CONSUMERS FOR AUTO
RELIABILITY AND SAFETY
AUTO RELIABILITY AND SAFETY
FTC File No.
Consumers for Auto Reliability and Safety appreciates this
opportunity to comment concerning vehicle buybacks, and we look
forward to reviewing the comments filed by other interested
organizations and individuals.
In addition to these Comments, we also submit the
"Preliminary Report: Resales of Vehicles Determined to Be Lemons,"
produced by the Consumers for Auto Reliability and Safety
Foundation, based on data from 7 states that furnished Vehicle
Identification Numbers (VINs) of vehicles that were determined to
be lemons in state-administered arbitration programs. The study
traces the title histories of 498 lemons. Should more complete
data become available, the CARS Foundation will incorporate it
for submission to the FTC at a later date.(1)
- 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
- The total number of vehicles bought back due to quality
or warranty performance problems is truly known only to
the manufacturers. There is no central registry or census
of buybacks available to the public. Data from the states
is not complete, although there is enough available for
commenters to make some extrapolations, as we do below.
The key issue: what buybacks to
include in the census
- It is critical that any census of the lemon laundering
problem, it is to accurately reflect consumers'
experience, include all vehicles with a history of
defects, or known to the manufacturer to be seriously
defective, and not just those that are adjudged
"lemons" under state law. For reasons that we
discuss in greater detail here and in response to
Questions 3 and 4 below, any accounting of the number of buybacks
must include so-called "goodwill" buybacks and
"trade assists" completed with financial
assistance from the manufacturer or its financial arm.
- Previous public comments by manufacturers on the issue
would have agencies exclude from the census the many vehicles
bought back before arbitration decisions or court orders,
and we expect that argument will be made again in this proceeding. There
are two types of transactions included in this argument:
1) vehicles repurchased by the manufacturer before any
final arbitration or court decision, and 2) vehicles
traded in to the selling dealer after a consumer
complaint where there is some financial participation by
the manufacturer. The first has been described by manufacturers
and dealers as "goodwill" or "customer
satisfaction" buybacks, terms that do more to
obscure than to explain their purpose. The second is
known in the industry as "trade assists,"
meaning the manufacturer assists in making the deal financially
acceptable to the customer and the dealer, but the actual repurchase
is made by the dealer or the finance company.
- "Goodwill buyback" has a broad, encompassing,
and generally misleading meaning as it is used by
manufacturers and dealers. The term itself connotes that the
sole reason for buying back the vehicle is to promote a
positive relationship between the buyer and manufacturer.
In another context, "goodwill" connotes that intangible business
asset consisting of the regard customers and the public
hold for a firm's quality, reliability, and trustworthiness.
Manufacturers have used the term in the lemon buyback
context, however, to include any buyback made before a
final arbitration decision, or before a court order has
been issued, even where the company's own internal
documents confirm that the vehicle has serious defects
and clearly surpasses the presumption set forth in state
lemon laws for buybacks. (See additional discussion of
the issue below in our response to Questions 3 and 4.)
- It would be a great disservice for the Commission to
adopt this industry term and to ignore the many vehicles
it covers. These vehicles are at least as likely as other buybacks
(ones ordered by arbitrators or courts) to have serious
defects. A better term for these vehicles is "early
Early settlement buybacks are
among most defective lemons
- Cars that are repurchased or traded in shortly after a
consumer voices a complaint are likely to be among the worst
cases of unrepaired defects, and so are precisely the
kinds of vehicles that second buyers should know about.
Early settlements of disputes spare both buyer and
manufacturer the expense of litigation, but this does not
erase the fact that the vehicles have a history of
defects and quality problems. Indeed, a rational buyback program
from the manufacturers' viewpoint would have the worst
vehicles--those that are most clearly unrepairable--repurchased
quickly by settlement, and the more questionable cases
moved into arbitration or litigation to resolve such
questions as whether the facts support a finding that the
car meets the statutory presumption for
- Arkansas, California, Connecticut, Indiana, and Utah
already recognize this and require title branding and
resale disclosure for early settlement buybacks. Indiana allows
a narrow exception for advertised guaranteed repurchase
programs, provided the vehicles were not found or alleged
to have a nonconformity. We expect this trend will
accelerate as the states focus on ways their lemon laws
can be improved to better protect subsequent buyers.
- We have reviewed an advance copy of the comment of
Seattle attorney Peter Maier that bore directly on this issue.
We find the study described in the comment persuasive.
Maier looked at 22 cases in which he represented the
consumer, and another set of 119 cases filed with the
State of Washington Lemon Law Administration. The case
analysis looked for any pattern of early settlement buybacks
versus arbitration decisions for buybacks; it analyzed
them based on the severity of the defects alleged, such
as whether there was a safety defect as one allegation.
The study reveals no pattern; Maier concludes that as a
group, early settlement buybacks have the same type and
severity of defects as ones that go through the
Manufacturers have used the terms
"goodwill" and "customer satisfaction"
to describe buybacks that their own internal records
admit qualify as "lemons" under state law
- An example of how the terms "goodwill" and
"customer satisfaction" buyback can be
misapplied to obscure the issue of defects comes from the
recent administrative action in California against
Chrysler Corporation regarding the disposition of 119 manufacturer
Chrysler argued in its defense that all 119 vehicles were "customer
satisfaction" buybacks, and thus not subject to
California lemon law title branding, disclosure, and warranty
requirements. But Chrysler's own statements clearly
acknowledged that certain vehicles met the state law
presumption for "lemons," and thus would
ultimately be subject to a buyback order in arbitration
or court. In one case, a sales tax refund request to the
state submitted by Chrysler states that the vehicle in
question was a "State Lemon Law Buyback...Vehicle in four
times for four attempts and 32 days down for repairs to Transmission
- In fact, California's DMV alleged that 96% of the 119
vehicles had a "safety defect." Problems
experienced by consumers included faulty brakes that repeatedly caused
harrowing incidents, transmissions that intermittently failed
to shift above low gear in freeway traffic, and vehicles
that unpredictably stalled on the freeway, which the administrative
law judge found to be "an obvious safety hazard."
