January 2012 - Feature
Updated: True Controversy
TrueCar is taking fire from dealers, trainers and state motor vehicle boards, but its embattled founder says the company will survive.
By Gregory Arroyo
In the 2006 edition of his automotive legal guidebook, Carlaw, Hudson Cook’s Tom Hudson offered an early glimpse at how states would respond to the emergence of companies like TrueCar. He also correctly predicted the reception dealers would give the online marketing service.
Hudson wrote that many of the laws that have snagged TrueCar since December were intended to regulate traditional advertising and “never contemplated the web.” He also noted that many of those laws doubled as protection against would-be attackers of the dealer business.
“The biggest challenges these Internet players face is the strength of their foes,” Hudson wrote, in part. “Car dealers have spent decades building defenses against attacks on their business. The defenses have taken the form of licensing laws, franchise schemes and outright prohibitions on competition activities.”
On the Front Lines
Since the end of November, TrueCar has come under fire from a vocal group of dealers who call the site a margin killer that aims to turn dealerships into TrueCar outlets.
Scott Painter, the company’s founder, responded in December through open letters published on the TrueCar blog and interviews with his critics. He argued that his service is designed to help dealers sell more cars by offering a new marketing channel.
Houston-based Group 1 Automotive was the first major dealer group to cut ties with TrueCar, and others followed. Honda warned its dealers that marketing dollars would be withheld if they advertised Hondas below dealer invoice and Acuras below MSRP on TrueCar. But TrueCar’s attackers didn’t stop there, as they also questioned the company’s compliance with state laws, pulling dealer associations in California, Colorado, Indiana, Louisiana, Nebraska, Ohio, Oklahoma, Virginia and Wisconsin into the fray. The concerted effort then reached the offices of state regulators.
The first state to weigh in was Colorado. In mid-December, the state’s department of revenue issued a memo that warned TrueCar dealer clients that they may be violating at least five of the state’s advertising laws, as well as other state prohibitions. TrueCar was expected to attend the Colorado dealer board’s Jan. 12 meeting to discuss the issues raised. A week before the scheduled meeting, TrueCar reportedly suspended its service statewide.
The discussion took place after the magazine’s editorial deadline and three days after Bruce Gould presented his analysis of TrueCar to Virginia’s motor vehicle dealer board. He and the board concluded that TrueCar’s business model was in violation of that state’s dealer licensing laws, and warned dealers that they risked civil finds and suspension of their licenses if they continued using any service that tied compensation to a successful sale.
Oklahoma’s board came to the same conclusion a day later, and others were expected to do the same.
TrueCar’s Painter maintains that his business model does not equate to a brokerage or buying service because TrueCar staffers do not engage in the selling of vehicles. However, he said the company will present a subscription-based model similar to the one it uses in Texas, which has similar prohibitions, to all three states.
“We see no insurmountable regulatory issue at this time,” Painter says.