ABA Section of Business Law

Volume 14, Number 6 July/August 2005

Rent a Car, Rent a Spy
Governments react to new uses for GPS
    By Elizabeth C. Yen

It started with a bit of new technology. It ended with at least a few legislatures coming down really hard. So much for unbridled innovation in the marketplace.

Global positioning system (GPS) tracking devices have been available for several years in motor vehicles, for the primary purpose of offering drivers navigational assistance. However, these devices also enable third parties (including law enforcement and car rental companies) to see where and at what speeds a vehicle has been driven. In Connecticut and California, two locally owned and operated car rental companies were recently required to discontinue using GPS information as a means of enforcing speeding and mileage surcharge provisions in their rental contracts.

Several states (including New York, Connecticut and California) have also enacted legislation restricting the car rental industry's ability to use GPS information. The innovative business practices of a very small number of companies have apparently caused industry-wide legislative repercussions.

Recent Connecticut litigation involved a car rental company's use of GPS information to determine the number of times a customer had exceeded 79 miles an hour for two or more continuous minutes. The contract included a provision allowing the rental company to impose a speeding surcharge of $150 for each speeding episode lasting two or more minutes. These surcharges typically appeared on a customer's credit or debit card statement several weeks after the rental vehicle had been returned.

Some customers did not receive advance notice of these surcharges, and therefore unwittingly exceeded their credit limits or overdrew their deposit accounts. (See American Car Rental v. Commissioner of Consumer Protection, 273 Conn. 296, 2005 WL 756772 (Conn., April 12, 2005). See also Turner v. American Car Rental, 2004 WL 1888947 (Superior Court 2004), where the jury awarded the plaintiff the $450 that had been charged to his credit card for three separate instances of speeding during the course of a short-term car rental, plus court costs and $6,000 in attorneys' fees.)

In an administrative proceeding initiated by the Connecticut Department of Consumer Protection against the car rental company, the company argued that the $150 charge was reasonable liquidated damages for the additional wear and tear caused to its vehicles by customers who engaged in unlawful speeding. However, an administrative hearing officer determined, based on the testimony of various expert witnesses, that the excess wear and tear associated with driving one of the rental car company's cars at 80 miles per hour for two continuous minutes was closer to 37 cents.

Following the rental car company's unsuccessful appeal from the administrative proceeding to a Connecticut trial court, the Connecticut Supreme Court recently affirmed that the $150 charge was an unenforceable penalty, unsupported by evidence of commensurate vehicle wear and tear, and a violation of the Connecticut Unfair Trade Practices Act.

The court held that, even if use of GPS information to enforce the speeding surcharge provision of the rental contract was clearly disclosed in advance to a renter, the rental company could not surcharge its customer $150 for two-minute-long episodes of speeding, since the company failed to present evidence showing a reasonable relationship between the $150 surcharge and the increased depreciation, wear and tear suffered by a vehicle because of speeding.

The Connecticut Supreme Court noted that a renter who maintained a speed of 80 miles an hour for 30 continuous minutes would be charged $150 according to the terms of the rental contract. A renter who maintained a speed of 80 miles an hour for only two minutes would also be charged $150, indicating that the $150 surcharge did not reasonably correlate to vehicle wear and tear. In addition, a renter who maintained a speed of 80 miles an hour for 15 continuous minutes, and then decelerated to 75 miles per hour for five minutes, followed by an acceleration to 85 miles an hour for 10 continuous minutes, would be charged $300 for two episodes of speeding.

The court observed that, based on the administrative hearing officer's factual determinations, "a customer would have to travel more than 1,070 miles at high speeds, without decelerating below 80 miles per hour, to cause $150 of excess wear on the vehicle. Presumably, the customer would have to stop to refuel several times, especially if driving at high speeds, to travel that distance. Each time the customer decelerated below 80 miles per hour, as would be required to refuel, the subsequent acceleration above 79 miles per hour would trigger another 'occurrence' and another speeding fee. Thus, the rental vehicle could never suffer enough additional wear due solely to high speed driving to qualify the plaintiff's speeding fee as a liquidated damages charge."

The California attorney general also recently took administrative action against a leasing company that used GPS information to surcharge its customers. (See a California attorney general press release of Nov. 9, 2004, regarding settlement in the matter of State of California v. Acceleron Corp. et al., copies available at http://www.ag.ca.gov/ newsalerts/2004/04- 129.htm and http://www.ag.ca.gov/newsalerts/2004/04- 129_settle.pdf.)

The California rental company's contract disclosed the fact that a higher mileage charge would apply if the car were driven out of state, but apparently did not disclose that GPS information would be used to determine whether the car had been driven out of state. In addition, the car rental company apparently advertised unlimited mileage (no per-mile charges), without clearly disclosing the geographic limitations associated with the unlimited mileage feature.

Due in part to the practices of these two leasing companies, the California and Connecticut legislatures enacted laws restricting the ability of leasing companies to use GPS information. In California, car rental companies may no longer use GPS information to impose surcharges, fines or penalties relating to the renter's use of a leased vehicle. (See California Civil Code Section 1936(o).) GPS information may be used by a California rental company to help locate a stolen, abandoned or missing vehicle, provided that this is clearly and conspicuously disclosed in advance to the customer.