In addition, 48 of the 119 vehicles were repurchased
following a decision rendered in Chrysler's own third
party dispute process. Chrysler also had applied for a
sales tax refund under the lemon law for 115 of the 119 vehicles.
The administrative law judge found that "The only
way for a manufacturer to obtain a sales tax refund is to
prove to the [California] Board of Equalization that the
vehicle is a 'lemon' within Civil Code section
- Another example comes from California's action against
General Motors.(4) Typical statements
in GM's internal documents regarding these buybacks allegedly
made for "customer satisfaction" include these
statements: "Vehicle qualifies as a Cal. Lemon under
2 criteria req'd for repair atts and loss of use time";
"Vehicle qualifies under lemon law for # of days in
shop. Dealer has worked with TAN and cannot repair vehicle";
"Repurchase to facilitate trade: CA lemon law
qualified." The corresponding disclosure forms for
each vehicle indicated it was a "Mediated or Customer
- Manufacturers and dealers use the misleading term
"goodwill" to include vehicles with serious
quality and safety defects not repaired under the
warranty, precisely the vehicles covered by lemon laws.
When first owners benefit from an early settlement, we
see no reason to withhold the protection second buyers
are accorded under these laws. The Commission should
consider carefully the equities of protecting first and
second buyers when crafting a remedy for the lemon
"Trade Assists" are an
early settlement remedy; the term does not mean that the
problems are insubstantial
- The second category of buybacks that should figure in an
accurate census is the "trade assist." This
type of "early settlement" buyback means that
the owner trades in a defective vehicle to the selling
dealer for a replacement. As lemon owners may be
desperate to get rid of a vehicle, they are sometimes
induced to buy a more expensive model, instead of
choosing a replacement or refund as the lemon laws provide.
Presumably these trades should be made on terms more favorable
to the consumer than a typical early trade-in, which can
involve considerable depreciation; however, that is
generally not the case.
- As with the more general term "goodwill"
buybacks, manufacturers have argued elsewhere that these
vehicles are bought back not under the lemon laws or for
any acknowledged defects, but in an effort to promote "customer
satisfaction," and therefore should not count as
lemon buybacks." We expect the manufacturers and dealers
to submit comments that purport to quantify this
category, and urge the Commission to regard them with skepticism,
for the reasons cited above.
Caveats concerning California
- We know of no nationwide source of data to compile a
census of buybacks. However, some very rough calculations
can be made on the basis of some of the figures we have
from the states. The difficulty with state data is that
the states have varying laws, arbitration programs, and
reporting requirements. Any accurate estimate will have
to account for these disparate factors, and is beyond the
scope of this comment.
- We can offer some words of caution about making
unwarranted assumptions based on figures from California, which
comprises about 10% of the U.S. new vehicle market each
year. The state's Arbitration Review Program recorded
4890 consumer requests for arbitration under the lemon
law in 1995(5). However,
this figure represents only vehicles whose manufacturers
offer a certified voluntary arbitration program, which
represent approximately 66% of the California new vehicle
market. We can extrapolate, then, that if 100% of the manufacturers offered programs,
the figure would have been 1.5 times that (100% divided
by 66%), or 7335.
- Some California lemon owners remain unaware that the
arbitration programs exist. Surveys indicate that only 3-5%
of consumers who apply for arbitration found out about
the program through the manufacturer. Notices in owners manuals
are often overlooked. Unlike in other states, there is no
requirement for a "lemon-aid kit" in the glovebox
or when consumers experience problems. Consequently, in
California the level of awareness about arbitration is
lower than in states with high-visibility, user-friendly
education and awareness campaigns.
- Figures for cases found to be out of jurisdiction (1591)
are not valid indicators for other states, because California's
lemon law is one of a minority that does not include
vehicles purchased for business use. This exclusion
applies to individuals such as real and insurance estate
agents and other self-employed persons, as well as small
businesses. Therefore, an undetermined, but undoubtedly
significant, number of consumers allege that their
vehicles are lemons, but are excluded from arbitration
because they use their vehicles to make a living. However,
they would be granted access to arbitration in most other
states, which include commercial use vehicles.
- Figures for cases where consumers were awarded buybacks
(564) are also not valid indicators for other states, since
in California arbitrators only take the law "into account,"
which means it is often ignored. Consequently, only about
25% of Californians who seek relief are granted buybacks,
compared to 48-64% in states where the law is applied.(6)
- Any extrapolation based on solely on filings for
arbitration would grossly underestimate the number of
buybacks in California. One factor is the undetermined number
of buybacks which result from early settlements when serious nonconformities
are obvious, and cases are resolved before the consumer even
files for arbitration. California does not record such
settlements. Extrapolations based on awards in
arbitration would fall even further from the mark. For
example, in the DMV's administrative action against
Chrysler, 58% of the 116 vehicles that the administrative
law judge found to be lemons were repurchased through
negotiated settlements or agreements, and not due to an arbitration
- In addition, 10% of consumers who apply for arbitration
in California subsequently file lawsuits, adding another 500
cases. Based on an informal survey conducted among the
California plaintiff's attorneys who specialize in the
field, we estimate that approximately another 1,500 cases
are filed annually. An estimated 85-90% result in settlements,
with the consumer receiving a refund and attorney's fees,
and the vehicle's being repurchased. The California Motor
Car Dealers Association recently indicated that an
estimated 5,000 lemon law cases are filed annually in the
state, but we believe that figure is too high(8).
- Given the complexities of the data, and the absence of
specific figures for whole categories, such as the number of
business-use vehicles, any extrapolations at this point
would be merely speculative. However, perhaps now that a
new title branding law has taken effect in California, in
time a clearer picture will emerge.
- 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?
