give any vendor or business partner access to their DMS. This kind of arrangement raises a whole host of customer privacy concerns and serious questions about how best to protect proprietary business information. Obviously, dealers should have sufficient, valid business reasons before they consider opening up their DMS to any outsider.  But, at the end of the day, it’s an individual dealer’s choice to do that, if they believe it’s in their best interest to do so.

While this can apply to all types of operations, we have mentioned TrueCar/ZAG as it serves as a comprehensive example.  Yet, it is not the typical motor vehicle broker KADA has seen in the past.  They are backed by $200 million in venture capital and have over 60 relationships with entities such as AAA, American Express and USAA. We know for a fact that TrueCar/ZAG has already hired one lobbyist in Kansas and may have possibly hired another. There are only two reasons to hire a lobbyist:  (1) Either you are going to attempt to pass legislation; or (2) attempt to repeal legislation.  Accordingly, KADA is expecting an attempt to repeal or modify the Kansas broker prohibition this coming legislative session.

TrueCar/Zag has put out information itself describing how it does business.  It is clearly brokering vehicles through a number of Kansas new vehicle dealers. If you are currently doing business with TrueCar/ZAG under their currently described business model it is clear you are simply brokering vehicles and that is a violation of state law which could lead to financial penalties and even the loss of your dealer license.