Published May 23, 2019, Dealer’s Voice – Operating an automobile dealership requires risk management and delegation. Dealer principals must delegate to ensure the daily functioning of the dealership and to meet sales expectations. However, delegating duties creates risks that principals must understand and manage to ensure the dealership complies with state, federal, factory, and other administrative requirements. The following is a breakdown of risk management protocol in a large car dealership.
A new dealership introduced a strategy to increase aftermarket product sales. New vehicles on the lot were equipped with VIN number etchings prior to sale at no additional cost. Every customer was also given the opportunity to purchase a VIN etch aftermarket insurance product that guaranteed certain benefits upon vehicle theft. If the customer purchased the aftermarket product, they signed a contract regarding the product. Salespeople set the prices for the aftermarket product and received compensation for sales.
A customer purchased a new vehicle and several aftermarket products, including etch. All aftermarket products were on a buyer’s order, signed by the customer. However, the customer did not sign the contract with the terms of the aftermarket products purchased. The salesperson wrongfully forged the customer’s signature on those contracts.
The customer brought a lemon lawsuit, alleging vehicle defects and the dealer’s failure to repair. The manufacturer assumed its obligation to defend and indemnify the dealership for the claims.
In discovery, the customer requested copies of all purchase-related documents. The customer saw the forged signature on the contracts and amended the complaint to add fraud claims. The manufacturer tendered defense of the fraud claims to the dealership after settling the warranty claims.
The customer filed police reports against the dealership and the salesperson, leading to criminal investigations. The customer filed a complaint with the state’s Attorney General and the Secretary of State, which licenses dealerships. The customer’s allegations could result in a revoked dealer’s license and the inability to continue as a franchised new motor vehicle dealer.
The customer’s attorney solicited others to find more customers who suffered forgery for a possible fraud class action. The case from the initial forgery lasted over five years, with costly attorney’s fees and anxiety for the dealer principal. The case is pending a prosecutor’s decision whether to file criminal charges. The dealership agreed to probation with the Secretary of State, resolving the administrative complaint without admitting guilt. The dealership agreed to pay a financial penalty, to participate in training, and to be subject to further compliance inspections by the Secretary of State during the probation period.
Here are the three main issues that led to this undesirable scenario:
- Inconsistent aftermarket sales process
- Sloppy documentation of transactions
- Lack of audit/oversight of transactions
Implement menu-selling for F&I products – Dealer principals should present a uniform “menu” for all aftermarket products to every customer. Salespeople should not quote variable prices to different customers, as this risks a disparate impact claim.
Review price of aftermarket products so customers receive reasonable value – Dealer principals should understand the offered aftermarket products and their value. Is the cost defensible based on the value? The cost of aftermarket products has recently received regulatory scrutiny.
Implement training for salespeople – Dealer principals should train all salespeople on a uniform transaction process and standardized documents, with checklists to ensure they always follow the same process and that customers sign all documents. No salesperson is exempt from these requirements.
Implement routine, random review of deals by managers – Sales managers should regularly review a random selection of sales transactions to ensure they were conducted and documented appropriately. If errors are discovered, the manager should take immediate corrective action to eliminate future errors.
Attorneys play an important role in helping dealer principals understand and manage the risks inherent in dealership operations. While risk will always be present, dealer principals can mitigate risk by mandating adherence to best sales practices and instituting rigorous audits of deal files. Minor adjustments in dealership risk management protocols can help prevent an occurrence like the one above.