Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: FTC settles deceptive marketing case against vehicle service contract providers, (Aug 1, 2024)

By Kenneth H. Ryesky, M.B.A., J.D.

Service contracts were marketed on television and radio using endorsements by athletes, sportscasters, actors, and other celebrities who were not actual parties to such contracts.

The FTC announced that it has settled a case with the purveyor-administrator of automotive service contracts and a firm that marketed and sold such contracts. The FTC found that the methods used to market and administer those contracts were deceptive and illegal. The FTC filed its complaint in federal district court in Missouri, along with a contemporaneous stipulated proposed order. The settlement order, when entered by the court, would enjoin the defendants from using deceptive tactics to market the service contracts, and also included a monetary settlement of $10 million (FTC v. NRRM, LLC, FTC File No. 2223031, No. 4:24-cv-01055 (E.D. Mo.)).

NRRM, LLC, d/b/a CarShield (CarShield), sells and markets vehicle service contracts (VSCs) to consumer automobile owners through television, radio, online, and direct mail advertising. These VSCs are developed, composed, and administered by American Auto Shield, LLC (AAS). Per the agreement between AAS and CarShield, AAS has final say over the content of the marketing materials used by CarShield. CarShield and AAS thus have a symbiotic relationship whereby 80 percent of AAS's VSCs are marketed by CarShield to the exclusion of all other VSCs. From 2019 through 2022, AAS's revenue from the arrangement exceeded $1 billion, from which CarShield derived approximately $600 million in commissions.

The actual sale of the VSC is done through a telephonic conversation between the customer and CarShield; the initial conversation is initiated by the customer calling the telephone number given in CarShield's advertisements.

The sales of AAS's VSCs by CarShield drew the attention of the FTC. The FTC had reason to believe that the arrangement violated the FTC Act, the Telemarketing Act, and the Telemarketing Sales Rule promulgated by the FTC pursuant to the Telemarketing Act. The FTC filed a complaint in federal district court alleging such violations and seeking injunctive and monetary relief.

The FTC's complaint alleged that the AAS/CarShield arrangement engaged in various illegal practices. These included misrepresentations regarding the scope of the coverage provided by the VSCs, the automobile owners' choices regarding the repairs and repair facilities used, and the provision of substitute rental cars available to the consumer pending repair of the vehicle. The complaint also alleged that the marketing was done using improper celebrity endorsements by public figures who were not actual VSC customers.

A key deceptive practice was failure to completely disclose the exceptions and conditions to the service coverage under the VSC, which were perfunctorily spoken over the telephone by the CarShield sales representative; the full extent of the exceptions and conditions was not actually disclosed until after the sale was closed in the telephone conversation and the customer subsequently received the "dense, 25- to 30-page document" containing the numerous theretofore undisclosed terms, conditions, and exclusions. Those terms and conditions authorized AAS to select the repair parts and limit the reimbursement to the repair services provider. AAS also imposed onerous paperwork requirements upon both customer and repair shop, such that many repair shops that would otherwise be the consumer's choice were unwilling to deal with AAS in performing the repairs. As a result, many VSC customers were compelled to pay significant amounts for what should have been covered by the VSCs.

If, during the initial call-in by the prospective customer, the sale was not closed, CarShield telemarketers would make follow-up calls to the prospective customer, during which time similar false and deceptive representations were made. Likewise, CarShield's "Retention Department" representatives used overly pressuresome tactics to discourage VSC customers who requested termination of their contracts.

The complaint further alleged that AAS and CarShield had earlier been placed on notice that their scheme was improper, based upon, inter alia, complaints by various Better Business Bureaus in diverse locales, and by apprisals from the FTC itself.

Settlement. The stipulated settlement agreement permanently prohibits AAS and CarShield from engaging in misrepresenting the terms of the VSCs they market and/or administer, and from engaging in deceptive telemarketing practices. They also are permanently enjoined from using false testimonials by individuals who purport to endorse the VSCs. AAS is required to provide a copy of the stipulated order to any person or entity it utilizes to market its VSCs. A $10 million monetary settlement, for which AAS and CarShield are jointly and severally liable, is to be paid to the FTC. There also are compliance reporting and monitoring requirements, and a recordkeeping mandate.

The Case is No. 4:24-cv-01055.

Judge: Autrey, H.

Attorneys: Matthew M. Scheff for the FTC.

Companies: NRRM LLC d/b/a Carshield and American Auto Shield LLC

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