The Fifth Circuit Slams the Brakes and Vacates FTC CARS Rule

By Leonard L. Gordon, Jay Prapaisilp & Eden Caliendo

This week, the U.S. Court of Appeals for the Fifth Circuit vacated the Federal Trade Commission’s (FTC) Combatting Auto Retail Scams (CARS) rule. Industry groups had challenged the rule, arguing that:

• The FTC violated Section 18(b) of the FTC Act by failing to issue an advance notice of proposed rulemaking (ANPRM) before promulgating the CARS rule.
• The FTC arbitrarily and capriciously failed to articulate a reasoned basis for the rule.
• The FTC’s cost-benefit analysis was arbitrary and capricious.

The decision highlights the Fifth Circuit’s hostility to the “Administrative State” and the two different rulemaking schemes under which the FTC operates.

The CARS Rule

The FTC issued the CARS Rule in 2022 to prevent perceived deceptive practices by automobile dealers, including bait-and-switch advertising, hidden “junk” fees, and misrepresentations about material terms. The rule would have required dealers to provide clear disclosures about costs and terms and to obtain express, informed consent from consumers before charging for any item. The FTC published the final CARS rule on January 4, 2024, but stayed the rule pending litigation.

Court Holds FTC Cannot Bypass ANPRM

The FTC argued that the Dodd-Frank Act gives the agency the authority to use notice and comment APA rulemaking for auto dealers and that the FTC is not required to follow the more burdensome requirement of Magunson Moss rulemaking, including issuing an ANPRM as part of that rulemaking process. Under Magnuson Moss rulemaking, the FTC must follow a more convoluted process before promulgating a rule. For more information on rulemaking, please see our blog post on this process.  

The Fifth Circuit agreed that the FTC’s failure to issue an ANPRM was fatal. The court explained that while the Dodd-Frank Act did exempt the FTC from “certain procedures when exercising existing authority” to regulate auto dealers, it did not eliminate the additional procedural requirements outlined in Section 18(b).

Furthermore, the court rejected the FTC’s argument that its failure to issue an ANPRM was a harmless error, holding that the petitioners established sufficient prejudice under the APA’s harmless error rule. By bypassing the ANPRM requirement, the FTC deprived the petitioners of a procedural benefit, likely limiting their ability to “participate earlier and more extensively” in the rulemaking process. Given the real possibility that the outcome of the rule could have been different, the court found the FTC’s error was not harmless and vacated the CARS rule.

Judge Stephen Higginson dissented, asserting that the petitioners were not prejudiced by the absence of an ANPRM. He highlighted that the FTC’s process included extensive public engagement, including a decade of roundtables, comment periods, and analysis of over 100,000 consumer complaints, many of which have led to federal and state enforcement actions against unfair and deceptive motor vehicle dealer practices. Higginson argued that these steps gave stakeholders sufficient opportunity to influence the rule and that the FTC’s rulemaking process was neither arbitrary nor capricious.

The court rejected the FTC’s alternative arguments that the court should defer to its interpretation of the relevant regulatory framework under Auer v. Robbins and Kisor v. Wilkie. The panel held that such deference may be considered only where the regulation is ambiguous and reasonable, and here there was no such ambiguity. This ruling is another example of the Fifth Circuit’s aggressive role in reviewing regulatory actions.

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