Free at Last

There’s an old joke about my Uncle Murray the dressmaker. He sold dresses for $10 that cost him $15 to sew, but figured he’d make it up on volume. He had a great Christmas and it put him out of business!

There’s something attractive about making money by giving a product away. In the car business, it can look like preloads — products included in the price of the car to create a sense of value or set up more profitable sales of additional amounts of the product in F&I. For example, a dealer might provide one year of prepaid maintenance for free with every vehicle purchased. Then, in the F&I office, the customer is offered the opportunity to extend that benefit for, say, another four years. Done right, it can even be legal. But oftentimes it is not.

Addendum stickers list all the good things the dealer is providing to demonstrate its superior value proposition. Prepaid maintenance, oil changes, identity theft recover, VIN etch, warranty for life, nitrogen-filled tires, car washes and tanks of gas — all have been used to increase the front-end price of a vehicle and, dealers hope, the bottom line.

But there are dangers to “free.” First of all, the Federal Trade Commission doesn’t like that word when used in connection with a product whose price is typically negotiated. That guidance was published in 1971, and still applies. Part of that guidance (16 CFR 251.1) reads:

“(g) Negotiated Sales. If a product or service usually is sold at a price arrived at through bargaining, rather than at a regular price, it is improper to represent that another product or service is being offered ‘Free’ with the sale. The same representation is also improper where there may be a regular price, but where other material factors such as quantity, quality or size are arrived at through bargaining.”

The above fits the way most retail vehicle transactions are conducted, so using the term “free” in the addendum sticker would constitute a violation. What’s a dealer to do?

One approach might be to use a similar term … except that the FTC has already thought of that too:

“(i) Similar terms. Offers of ‘Free’ merchandize or services which may be deceptive for failure to meet the provisions of this section may not be corrected by the substitution of such similar words and terms as ‘gift,’ ‘given without charge,’ ‘bonus,’ or other words or terms which tend to convey the impression to the consuming public that an article of merchandize or service is ‘Free.’”

So what, you say? For that, we turn to 16 CFR 17: “Failure to comply with the guides may result in corrective action by the commission under applicable statutory provisions.” What, pray might those “applicable statutory provisions” be? The FTC guidance itself gives us a clue:

“(2) Because the purchasing public continually searches for the best buy, and regards the offer of ‘Free’ merchandise or service to be a special bargain, all such offers must be made with extreme care so as to avoid any possibility that consumers will be misled or deceived.”

Catch those last two words? Protecting consumers against being “misled” or “deceived” leads us to Section 5 of the FTC Act, which prohibits unfair and deceptive acts and practices. And what’s the penalty for violating Section 5? Following the FTC’s 2016 adjustment for inflation, the maximum penalty is now $40,000.

To be fair, the maximum fine is usually limited to violations of a final consent order, meaning the offending dealer has already been slapped on the wrist at least once. Initial fines can be much lower, but they can be assessed per violation. Each misuse of the term “free” can be considered a violation. How many stickers are on a dealer’s lot?

Where does that leave a dealer who wants to highlight a bundle of benefits? One safer approach would be to list each included benefit and its value. But be warned: The stated value had best bear some relation to reality. If not, we’re back to Section 5 of the FTC Act. Listing nitrogen-filled tires as a $6,250 value is not a best practice. Listing “values” that can be related to actual retail sales of substantially similar products or services is a best practice.

Another approach is to use the term “included” instead of “free.” While there is little caselaw to guide us, the assumption is that “included” — in the price — is the opposite of “free” (independent of the price paid).

Why should providers care about how a dealership prices or sells its products? The practical answer is that providers generally have deeper pockets than individual dealerships, and plaintiffs’ lawyers are trained to look for deep pockets. If the provider — or its agent — knew or should have known of the dealer’s deceptive sales practice, a good lawyer will find a way to bring the provider to the party. Even worse is when the provider — or its agent — encourages the “free” preload as a sales tactic. That’s when the provider finds out that free really isn’t.