- The question of "successful" repairs makes
unwarranted assumptions about the nature of persistent
quality and safety problems with motor vehicles. Vehicles
that have been repurchased by manufacturers and dealers typically
have been returned and surrendered to the dealer numerous
times during the warranty period for repairs. Most state
laws set a standard of 4 repair attempts for substantial
defects under the warranty, after which the vehicle is
presumed to be a lemon. In many cases, there are repeated
attempts to remedy a single component; in others, several repairs
are made to related components that fail due to a single
underlying design or assembly defect. (For example, a
bent frame might cause suspension and drivetrain problems
in several different components.) The repair may only be temporary, allowing
the owner to drive the vehicle for a period until the
problem resurfaces or manifests in another breakdown. Is
a temporary repair "successful"? Only in that it gets
the vehicle back on the road. But more importantly in
this context, the underlying defect has not been cured,
and the warranty has not been honored. Such intermittent
nonconformities are common.
- Furthermore, many state lemon laws mandate that consumers
allow the manufacturers one more try to successfully
repair nonconformities, after the dealer has repeatedly
failed. The manufacturer's opportunity to "cure"
comes before the matter can be heard in arbitration.
A new standard of
"successful repair" would merely add yet
another attempt to state lemon law presumptions
- Each time a dealer returns a vehicle after warranty work
has been performed, there is an implicit representation that
the repair has remedied the nonconformity. Does it clarify
the matter to introduce a new standard that yet another
repair can be declared "successful"? We think
not. It is simply another chance to "cure," adding one more
to the state law presumption that is now working to
protect consumers. A federal remedy to the lemon laundering
problem should not introduce another, "one more
- More fundamental than these practical objections is our
position that the question itself ignores the policy that underlies
the 38 state laws that now require disclosure to all
second retail buyers. (Only Connecticut's law allows for
vehicles to be declared "successfully"
repaired.) State law disclosures to second buyers do not purport
to advise them of existing defects, but instead
that the vehicles have a history of problems. The
issue, then, is not whether the nonconformities
ultimately were remedied under the warranty; instead, the
disclosure provisions are designed to alert prospective
purchasers that the first owner experienced serious problems
with the vehicle. And for good reason. Cars with repeated
problems, or that are out of service for extended
periods, may have underlying structural or design flaws,
or they may be repaired with parts or components that
have the same design flaw that caused the problem.
Buybacks are fundamentally
different from other used cars
- Consumers buying a used vehicle are entitled under state
laws to notice of the history of problems the first buyer experienced,
and any federal rule or remedy should continue this
- State laws classify a few types of used vehicles as
worthy of special notice: salvage vehicles that are
rebuilt from wrecks, flood damaged cars, and lemon buybacks. The
policy underlying these designations is that they have traits
that separate them from the general population of used
vehicles. In particular, they are more likely to have latent
defects. The purpose of the disclosures is to prevent fraud.
We see no reason for any Commission action in this area
to remove some of the vehicles from the operation of
state law remedies.
- Beyond these objections are the practical problems of
introducing a "successful" repair standard.
What entity will be designated to determine what is
"successful"? We do not foresee a workable
program to have an independent authority do this, and we
would oppose any proposal to have the question resolved
by the manufacturers or dealers, as they are disqualified
Consumers use the notice to avoid
- The notion of "successful" repair, then, misses
the point of the disclosure laws, which is to give the
used vehicle buyer information about the vehicle history,
and not its repair status on the day it is sold. Any
disclosure to retail buyers about the vehicle's troubled
repair history enables the buyer to inquire further,
demand further assurances or warranties against recurring
problems, bargain for a better price and assume the risk,
or decline the risk altogether and refrain from making the
- The very concept of "successful" repair is
implicitly dismissed in a recently announced policy of
one manufacturer. Ford Motor Co.'s new "Lincoln
Assured" used car sales program, announced this
April, is designed to bolster consumer confidence in
purchasing recent model year, low-mileage used cars (2
years old, under 36,000 miles). Essentially, the
manufacturer will certify certain used cars for resale
through franchised dealers. The program includes a
minimum 2 year/24,000 mile warranty from the
manufacturer. According to a Wall Street Journal
account of the program, eligible vehicles are limited to
"previously leased Lincolns and Lincolns driven by a
sole owner, which as a Ford Motor employee...[However,] cars
previously used in rental fleets or cars with poor repair histories
are being excluded."(9)
- The reason for excluding daily rental cars should be
obvious, as it is common knowledge that short-term
renters drive cars harder than owners who have a stake in
their car's durability and trade-in value. The reason for excluding
cars with "poor repair histories" should be
equally evident: the manufacturer believes that a poor history
is an indicator of future problems. Cars with
poor repair histories increase customer dissatisfaction
and warranty costs, two outcomes Ford logically wants to avoid.
We note with interest that Ford's announcement does not
foresee taking cars with poor repair histories, giving
them a final "successful" repair, and then
selling them under the program.
- Studies showing frequency-of-repair histories of
manufacturer buybacks versus other used cars would of
course be highly relevant to the issue at hand. We expect that
the manufacturers have this data, and would be interested to
see it entered into the record of this proceeding.
Manufacturers' claims about
post-buyback repairs are unreliable
- Related to this, and underscoring our points above about
the idea of "successful" repair, we turn to the
Proposed Decision in the recent California case against Chrysler.
There the Administrative Law Judge's findings included the
defect and repair histories of 19 cars as experienced by
first, second, and (in a few cases) third owners. In at least
9 of those, or nearly 50%, problems with specific components recurred
after the resale (Bonetti-Hanover, clutch slave cylinder,
at 4-5; Soldano-Hogan, transmission, at 11-12;
Lorraine-Kidroski, brakes, at 12-14; Stephens-Vigil,
transmission, at 14-16; Smith-Estes, seat lock, at 18-20; Skogebo-Sodari,
frame and tire wear, at 20-21; Dewitt-Jones, water leaks, 21-23; Sanford-Reid,
brakes, 27-29; Puri-Pappangellan, transmission, at 29-30).
