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.[PAGEBREAK]

Bidding for Customers

Painter says his service only provides what today’s Internet shopper wants: pricing information. And by providing dealer cost and factory invoice pricing, he adds, shoppers will make a quicker buying decision. And once that information is presented, TrueCar provides the customer with three dealers that have the vehicle they want for the going rate. The tradeoff for the dealer is that they don’t have to pay for the lead ($300 for new vehicles, $400 for used) unless the sale is completed.

Mel Parekh, owner of Route 1 Buick GMC in Woodbridge, Va., didn’t hesitate to provide TrueCar with invoice pricing when he signed up two years ago. Out of the gate, the service worked great, mostly because he was the only dealer on TrueCar in his area representing his marques. But he’s been in a “race to the bottom” ever since that exclusivity ended.

“The only way to get into the Top 3 is to provide the lowest quote, and what is happening is dealers are fighting each other, lowering it by $20, $50, $70 every day to try and enter the Top 3,” he says. “We’re now at the point where, on some cars, we are $2,000 and $2,500 under invoice.”

The reason Parekh hasn’t cut ties with TrueCar is because of the company’s relationship with USAA, which directs military personnel from two nearby bases to his store. But that relationship will end on Feb. 1, Parekh says, a decision he made after seeing his veteran sales team become “order takers” for TrueCar.

It’s stories like that that have fueled one of TrueCar’s most outspoken critics, Jim Ziegler. The dealer consultant and F&I and Showroom columnist said he learned of the service after reading a blog post more than eight months ago. But he didn’t mount his campaign against TrueCar until late November, when he began hearing complaints from dealers.

Denying Access

Describing the conflict as “Armageddon,” Ziegler and his band of bloggers and dealer advocates started their campaign by questioning TrueCar’s connection to its customers’ dealer management systems. That level of access fueled accusations that TrueCar was using DMS data to drive its website’s pricing curves or to trade customer data. Painter denied those allegations and said his website’s pricing curves are powered by flat-file data TrueCar sources from more than 30 different providers.

This revelation fueled a new rallying cry for Ziegler. “I’m going after all of the data aggregators,” he said. “I want the Federal Trade Commission to investigate privacy violations, Gramm-Leach-Bliley Act, whatever. We want to lock down the dealer’s data from being used against us.”

TrueCar’s relationship with DealerTrack also came into question after the technology provider sold its ALG division to TrueCar last August. The transaction gave DealerTrack a 15 percent minority interest in TrueCar. “DealerTrack is not providing any data to TrueCar,” says Ken Engberg, a DealerTrack spokesman. “Dealers can set up data extracts from virtually any DMS, and, in our case, that would take their direct authorization.”

Engberg added: “The sale of ALG was a financial transaction, and we view the share value received as an investment. We’re a dealer-centric company, and ALG was no longer a strategic fit.”

Chris Snyder, legal counsel for Wisconsin’s dealer association, questioned the transaction in the group’s Dec. 20 bulletin. He wonders why DealerTrack didn’t notify dealers about the company changing hands, saying that ALG customers should know they’re now dealing with TrueCar. He also questions TrueCar’s push for upfront pricing. “I don’t understand why there’s such a push to get dealers to disclose their profit margin on every transaction,” he says. “I don’t see other industries doing it.”

Painter has heard that complaint all too often, but says his company still facilitated more than 30,000 car deals in December and 235,000 for all of last year. He added that dealer inquiries rose 481 percent last month and that the number of dealers added to the service each week has doubled since November.

“When you have a new business that represents a paradigm shift in the industry, you’re going to have people fighting the changes,” he says. “Sooner or later they will realize that they can stop the hands of the clock, but they can’t stop progress.”

Editor's Note: DealerTrack notified the industry of its sale of ALG to TrueCar in an Aug. 22 press release. Users of ALG, which includes banks, captive finance companies and large fleet companies, also were notified via mail, e-mail and phone communications. Company officials added that ALG does not sell products to dealers.