California Dealers Question Legality of GM’s Online Sales Portal
February 23, 2016
DETROIT and SACRAMENTO, Calif. — General Motors Factory Pre-Owned Collection (FPOC) program was the subject of a letter exchange between the automaker and the California New Cars Dealers Association (CNCDA). The latter raised a number of concerns, including whether the program violated state laws governing auto brokering and advertising.
The association also questioned whether GM’s Factory Pre-Owned Collection program, which went live on Feb. 9, puts dealers at risk of unfair business practices and violations of the state’s vehicle safety requirements and emissions standards. The bigger question posed by the CNCDA in its letter is whether the program violates state franchise laws.
“CNCDA has strong concerns about whether GM’s recently launched [FPOC] program complies with a number of consumer protection and other legal requirements,” read the CNCDA’s Feb. 8 letter, which was addressed to GM North American President Alan Batey and signed by CNCDA President Brian Mass. “We have had our attorneys review the program and they have raised various legal concerns that need to be addressed by GM.”
In mid-January, GM announced plans to open up its remarketing channel to consumers through an online portal that would allow them to select from more than 40,000 company-owned, off-lease and off-rental vehicles with less than 37,000 miles on the odometer. Using the automaker’s Shop Click Drive buying service, customers can only reserve the vehicle on the site. They would then need to visit a dealer participating in the program to take delivery.
At the time of the announcement, GM spokesperson Ryndee Carney said the move was designed to help GM dealers compete with third-party sites that were disrupting the used-car market. “The benefit for dealers is that it will help them achieve incremental used-car sales by having access to virtual inventory they do not have to floorplan nor advertise/market, as well as allow them to engage with customers whom they would not normally see in their showrooms …,” she said, adding that participating dealers will also have the opportunity to sell F&I products on vehicles sold through the portal, as well as benefit from warranty and customer-paid repairs.
According to Carney, more than 1,200 of the automaker’s 4,200 dealers are participating in the program. Only dealers who were previously signed up for Shop Click Drive were eligible to participate in the FPOC program. Currently, more than 2,600 dealers are signed up for Shop Click Drive.
The CNCDA, however, questioned whether participating dealers were effectively handing over control of their used-vehicle operations to GM, and whether GM was effectively altering its dealer agreements without proper notice. It also questioned whether GM was unfairly competing with its dealers, noting that it could set a higher “Buy Now Price” for its POC vehicles and achieve greater gross profits since it has access to its dealers’ used-vehicle sales data
“If appears that profit margins for POC program sales will be substantially less than historical margins,” Mass wrote. “An argument can thus be made that GM, in effect, is competing in the relevant market area of every California GM dealer who opts not to participate in the program.”
The automaker responded to the association’s concerns in a Feb. 19 letter signed by George Doss III, head of industry dealer affairs for GM. He disagreed with the association’s charge that the program constituted unlawful competition between GM and its dealers because all vehicles listed on the POC portal are first offered exclusively to GM dealers at auction. He added that the vehicles remain available to dealers even after they’re listed on the site.
As for whether the program constituted a modification of the automaker’s dealer agreements, Doss wrote that the program was available to any dealer at no cost. “It does not in any manner change or alter a dealer’s obligations, or GM’s obligation, under the [Dealer Sales and Service agreement],” he noted. “Dealers retain control over their participation in the program (or not), their purchase of vehicle under the program, the price at which they purchase those vehicles, and the price at which they sell those vehicles.
“The suggested price on the FPOC website is simply that, a starting point for negotiations between the customer and the dealer — similar to an MSRP on a new vehicle. … Final pricing is in the hands of the dealer,” he added.
The sales portal allows consumers to compare the suggested prices with what other buyers in the area have paid through the Kelley Blue book Fair Market Range. It also provides buyers with access to Carfax Vehicle History Reports.
“The Factory Pre-Owned Collection program is designed to supplement dealers’ current used-vehicle sales operations with incremental, high-quality leads and business opportunities to engage with customers they otherwise may not have seen at all,” Doss noted. “Even if we achieve current projections, FPOC projected sales will be roughly 1% or less of current used retail volume our dealer network sells — enough to add incremental volume, but not enough to significantly impact dealerships’ used-vehicle sales operations.”
If the program is a simply a lead source for dealers, the CNCDA said GM could be in violation of state auto brokering laws, Maas noting that a court could view the higher profits GM is able to secure on POC vehicles as a “fee or other consideration” for directing business to its dealers.
“Of course, under the FPOC process, all of the vehicles are sold to a participating licensed dealer,” Doss responded in the automaker’s letter. “In addition, even if GM were somehow considered a ‘dealer’ under California law, GM could not possibly ‘broker’ a vehicle that GM owns.”
Doss also noted that GM has every intention of complying with the state’s advertising laws, adding that the automaker would make any adjustments if the association identifies any issues. As for whether GM will inspect vehicles to ensure they meet the state’s safety requirements, Doss said GM expects its dealers to conduct the necessary inspections and recondition vehicles so they comply with state laws.
Doss also revealed in the letter that GM will pay a reconditioning allowance of 0.5% of the Buy Now Price on every FPOC delivery, even if the dealer incurs no reconditioning expense on the vehicle. He also noted that GM altered its systems so that vehicles with less than 7,500 miles are not visible to customers with California ZIP codes. According to the California Vehicle Code, dealers are prohibited from buying or selling vehicles with less than 7,500 miles on the odometer and are not equipped with California certified emissions control equipment.
“If GM and its dealers do not move into the 21st century, with consumers’ preference for online options to purchase everything from a pencil to a mortgage on a home, the competition will, and in the process will siphon off an ever growing share of the used-vehicle business,” Doss wrote. “GM’s goal in creating the FPOC program is to work together with our dealers to capitalize on the evolution of the retail shopping experience.”