- In a number of these instances Chrysler's disclosures to
the second buyers claimed that problems experienced by
first owners had been repaired. Typical of these is the notice
to second buyer Vigil, which read:"A-604 TRANSMISSION FAILURE
- VEHICLE REPAIRED 10-11-91" (at 16. See also
disclosure to second buyer Jones, at 22.) However, Vigil
continued to experience repeated transmission failures
within 3 months of purchase.
- Other examples from the Chrysler record show that
manufacturer claims about repairs are not reliable. In at least
one instance, Chrysler's partial disclosure to second
buyers claimed that a problem had been repaired, while
other Chrysler documents clearly contradicted that
Warranties are no substitute for
disclosures of defects
- One issue which should not cloud this discussion of the
second buyer's repair experience with buybacks is the issue
of used car warranties. Consumers are entitled to vehicle
history disclosure whether or not there is a warranty
offered on the used vehicle, and for several reasons.
First, used vehicle warranties are not equal, and many
cover only part of the cost of repairs. Second, no
warranty that promises repairs of defects can replace the
lost time and the inconvenience of repeated repairs,
including lost wages and rental car expenses. Furthermore, consumers
are concerned about safety and reliability, not just
whether their repair costs will be covered.
- We believe it is self-evident that given a choice,
informed consumers will pass over a vehicle with a bad
history of repairs under warranty for one with an average history,
even where both vehicles are offered with a comprehensive
used car warranty. The 14 states' laws that prescribe
warranties for the defects that gave rise to a buyback do
not excuse disclosure in favor of the warranty coverage.
The statute's provisions work together to protect
consumers, and one is not intended to be a substitute for
- In summary, we strongly disagree that the problem of
lemon laundering would be improved by introducing the notion
of "successful repair." It ignores the clearly established
policy of the states to require disclosure of the poor
repair history of lemon buybacks; it introduces a
"one more try" standard which dilutes the
states' presumptions of how many repair attempts trigger
the lemon remedies; and it has no realistic means of enforcement,
as there is no practical way to test or certify repairs as
- 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 of 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
- As we have already commented extensively regarding this
issue earlier, at Question 1, we will not repeat those comments
- As a matter of public policy, any state or federal remedy
should not allow manufacturers to evade title branding, disclosure,
and warranty requirements merely by choosing to settle a
matter at an early state with a repurchase.
Buyback status hinges upon the
vehicle's nonconformities, not when it is repurchased
- We concur with former Governor George Deukmejian of
California, who vetoed a bill (SB 2568) that would have
limited the disclosure law to only those vehicles reacquired
pursuant to a court order or arbitration decision. In his
veto message, the Governor stated:
- "I am returning Senate Bill no. 2568 without
my signature. This bill would limit the transactions
on which a manufacturer would be required to disclose
that a vehicle was the subject of restitution or
replacement to those that were the subject of a court
order or a decision rendered through a third-party dispute
- I am concerned that this bill would result in a
disclosure requirement based on the level of the
dispute rather than the reliability of the vehicle.
Apparently, this bill would exempt from disclosure
those vehicles that are clearly a 'lemon' because the manufacturer
or seller did not dispute that the vehicle
did not comply with the warranty.
- Moreover, this bill would undermine the integrity
of the records of the Department of Motor Vehicles by
failing to identify all vehicles that were unable to
be brought into conformity with warranty laws whether
the manufacturer voluntarily complied or was forced
to by a court or arbitrator."(11)
- In the same vein, the Administrative Law Judge in CA
DMV v. Chrysler found that:
- "There is no requirement that a third party
determine that a vehicle is a 'lemon' before it can
be repurchased as such. It is sufficient under the
law that a new motor vehicle had a nonconformity
which substantially impaired its use, value or safety,
and the vehicle could not be repaired after a reasonable number
of attempts, for it be eligible for repurchase. When
the owners of new Chrysler vehicles represented to
the manufacturer that the vehicles had nonconformities
which could not be repaired after a reasonable number
of attempts, those vehicles were 'lemons' and
Chrysler agreed they were 'lemons' by honoring the customer's
demands that the vehicles be repurchased and they
- If buyback provisions were triggered only when there is a
formal determination in arbitration or court, it would ironically
exempt vehicles when the manufacturer fully agrees that
they are lemons, and there is no dispute.
The exception: advertised
"satisfaction guaranteed" buybacks
- We recognize that a legitimate exception to this general
rule occurs when manufacturers advertise a guaranteed repurchase
or satisfaction program for a defined period, provided
that no nonconformity is alleged or found. We note that Indiana
has adopted language that defines that narrow exception,
and believe that Indiana's statute is an optimal approach
that is fair to all parties.
- 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
- We do not believe that requiring disclosure of
pre-settlement buybacks would cause a chilling effect on repurchases
of truly defective vehicles. There are several reasons
for our position. First, we understand from data in
Connecticut and Florida that title branding and
disclosure provisions have not lessened the incidence of early settlement
buybacks in those states. Second, we note that all 50
states have enacted lemon law statutes. In all 50 states,
the manufacturer's obligation to buy back seriously
faulty vehicles is not discretionary, but is required when
the legal standard or presumption is met. Third, most
major auto markets in the nation, with the exception of
California, offer a state-administered arbitration program
were the law is applied. Altogether, 12 states,
accounting for about 33% of the new vehicle market, offer
If early settlement buybacks
decrease, arbitration buybacks would increase
- Even assuming that manufacturers become reluctant to
conduct early settlement buybacks prior to arbitration in those
12 states, that would mean that generally speaking,
instead of repurchasing lemons before a hearing, companies
would repurchase them shortly after a hearing--a
difference of days. That would impose greater costs for
administering arbitration programs, but would not
forseeably lead to fewer repurchases.
