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Better Business Bureau weighs in on going-out-of-business ads

November 15, 2010

By Patricia Kelly

As we know, Chrysler and GM decided to terminate the franchise agreements of many local dealers. These dealers have no choice but to sell off their inventory as a result. 

The BBB has been asked to review advertisements calling for much reduced prices as these dealers sell their stock. Rule 475.380 of the Illinois Motor Vehicle Advertising Rules governs the practice of dealers advertising liquidation sales and other forced sales.

The rule states, "It is an unfair or deceptive act to use any advertising terms such as ‘Liquidation Sale,’ ‘Public Notice,’ ‘Closing Out Sale,’ ‘Lost Our Lease Sale,’ ‘Forced to Vacate Sale’ or similar terms used to connote or imply a court-ordered or other forced liquidation of assets, or to induce a belief that upon disposal of the stock of good on hand, the business will cease and be discontinued at the premises where the sale is conducted, unless such is the case."

Therefore, unless a dealer is actually going out of business at the location where the sale is being held, the dealer cannot advertise a liquidation sale or other sale suggesting the store is closing. 

Only those dealers who are actually closing their doors forever at the location are able to truthfully advertise such a sale under Rule 475.380. Other dealers remaining in business and purchasing vehicles from the terminated dealers cannot advertise "liquidation sales" because they are not going out of business.

Another Illinois provision concerning liquidation or going out of business sales is the Fraudulent Sales Act, 815 ILCS 350. The Act requires every person conducting such a sale to first obtain a license from the clerk of the city, village, and incorporated town or, in unincorporated areas, the township where the sale is to be conducted. That would be the local municipality where the dealership is located, for the most part. 

The Act sets out many requirements necessary to apply for the license, including the reason for the sale and a full description of the inventory. The Act prohibits the seller from adding to the inventory stated on the application. The application also must be signed under oath by the applicant. The license allows for a 60-day period to conduct the sale. The fee is $75. If the inventory is not disposed of in 60 days, there is an opportunity to renew the license. 

An important requirement for advertising such sales is that the license number issued by the municipality as well as the expiration date of the license must be posted clearly and conspicuously in all advertisements. The Act is enforceable by the Illinois attorney general’s office and the local municipality. Enforcement would involve obtaining a court order stopping a sale without a license. The lack of a license number and expiration date in an advertisement would indicate noncompliance with the Fraudulent Sales Act.

The Fraudulent Sales Act does not apply to any sales directly ordered by any court or referee in bankruptcy. This means that the specific sale being conducted, if ordered directly by the court, is exempt. It does not mean that sales being conducted as a result of a franchise termination are included in the exemption if the court did not order that individual sale. 

Dealers must seek legal advice as to the status of their sales in this regard. They should be prepared to substantiate an exemption.

Dealers who must go out of business due to the termination of their franchise agreements by a manufacturer should consider the terms of the Fraudulent Sales Act as well as Rule 475.380, as they conduct and advertise liquidation sales.  Implicit in the advertising of a liquidation sale is the requirement that the sale is being conducted under a license from the local municipality.

As such, any advertisements that promote liquidation sales must also clearly and conspicuously disclose the license number and expiration date.

Patricia Kelly is senior counsel of the Better Business Bureau of Chicago and northern Illinois.