The California attorney general's recent administrative settlement with Acceleron Corp. goes a step further, requiring this disclosure to be included in ads, during the reservation process, and at the rental counter, and by requiring the rental company to make vehicles available to renters, on request, that do not contain functioning GPS or other electronic surveillance devices.

GPS information also may be used by a California car rental company "for the sole purpose of determining the date and time the vehicle is returned to the rental company, and the total mileage driven and the vehicle fuel level of the returned vehicle," provided that the technology is used for such purposes "only after the renter has returned the vehicle to the rental company."

California Civil Code Section 1936(o) also allows a rental vehicle to include "GPS based technology that provides navigation assistance to the occupants of the rental vehicle," provided that "the rental company does not use, access or obtain any information relating to the renter's use of the rental vehicle that was obtained using that technology, except for the purposes of discovering or repairing a defect in the technology and the information may then be used only for that purpose."

In addition, a rental vehicle may include electronic surveillance technology for remote locking or unlocking of the vehicle at the request of the renter, or for vehicle roadside assistance at the request of the renter, provided the car rental company only uses this technology for such purposes. GPS information may also be disclosed by a California car rental company to law enforcement "pursuant to a subpoena or search warrant."

New York similarly prohibits short-term car rental companies from using GPS information "to determine or impose any costs, fees, charges or penalties on an authorized driver for such driver's use of a rental vehicle," subject to an exception for the recovery of "a vehicle that is lost, misplaced or stolen." (See McKinney's General Business Law Section 396-z, Subsection 13-a.) Other states (such as Massachusetts) are contemplating similar legislation.

All of this serves as a useful reminder that, although a business may use entirely legal and commonly available technology, together with full contractual disclosure, that may not be enough to insulate the business from administrative, legislative or legal action, particularly if the business' practice is perceived to be overreaching, unfair or deceptive. A business may operate entirely within the four corners of the letter of the law, but if it does not exercise sufficient self- restraint, disgruntled consumers may demand a governmental response that industry will have difficulty counteracting.

Connecticut's legislative response to press reports about the use of GPS and similar devices in vehicles, both within and outside of Connecticut, was particularly harsh. Connecticut enacted nonuniform provisions concerning the use of GPS, remote ignition "kill" and other "electronic self- help" devices by both secured creditors and lessors, as part of the state's versions of UCC Articles 9 and 2A.

Connecticut's version of UCC Section 9-609 prohibits "the use of electronic means to locate the collateral" or to "render equipment unusable" unless (a) "the debtor separately agrees to a term of the security agreement authorizing electronic self-help that requires [advance] notice of exercise" and (b) the secured party gives the debtor at least 15 days' advance written notice of its intent to use electronic self-help. In addition, "electronic self-help may not be used if the secured party has reason to know that its use will result in substantial injury or harm to the public health or safety or grave harm to the public interest substantially affecting third parties not involved in the dispute." (See Conn. Gen. Stat. Section 42a-9- 609(d).)

Comparable provisions appear in Connecticut's nonuniform version of UCC Article 2A, Section 2A-702, applicable to both short-term and long-term consumer and commercial leases of personal property, and in Connecticut's nonuniform version of the Uniform Consumer Leases Act. (See Conn. Gen. Stat. Sections 42a-2A-702(e) and 42- 419(d).)

In contrast to GPS devices, remote ignition "kill" devices allow a rental company or other third party to effectively render the vehicle nonfunctional, posing potential public safety concerns and also implicating self-help repossession statutes. (See, for example, Conn. Gen. Stat. Sections 42a-2A- 717(a) and 42a-9-609(a)(2).)

GPS devices do not appear to present the same public safety or repossession-related questions as ignition "kill" devices, but were nonetheless lumped together with ignition "kill" devices in behind-the-scenes Connecticut legislative drafting discussions that culminated in the state's current statutory restrictions on the use of "electronic self-help" to locate or repossess collateral, or to make collateral unusable.

The legislative response in Connecticut to the use of GPS tracking devices by a very small number of players in the relevant marketplace was arguably unnecessarily broad in scope, by applying to both long-term and short- term vehicle leases, as well as the use of GPS tracking devices in vehicles by secured parties, without any exception for large-dollar or commercial-purpose transactions. Long-term commercial leasing and finance companies that did not contribute to the GPS-related concerns recently addressed by the Connecticut Supreme Court may now be effectively precluded from using GPS or similar electronic technology to locate their leased or financed personal property post-default.

The California, New York and Connecticut legislative responses to the use of GPS devices in rental vehicles provide cautionary examples of governmental responses to the use of technology for purposes not originally intended nor anticipated by manufacturers.

State and federal "do not call" and "do not fax" restrictions are additional recent examples of governmental responses to widespread business use of legal, readily available, inexpensive technology for legitimate marketing purposes that evolved with inadequate industry self-regulation and insufficient industry attention to consumer privacy concerns.

Once a consumer protection matter becomes the subject of legislative or regulatory scrutiny, it may be too late for an industry to use "best practices" or other forms of self-regulation as an effective way of minimizing government intervention.