- In the other 38 states, most auto manufacturers offer
voluntary dispute resolution programs under Federal Rule 703,
which are supposed to hear cases within 40 days. The
results are binding upon the manufacturer if the consumer
accepts. Minnesota, Kentucky, and Arkansas require
manufacturers to offer such programs. While manufacturer-sponsored
programs are seriously flawed, they nonetheless represent
an opportunity for manufacturers and consumers to resolve warranty disputes
readily. They provide a degree of uniformity and access
- While there indeed may be a lessening of buybacks where
no defects exist, and a repurchase is not required by law,
that would not represent a significant harm to consumers.
Examples that have been mentioned by manufacturers in the
past, such as purchasers who suddenly decide they prefer
another color, or discover that the seats collect too
much lint, are trivial, especially when compared with the compelling interest
in identifying truly defective vehicles.
- It is conceivably possible that manufacturers would cease
to offer voluntary arbitration programs in the 38 states, and
appeal more cases from state-administered programs in the
other 12 states, undermining the arbitration process in
those states. However, absent a wholesale practice of
failing to comply with state lemon laws, we do not
foresee a significant chilling effect on buybacks. Should
a pattern of violations of state lemon laws emerge, that
would be appropriate for state enforcement action.
- 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?
- The pitfalls of a "successful repair" standard
are discussed above, in response to Question 2, so we
will not repeat those points here
Permanent labeling would benefit
consumers, auction companies, and dealers
- This year, California became the first state to require a
permanently affixed label on the driver door frame to identify
buyback vehicles to prospective purchasers throughout the
entire chain of ownership. There are several reasons for
adopting a similar provision on a federal basis.
Principally, it would provide a simple, cost-effective, uniform
means for consumers, auction companies, and dealers to identify
vehicles that had a history of defects. An on-vehicle
label, placed so that it does not detract from other
required disclosures, alerts consumers to inquire further about
a car's repair record.
- Given the mobility of lemon vehicles, and the fact that
they may undergo several wholesale transactions before being
resold to a retail consumer, a permanent label serves a
useful purpose for auction companies and dealers: it
indicates that additional paperwork and disclosures are
required in connection with that vehicle, thereby making
it easier to comply with state lemon disclosure laws.
However, a permanent label is not a substitute for full
disclosure of defects and warranty histories, but a
device for facilitating compliance with the law and
alerting downstream transferees.
- We also understand that some dealers prefer to avoid
purchasing and reselling lemons, to enhance their reputations
for dealing solely in more desirable vehicles, and to
reduce their liability. To the extent a label improves
compliance, it also benefits those dealers, as well as
individual consumers. Finally, as the vehicle is resold
over the years, a label increases the likelihood that
subsequent prospective retail purchasers will become aware
that the vehicle should command a lower-than-normal
price, and indeed may have latent defects that defy repair.
- We would oppose removing the label after a number of
years or miles, since consumers who buy older vehicles need
protection at least as much as those who purchase newer
vehicles. Most states lack a used car lemon law, and
older vehicles are typically sold "AS IS."
Therefore, repair costs must be borne by the consumer. Consumers
need to know that a vehicle has a history of defects, and may
be unsafe, unreliable or inordinately costly to operate.
- 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/benefits of these disclosure methods to manufacturers?
To auction companies? To dealers? To consumers? To other parties?
- While 37 states require various forms of disclosure to
consumers, noncompliance appears to be the norm. We note
that in Florida, which has recently been investigating
the practices of 20 manufacturers, failure to provide disclosures
is apparently widespread, with over 88% of vehicles being
resold without the required disclosures being provided to
the agency. An inference can be drawn that they were also
very likely not provided to the consumers. Even when individual
state disclosure laws are well-designed, disclosure
documents may be "lost" as vehicles move across
- The CARS Foundation Report on Lemon Resale Practices
reveals that only .6% of 498 lemons appear to have been
branded on their titles as lemons. That indicates a likelihood
that disclosure was also not provided in many cases, but
it is not conclusive on that point. Further investigation
is needed to determine whether disclosure was provided,
and whether it was accurate.
Manufacturers' disclosures are
- Even when disclosures are given, as we discussed more
fully in responses to Questions 1 and 2, they can be quite
misleading. In some cases, they indicate that vehicles
were repaired, when internal documents confirm vehicles
were in fact not repaired. Sometimes they list only a
minor flaw, and neglect to mention major defects.(13) They are subject to
misrepresentations by salespersons, who exploit ambiguities
to minimize their import, such as claiming that a vehicle
repurchased "in settlement of a legal matter"
was merely a repossession from a consumer who could not
- In some cases, the disclosures themselves are
contradictory and confusing. For example, General Motors' disclosure
form presented several categories, including "Mediated
or Customer Satisfaction Repurchase," with the
explanation that "General Motors voluntarily
repurchased or reacquired the vehicle as a customer satisfaction measure,
included in this category are vehicles repurchased or reacquired
to settle (mediate) a dispute in the BBB program
sponsored by General Motors. These disputes may
include claims that could fall under a state 'lemon law.'"(14) This blurs the line
between "customer satisfaction" and "lemon,"
which are in fact two mutually exclusive categories.
- Even when the forms themselves are not inherently
misleading, they may be filled out in a way that may be misleading.
For example, Karen Melvin of Minnesota purchased a used
1989 Dodge Caravan that had been the subject of a lawsuit
in Virginia that reached Virginia's Supreme Court. In the
course of litigation, Chrysler had stipulated that the
vehicle was a lemon. It had a leaky seam which allowed rainwater
to drip onto the steering wheel and into the driver's
lap. Numerous attempts to fix the leak had failed.
- On the disclosure form that accompanied the vehicle,
there was a line for indicating that a vehicle was "repurchased
by Chrysler Motors and/or [Dealership name] as a result
of" the "State of lemon law ruling or settlement."
