LEGAL, LEGISLATIVE AND REGULATORY SUMMARY

February 2007

The House and Senate convened at noon on January 4th, with Democrats in control of both Chambers for the first time in 12 years. Members of the House immediately began tackling the Democrat's "first 100 hours agenda" and they succeeded in passing an Omnibus Spending Bill, adopted new budget and earmark rules, as well as lobbying and ethics changes, and passed Legislation to implement many of the remaining anti-terrorism recommendations of the September 11 Commission, increase the minimum wage and reduce student loan interest rates. Passage of the House Energy Bill on January 18th marked the completion of the House Leadership's first set of priorities.

Just five days later, on January 23rd, the President announced his priorities to the Nation during his State of the Union Address. Reducing gasoline consumption, expanding health insurance coverage and increasing the number of troops in Iraq were at the centerpiece of his speech. It remains to be seen whether Federal Legislators will be able to reach compromises on these controversial issues. At least a dozen states are moving toward rewriting portions of their tax codes, twenty-nine states have raised their minimum wage above the current federal level, and a number of states have already begun to address illegal immigration, by placing new restrictions on social services, education and, most recently, the ability to obtain a state identification card or title/register a vehicle.

·   Federal Legislative Developments

House Passes Stand Alone Minimum Wage Bill

On January 10, 2007, the House passed H.R. 2, which would increase the minimum wage by $2.10 in three steps over the next three years. But several hurdles remain before a Minimum Wage Bill can make its way to the President's desk. The effort to send a stand-alone Minimum Wage Measure ended once the Legislation reached the Senate. After much debate, Senate Leaders agreed to send a Bill combining an increase in the minimum wage with an $8.3 billion package of small-business tax breaks and offsetting increases on January 29th.

Legislative and Executive Branches Haggle over Authority to Increase CAFE Standards

One of the highlights of the President's energy plan was a call for improvements in automobile fuel efficiency. He renewed his request for authority to overhaul the Corporate Average Fuel Efficiency (CAFE) Standards. President Bush indicated that he would use this authority to increase the CAFE Standards and reduce gasoline use by up to 8.5 billion gallons a year by 2017, a 5 percent reduction in projected consumption. White House officials said the Administration could achieve those numbers with an annual increase of 4 percent in the standards for cars and light trucks, beginning in 2010. Draft Legislation was submitted to Congress on February 6th that would give regulators authority to raise the CAFE standards, but the National Highway Traffic Safety Administration did not include an annual mileage target. Last year a group of Lawmakers blocked a similar request arguing that the Administration already has this authority and that it would be preferable to write specific standards into law.

House-Passed Energy Bill Marks a New Beginning to the Energy Debate

The Energy Bill passed by the House on January 18th (H.R. 6) would change provisions in three laws, including the 2005 Energy Overhaul Legislation. It would roll back approximately $14 billion in tax breaks and other subsidies for oil and gas companies and require that the money be deposited into a fund to promote alternatives to fossil fuels. Oil companies holding flawed offshore drilling leases issued in 1998 and 1999 would also be required to renegotiate or pay a "conservation fee" as compensation before they could bid on more drilling leases. This Measure is the first in what most agree will be a long line of controversial energy bills to be considered by this Congress.

During the State of the Union Address, President Bush announced his plan to reduce U.S. gasoline by 20 percent in 10 years and to increase the amount of alternative fuels blended into the National gasoline supply. The White House has proposed requiring use of 35 billion gallons of biofuels annually by 2017. Corn ethanol and soy-based biodiesel have become the primary alternative fuels of choice, but some experts say there is a limit to how much they can produce without improving technology and increasing prices for corn. According to the Chairman of the Agriculture Committee, Congress will have to allocate up to $22 billion over five years for biofuel research and development programs to be successful in reaching the President's goal. The Senate Energy and Natural Resources Committee have already begun holding hearings on fuel efficiency and biofuel issues.

Senate Committee Considers Predatory Lending Practices

On January 25th, the Senate Banking, Housing and Urban Affairs Committee held the first in a series of hearings on what the Chairman called "confusing, misleading and in some cases predatory" lending practices. The focus thus far is on the credit card industry. During the hearing, the Committee addressed two practices in particular-the practice of raising an interest rate because of a late payment on another card, utility bill or something else in a credit report and the practice of charging interest on the full amount of a balance, even if the consumer has paid off a portion of that balance. Examining the finance industry is a priority for the Chairman, who has offered Legislation cracking down on industry practices in the past, in part because he is concerned that the Bankruptcy Overhaul Legislation enacted in 2005 is making it more difficult for consumers to file for bankruptcy.

·  Federal Regulatory Activity

FTC Announces Rule Review Schedule for 2007 and Beyond

The Federal Trade Commission (FTC) systematically reviews all of the rules and guides that the Agency adopts. On December 26, 2006, it approved for publication in the Federal Register the "FTC's Regulatory Reform Project and Rule Review for 2007." According to the Notice, during the upcoming year the FTC will conduct a review of the Guides for the Mail or Telephone Order Merchandise Rule and the Guide Concerning Fuel Economy Advertising for New Automobiles. The Notice also contains a revised regulatory review calendar for the next 10 years. Among those listed for review during 2008 are the Automotive Fuel Ratings, Certification and Posting Rule, the Rule concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations, and the Credit Practices Rule.