But Chrysler did not check that line. Instead, Chrysler
checked the line indicating it was bought back due to "The
settlement of legal matter," an ambiguous phrase
which could apply to a repossession or other type of
legal transaction. Thereby, the implication was made that
the vehicle was not a lemon. The company also wrote that
the reported problem was "Water Leaks," and
indicated under the heading "Date repaired or Other Comments"
"Repair Order Dated 7-15-92," implying the leaks
had been repaired. No mention was made of the earlier
repeated futile repairs.(15)
- When rainwater leaked in upon Ms. Melvin, she traced the
vehicle's history and discovered it was indeed a lemon.
In order to get a full refund, she had to file a lawsuit
under Minnesota's lemon disclosure law. Soon afterward,
Chrysler bought it back from Ms. Melvin to settle the
lawsuit. However, the disclosure form that accompanied
the vehicle still did not indicate that the vehicle was a
lemon. Instead, the company again checked that the
vehicle was bought back in "The settlement of a
Also, although the form indicated the vehicle was "to
be sold for parts only," it was subsequently sold to
a third retail purchaser, with a title that indicated it
was "rebuilt." The third buyer moved to
Illinois, where the vehicle continued to leak.
- State laws typically charge manufacturers with providing
disclosure. However, manufacturers have claimed in their
defense that vehicles were subsequently resold by dealers
franchised with another company, and that therefore they
are not liable for the absence of a disclosure.(17)
- Manufacturers must make the disclosures, but others must
pass them on. Even where manufacturers comply, auction
companies and dealers must transfer disclosures to the
ultimate buyer. Laundering insures this does not happen.
When the loopholes that allow laundering are closed, the
disclosure laws will reach their potential to protect
consumers. We are unmoved by manufacturers' protestations that
they have no control over others who may fail to pass on
disclosures. We invite them to assist the Federal Trade
Commission in fashioning remedies that close the loopholes.
- While the cost of providing effective disclosure would be
minimal, the cost to manufacturers and dealers of having
vehicles depreciate in value due to effective disclosure
is undoubtedly quite significant. Currently those costs
are being transferred to consumers, who stand to benefit
from more effective disclosures and greater compliance
with state laws.
- 7 and 8. (Because these questions are closely
interrelated, we have combined them here.) 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? 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?
States are moving to improve
their laws to protect subsequent purchasers
- Since 1988, 37 states and the District of Columbia have
adopted statutes that require disclosure concerning the history
of buybacks. These measures are in addition to Uniform
Commercial Code statutes prohibiting types of fraud
(e.g., concealment of material facts) in effect in all 50
states. Sixteen states and the District of Columbia require
title branding on various buybacks. Nine states require a
disclosure form to be attached to a vehicle.
- In some respects, Utah's statute is exemplary.(18) It requires a
disclosure in the contract stating that "This is a used
vehicle. It was previously returned to the manufacturer
or its agent in exchange for a replacement motor vehicle
or a refund because it was alleged or found have the
following nonconformities," with lines for listing
the nonconformities. The size of type is specified, and a
line is included for the buyer to sign and date the
- In addition, Utah requires a disclosure statement to be
"affixed to the lower corner of the windshield
furthest removed from the driver's side...clearly visible from
the exterior of the vehicle." The window sticker
shall state the identifying information for the vehicle,
its odometer reading, and the following: "Warning: This
motor vehicle was previously sold as new. It was
subsequently alleged or found to have the following
defect(s), malfunction(s), or conditions," with 5
lines for listing the nonconformities.
States have enacted
title-branding statutes in an effort to track lemons.
- In effort to curb illegal resales of lemons within their
borders and facilitate tracking of lemons, 16 states and
the District of Columbia require the titles on specified lemon
vehicles to be branded with various notations. Those states
are Alabama, California(19)
Connecticut, Florida, Indiana, Iowa, Louisiana, Maryland,
New Jersey, New York, South Dakota, Utah, Vermont,
Washington, and Wisconsin.
- For example, Utah requires that "immediately upon
receipt" manufacturers and dealers shall
"clearly and conspicuously" brand the titles of
buybacks with the notation "MANUFACTURER BUYBACK NONCONFORMING
VEHICLE." Vermont requires the title to be branded
"THIS VEHICLE WAS RETURNED PURSUANT TO LAW--DEFECT
SUBSTANTIALLY IMPAIRS THE USE, MARKET VALUE, OR SAFETY. 9
V.S.A. CHAPTER 115."
- Title branding is not a substitute for disclosure to the
consumer, particularly since buyers in most states do not even
see titles prior to purchase, or until after they have repaid
a loan. However, title branding operates as a potential
enforcement tool, enabling law enforcement agencies to
track specific vehicles.
State title branding statutes
alone are not sufficient.
- Based on the 498 title reports provided to the CARS
Foundation, it appears that steps are being taken to circumvent
state branding requirements. For example, the brand on 12
of Vermont's lemons was apparently washed when the
vehicles were transferred and retitled in neighboring
states that lack reciprocal branding requirements.
- Even when states require title branding on lemons shipped
from other states and resold within their borders, their efforts
may be frustrated. For example, Alabama requires that:
- "If a motor vehicle has been returned to the
manufacturer under the provisions of this chapter
or a similar statute of another state, whether as
a result of a legal action or as the result of an
informal dispute settlement proceeding, it may
not be resold in this state unless:
- (1) The manufacturer discloses in writing
to the subsequent purchaser the fact that
the motor vehicle was returned under the provisions
of this chapter and the nature of the
nonconformity to the vehicle warranty.
- (2) The manufacturer returns the title of
the motor vehicle to the Alabama
department of revenue advising of the
return of the motor vehicle under
provisions of this chapter with an
application for title in the name of the
manufacturer. The department of revenue
shall brand the title issued to the manufacturer
and all subsequent titles to the motor
vehicle with the following statement:
THIS VEHICLE WAS RETURNED TO THE
MANUFACTURER BECAUSE IT DID NOT CONFORM
TO ITS WARRANTY." (Acts 1990, No. 90-479,
- However, none of the 7 Georgia and Florida vehicles that
were determined to be lemons, then subsequently retitled
in Alabama, appear to have been branded, as required.
This pattern is consistent among manufacturers.(20)
- Similarly, lemons retitled in California, Iowa, Indiana,
Louisiana, Utah, and Washington also appear to be lacking
any brand, but instead have apparently clean titles, with
- In fact, of 498 title histories, only 3, or .6%, reflect
lemon brands. Those are:
- 1. A 1993 Ford that was determined to be a lemon
in Hawaii, and was retitled on March 19, 1996 as
a "Lemon Law Buyback" in California;
- 2. A 1993 Dodge that was determined to be a lemon
in Washington state and was retitled in
Connecticut on July 1, 1995 as a
"Manufacturer Buyback," then placed in
- 3. A 1990 Volkswagen that was determined to be a
lemon in Washington state, placed in
"auction," and retitled in California
on January 21, 1995, as a "Manufacturer
- The title on one vehicle, a Nissan determined to
be a lemon in Washington, was branded on June 13, 1994
as "Comments" in Louisiana, which may indicate
a lemon brand.
- Another 10 vehicles bore other brands indicating
that they had been retitled as
"rebuilt," "salvage," "reconstructed,"
or "JUNK." However, this brand may appear
as the consequence of a collision, rather than
because the manufacturer submitted the vehicle's
title to be branded under a state lemon law.
Permanent decals are a new
supplement to title branding to reduce laundering.
- This year, California became the first state to require a
permanent decal to be placed upon the driver's door frame,
indicating that a specific vehicle is a "Lemon Law
the language and the method are conducive to effective disclosure.
While other states require window stickers that are more
conspicuous, California is alone in requiring a lemon
label that is intended to be permanent. The costs are
minimal, and are one-time only. The label, like title
branding, is not a substitute for full disclosure of
Lack of compliance with state
disclosure statutes remains a problem.
- It appears that compliance with state laws varies. In a
number of states where attorneys general or the state department
of motor vehicles have investigated compliance with state
disclosure statutes, they found widespread failures to comply. These
investigations range from New York's action, filed
against Chrysler in 1988, to Florida's ongoing
investigation involving 20 manufacturers, and to recent
actions in New York, California, and Texas.
- Even states with the best laws have no assurance that
buybacks will not be shipped into their state undetected, absent
a federal system for identifying and tracking buybacks.
Consumers would benefit from
- In states with the most effective statutes and high
compliance rates, consumers benefit in numerous ways.
They avoid significant economic damages, as well as the human
and societal costs associated with unsafe vehicles. But unfortunately, the benefits
are not realized, because lemons are shipped to other
jurisdictions that offer less protection. This is why a
Federal role, to supplement state efforts, is essential.
No single approach will resolve
the buyback problem.
- We suggest several components that, working together,
would optimize the likelihood of effective, successful disclosures
- First is a "bright line" standard regarding
which vehicles should be subject to disclosure. As
discussed earlier, it is essential to provide
well-defined parameters designed to preclude
manufacturers from abusing discretion in this area, and
to include all buybacks, with narrow exceptions for
advertised programs where there are no allegations of a
defect. We believe that Indiana's statute is a model in this regard.
- Second is retitling in the manufacturer's name at the
time the vehicle is repurchased from the original owner,
in the state where the vehicle is bought back. This would assist
law enforcement agencies in tracking vehicle histories.
In the 14 states with branding provisions, retitling in
the manufacturer's name would also increase the likelihood
that the titles would be branded.
- Third is title branding, which as a practical matter
serves in most states as an enforcement tool, rather than
as a disclosure to consumers. We would like to see branding
provisions adopted by all the states.
- Fourth is a permanent label on the vehicle, as discussed
above in response to question 5, with penalties for removal.
This would cover all vehicles, even those resold in
states with no title branding.
- Fifth is specific disclosure information on the vehicle
itself, to be signed by the retail purchaser, confirming
that full disclosure was provided. This could be incorporated into
the existing FTC Used Car Buyer's Guide window sticker.
- Sixth is easy access to complete and accurate information
regarding the vehicle's warranty repair history. Prospective
buyers have a right to know as much about a buyback
vehicle's problems as the manufacturer and the sellers.
Manufacturers already maintain computerized records of
vehicle warranty repair histories. Printed versions of
these should be made readily available to prospective
buyers, perhaps for a nominal fee. This should significantly
lessen the ability of manufacturers and dealers to
misrepresent or conceal pertinent information.
- Seventh is strong federal and state monitoring and
Per-unit costs would be
- The cost of furnishing pre-printed disclosure forms is
not great. Even vehicle repair history print-outs can be produced
inexpensively from existing data. One-time labeling costs
would be nominal. Retitling in the manufacturer's name will
impose a one-time cost.
- We expect that the costs of providing the disclosures
should be no greater than for obtaining a credit report
on an individual consumer. Considering the billions consumers
invest in used vehicles and repairs, the relatively nominal
amount required to provide accurate disclosure
information on a small percentage of used vehicles would
be well spent. We note that some firms are already
offering similar services to consumers as a business venture.
For example, Carfax, which purchases records from state
agencies, provides a title report to subscribers for $3
and to consumers for $20. CCC Information Services will
fax a report to consumers for $12. The growth of online
services should also help to keep costs down.
- Even when taken in the aggregate, requirements for
retitling, branding, labeling, and disclosure are not burdensome.
They do not require costly repairs, or mandate warranties.
They do not even require that new information be
generated, but merely that existing information be
transmitted. In return, such requirements should bolster public
confidence in the multi-billion dollar used vehicle
- We expect that the per-unit costs would be nominal,
considering the sizeable investment vehicles represent, particularly
when compared to median household income. For individual
consumers, who may avoid costly repairs or problems that may
render a vehicle inoperable or even unsafe, the benefits
- Manufacturers and dealers also stand to benefit through
decreased costs associated with liability and litigation, as
well as a more positive public image. When there are violations,
the governmental costs of enforcement may be recovered
through the payment of fines and other penalties.