Deadline for States to Comply with REAL ID Act Looms

On May 11, 2005, President Bush signed into law the "REAL ID Act of 2005." Title II of the Act, the "Improved Security for Driver's Licenses and Personal Identification Cards" mandates that by May 11, 2008 any person who lives or works in the U.S. possess a federally approved ID card in order to participate in federally regulated activities, including air travel, collection of social security payments and receipt of federal services. A state-issued ID card must meet minimum federal regulations in order to be accepted for these purposes. Two of the mandatory requirements include verifying an applicants' identity and legal status in the United States and maintaining electronic copies of the identity source documents. States remain free to issue non-complying licenses as well, as long as they have a unique design and a clear statement that they cannot be accepted for any Federal identification purposes.

The potential impact of prohibiting illegal immigrants from obtaining driver's licenses is significant for many of members of our industry. Several States, including Utah and Tennessee, have already started issuing "driving privileges certificates/cards" in lieu of regular driver's licenses. This will permit applicants who are unable to prove their legal status in the U.S. to be tested and licensed to drive and obtain liability insurance using a special license that is otherwise not valid for purposes of Federal identification. Other States, including Indiana and Georgia, have taken the new requirements a step further than mandated by the Act; Legislation has been introduced mandating proof of citizenship before issuing a Certificate of Title or processing a request for registration of a motor vehicle. Other States are opposing the Federal mandate because they do not have the funds and/or desire to implement the requirements. As it stands now, those States that elect not to comply could lose Federal Transportation Funds. It remains to be seen whether the Homeland Security Department will delay the first deadline for compliance.

·  Activity of Interest

Alaska Legislature Introduces Financing Disclosure Bill

For those who are keeping track, you can add Alaska to the growing list of States that are considering imposing additional disclosure requirements related to the financing of motor vehicle sales transactions. Alaska H.B. 39 was introduced on January 5, 2007. It would amend current State law by adding a new subsection that requires a motor vehicle dealer arranging financing to disclose in writing before a sale is finalized whether the interest rate is different than the interest rate charged to the dealer and that it may not the lowest interest rate available.

Texas Legislature May Consider New UCC Article 2

Article 2 of the Uniform Commercial Code (UCC) has governed the sale of goods since its promulgation in 1951. The stated purpose of the rewrite was to accommodate electronic commerce and to reflect development of business practices and changes in other law. UCC Article 2A provides a legal framework for leases of personal property and was amended to update and modernize the Article and to conform to the changes in Article 2. The National Conference of Commissioners on Uniform State Laws and the American Law Institute completed the rewrite of Article 2 in 2003.

Given the uncertainty that surrounds the treatment of software and computer products in the Revised Article 2, there has been considerable opposition to its adoption at the State level. Prior to 2007, Legislation had been introduced in three States (Kansas, Nevada and Oklahoma) for consideration, but none of the States ultimately elected to revise their existing provisions. In January, we were advised that the Texas Legislature will be the next State to consider a major overhaul of Article 2 in the next few months. The proposed Legislation is similar to the final version approved by NCCUSL, but is expected to contain a number of changes designed to address some of the concerns raised by the business community.

·  Case of the Month

Opposing Counsel's Fees Can Add Up Quickly and Often Hinder Settlement Opportunities

The demand for payment of attorney's fees isn't new to motor vehicle dealers facing the potential of litigation, but the amounts being demanded, even early on in the settlement stage, has at times become astounding. The decision of the Ohio Appellate Court in Smith v. General Motors Corp illustrates why dealers should be cautious when evaluating the risks of proceeding with a case and why they may be focusing on the wrong dollar amounts.

The plaintiffs' claimed that the Dealership and GM had violated Ohio's Consumer Sales Practices Act in connection with the return of a "lemon" vehicle. After contacting GM, they signed a settlement letter stating that the vehicle would be replaced at no cost. After they returned the vehicle and had accepted delivery of the replacement vehicle, however, they were asked to return to the Dealership to sign more paperwork. At that time, they were informed that their new loan had a higher interest rate and that the full amount of their original down payment would not be fully credited towards the replacement vehicle. They were also told that the lemon vehicle was no longer available even if they wished to keep it. After a jury trial, a verdict was returned against GM for actual damages of $3,936 and against the Dealership for actual damages of $840. The jury also awarded $35,000 in punitive damages. The Trial Court subsequently granted a motion to treble the damages and awarded the plaintiffs' attorney fees in the amount of $55,525.

The amount of the attorney fees awarded and the standard for calculating that amount was one of the issues raised on appeal. The Dealership and GM claimed that the amount of attorney fees awarded was unreasonable for a case that involved only a single injury and actual damages in the amount of $4,776. The generally recognized standard for determining the amount of attorney fees pursuant to Ohio's Consumer Sales Practice Act is to first calculate the number of hours reasonably spend on the case times an hourly fee, and then the court may modify the calculation by applying other factors, such as the expertise of the attorney and difficulty of the matter before the court. The Dealership and GM pointed out that it was unreasonable for the Plaintiffs' Attorney to have allegedly spent approximately 290 hours on the case when their own counsel only had spent approximately 120 hours on it.

The Court of Appeals found that the arguments presented lacked any merit and declined to limit reasonable fees to the amount of time that was spent by the attorney "for the losing party." The Court commented "the extra time that the Smiths' attorney spent working on the case is possibly what enabled the Smiths to prevail..." Perhaps more shocking was the fact that the Court accepted the Attorney's word "as an officer of the court" that he spent that many hours working on the case!