- 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 bank of VIN numbers? By
- As discussed above, we foresee that a combination of
approaches will be most effective in enforcing disclosure and
title branding rules. We have noted that a number of
states have taken enforcement action concerning violations
that occur within their borders. Clearly the states have
indicated a strong desire to protect their citizens from
violations of their state disclosure and branding
statutes. The recent proposed decision in In re:
Chrysler (CA DMV), which calls for Chrysler's
license to be suspended for 60 days, and Florida's
investigation into the practices of 20 manufacturers, are
indicative of a strong state interest in this area.
- Regarding the establishment of a data base of VINs, we
note that Congress recently passed a bill (HR 2803--H Rept
104-618) to establish a national data base in the Justice
Department for tracking stolen vehicles. The bill would
also reauthorize grants to states to help them modify
software systems related to the data base and remove a
$300,000 grant cap established earlier. The bill's sponsors
state that the system will eventually be supported by
user fees--as are two national driver's license data
- While we suggest some approaches that we believe would
work, we also look forward to reviewing comments submitted
by other parties, to further define the problem areas and
possible solutions. We are especially interested to see
the comments of state officials regarding what they
envision for a Federal role.
- 10. Uniformity in the disclosures 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
standard be an effective method to get buyback
information to subsequent purchasers? What would be the
costs and/or benefits of a national standard?
- While a degree of uniformity is desirable to help resolve
the problem of interstate shipment of vehicles to avoid state
requirements, any remedy must be carefully crafted so
that it does not undermine existing state protections. Among
states, clearly the trend is toward more encompassing
statutes, stronger enforcement, and increased coordination
with other states, as awareness grows concerning auto industry
- We expect auto industry comments may favor a uniform
approach that would preempt state laws. However, from a
consumer perspective, the worst case scenario would be a
uniformly weak, nationally preemptive law that allows manufacturers
and dealers to disguise seriously defective vehicles as
"goodwill" or "customer satisfaction"
buybacks with impunity.
- A weak uniform federal statute would have the
economically perverse effect of rewarding manufacturers
for producing defective products and dumping them back into
the stream of commerce, as opposed to living up to their
warranty obligations. It would allow them to merely shift
the burden for their mistakes onto a more vulnerable
segment of the market.
- Any nationally uniform remedy, if it is to benefit
consumers, must be designed to:
- 1. Include pre-decision buybacks;
- 2. Require the transfer of the title to the
manufacturer, aiding in computer tracking of
- 3. Make title laundering or knowingly selling a
vehicle with a laundered title an unfair and
deceptive trade practice under the Federal Trade Commission Act,
Section 5, also making violations enforceable by consumers
under state "Little FTC Acts."
- 4. Operate as a minimum standard to assist in
tracking vehicles and spurring compliance, yet
allowing states the flexibility to go further to protect
their citizens and to enforce their own statutes.
Again, we appreciate this opportunity to comment, and look
forward to reviewing the comments of others.
ROSEMARY SHAHAN, President
LAWRENCE KANTER, Counsel
1. See Appendix A.
2. In re: Chrysler Motor
Corp., CA Dept. of Motor Vehicles, Case No. M-605, Proposed
Decision and Findings of Fact, May 30, 1996 (cited below as In
re: Chrysler (CA DMV) See Appendix B.)
3. In re: Chrysler (CA DMV),
at 15. See also disclosure notice at 17.
4. In re: General Motors (CA
DMV), Case No. D-4833, Accusation, April 29, 1993. Documents obtained
pursuant to Public Records Act request. See Appendix C.
5. CA State Dept. of
Consumer Affairs Arbitration Review Program, "Total Disputes
Processed by Certified Programs," Jan.1-Dec. 31, 1995."
6. Source: States of
California, New York, Florida, and Washington Lemon Law
Arbitration Programs, 1992-1994 Annual Reports.
7. "In 48 of the
vehicles listed in Schedules A, B, and C, Chrysler repurchased
the vehicles following a decision of its third party dispute
resolution process..." In re: Chrysler (CA DMV), at 3. Another
68, or 58% of the 116 vehicles the Administrative Law Judge found
to be lemons, were repurchased outside the scope of an
8. "It is estimated
that over 5,000 Lemon Law cases alone are brought each year by
new car buyers." Letter of Peter K. Welch, Director of
Government and Legal Affairs, to Assemblyman Larry Bowler, June
9. Wall Street Journal,
April 29, 1996, A4. Emphasis supplied.
10. In re: Chrysler (CA
DMV), at 10.
11. Veto Message of
Governor George Deukmejian, June 20, 1990. Emphasis supplied.
12. In re: Chrysler (CA
DMV), at 3.
13. In re: Chrysler (CA
DMV), at 16. Notice to second buyer Vigil mentions transmission,
but fails to disclose defects in brakes and steering.
14. See "Disclosure of
Vehicle Repurchase or Reacquisition Notice," Appendix C.
Notice" for VIN 2B4FK4536KR334036 dated 9-10-93.
Notice" for VIN 2B4FK4536KR334036, dated 6-1-94.
17. In re: Chrysler (CA
DMV), Respondent Chrysler Corporation's Post-Hearing Brief, Filed
August 17, 1995."The second owner, Ms. Weidemann, purchased
the vehicle from a Cadillac dealer, not a Chrysler dealership.
Not even the DMV can seriously contend that Chrysler has any
control over or should be responsible for the actions of a
Cadillac dealer." At 13.
18. Utah Sec. 41-3-408 and
Sec. 41-3-409, Laws 1993, c. 163, Sec. 5.
19. In January of this
year, California became the first state to require that lemons be
branded with the term "Lemon Law Buyback."
20. This information is
only as reliable as the data supplied to the CARS Foundation by
the states and Carfax, and is subject to further confirmation.
21. CA Civil Code, 1795.8,