Sears Auto Center Fraud Charges: 41-State Settlement and Aftermath

The Sears Auto Center fraud was a nationwide scheme, uncovered in 1992, in which Sears repair shops systematically recommended and performed unnecessary repairs on customers’ vehicles. A California undercover investigation triggered fraud charges, a 41-state settlement, a national class action, and the end of the commission pay system that drove the abuse.

What California Investigators Found

The case began with a 50 percent jump in consumer complaints filed with the California Department of Consumer Affairs in the late 1980s and early 1990s, a spike that tracked Sears’s move to commission pay for its automotive employees.¹ The department’s Bureau of Automotive Repair opened an 18-month undercover investigation in late 1990.²

Undercover agents visited 27 Sears auto repair shops a total of 38 times. In 34 of those visits, employees recommended unnecessary services or repairs.² Agents were overcharged an average of $223 per visit for work their vehicles did not need, with individual bills running as high as $550 for needless parts and labor.³ Investigators also documented instances where Sears billed customers for work that was never performed. In at least one case, a vehicle brought in for a brake inspection was returned without functional brakes.¹

Jim Conran, the director of the California Department of Consumer Affairs, called the findings “a constant pattern of abuse” and told reporters, “These are not honest mistakes. This is the systematic looting of the public.”⁴ On June 11, 1992, the department charged Sears with fraud and moved to revoke the company’s license to perform auto repairs in California, a step that would have closed all 72 of its shops in the state.⁵

Why It Happened: The Commission System

Sears automotive service advisers earned commissions of 3 percent on sales up to $110,000 and 6 percent above that figure. They also worked to specific sales targets for high-margin products such as front-end alignments, shocks, and brakes. One employee reported being expected to sell $147 worth of parts and service per hour.⁶

Performance was tracked weekly, and advisers who fell 80 percent below the store average faced termination. Sears ran competitive contests between stores, awarding tickets to California Angels games for top sellers and flying managers of top-performing departments to the Indianapolis 500. Sears called these “sales goals based on conservative projections of the workload,” not quotas. State investigators alleged the incentives directly led employees to recommend repairs customers did not need.⁶

Investigators also alleged that Sears ran print ads for low-cost brake jobs at $48 or $58 and then pressured customers into expensive, unnecessary add-on work once they were in the shop.³

How Sears Responded

On June 22, 1992, Sears chairman Edward Brennan held a news conference and acknowledged that the company’s “incentive compensation programs and goal-setting process for service advisers created an environment where mistakes did occur.” He stopped short of admitting fraud, saying he did not believe there was “willful overcharging” and that “the work that was done was done in good faith.”⁷

Sears eliminated commission-based pay for automotive service advisers and dropped product-specific sales goals. The company’s roughly 2,700 service advisers moved to hourly pay set at levels approximating their pre-commission earnings.⁸ A new program tied compensation to customer-satisfaction levels rather than sales volume,² and Sears committed to retaining an outside organization to conduct unannounced “shopping audits” of its auto centers.

The damage was already significant. Sears’s automotive business dropped 15 to 20 percent after the charges became public, costing the company an estimated $700,000 per day in lost revenue nationwide.⁹ Brennan appeared personally in television commercials, his first TV ad, telling customers the company would make things right under its “satisfaction guaranteed” policy.¹⁰

The 41-State Settlement

California acted first, but the problem was national. New Jersey’s Department of Consumer Affairs cited six Sears auto centers after an investigation found the shops recommended new parts for vehicles that had been secretly rigged to need nothing more than a reconnected alternator wire. Florida launched its own investigation.⁷ Forty-three states eventually pursued enforcement actions or investigations.¹¹

On September 2, 1992, Sears reached a nationwide settlement with the attorneys general of 41 states. The company denied liability or intentional wrongdoing but agreed to resolve the claims to avoid continued litigation.³ The terms included:

$50 coupons for merchandise or services to customers who had brake calipers, coil springs, shock absorbers, master cylinders, or idler arms installed between August 1, 1990, and January 31, 1992. An estimated 933,000 transactions qualified, and customers who considered $50 insufficient could negotiate individual settlements.¹²
A $3.5 million payment to California to cover investigative and legal costs, plus a fund of at least $1.5 million for automotive training at community colleges.³
$200,000 to the National Association of Attorneys General to fund a survey of auto repair practices and a consumer education program.¹³
An estimated total cost to Sears of roughly $15 million after tax adjustments.¹²

Separately, the California Attorney General’s office announced an $8 million settlement with Sears to resolve civil charges arising from the same overcharging allegations. California Attorney General Daniel Lungren said the deal was intended to “avert years of costly trials” and enforce changes in Sears’s practices.¹⁴ Under the deal, Sears’s 72 California auto shops stayed open.¹²

The Class Action and the Twigg Carve-Out

Consumers pursued their own claims. Nineteen class action suits were filed, primarily in California, Illinois, and New Jersey,¹⁵ and were consolidated as In re Sears Automotive Center Consumer Litigation in the U.S. District Court for the Northern District of California.¹⁶

In October 1992, the court certified an opt-out class covering everyone who bought auto repairs from any Sears Auto Center between June 10, 1988, and September 2, 1992, and approved a settlement. The terms mirrored the state deal: $50 coupons for customers who had the specified parts installed, a commitment by Sears to instruct employees to stop recommending unnecessary repairs, and a review process for complaints under the “Satisfaction Guaranteed or Your Money Back” policy. Class counsel received $3 million in fees and costs.¹⁶

The settlement did not close the door on every claim. In Twigg v. Sears, Roebuck & Co., a Florida customer named Kevin Twigg brought a separate class action alleging that Sears had charged for an “AccuBalance” tire service that was never actually performed. Sears argued the 1992 national settlement barred the case, and the district court granted summary judgment. The Eleventh Circuit reversed in 1998, finding that the notices in the original case had been too vague to inform absent class members that claims involving services never performed, as opposed to merely unnecessary ones, were being resolved. Applying the earlier settlement to bar Twigg’s claims, the court held, would violate due process.¹⁶ The ruling became a reference point for the specificity required in class action settlement notices.

What Happened to Sears Auto Centers

The scandal marked a turning point for the division, though its full decline took decades. In the 1990s, individual Sears auto centers averaged an estimated $3 million in annual revenue per store. By 2010, the division still ran about 740 locations but generated roughly $1.8 million per store. The count fell to around 600 by 2014 as auto centers closed alongside the full-line Sears stores they were attached to.¹⁷

In 2017, Sears Holdings announced it would close 50 auto centers as part of a $1.25 billion cost-cutting plan, with more than 700 still operating at the time.¹⁸ The company’s bankruptcy accelerated the closures. On January 19, 2022, Transform SR Brands, which managed Sears Holdings’ remaining affairs, closed the last 15 Sears Auto Center locations in the United States and Puerto Rico.¹⁷

1
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Time. Systematic Looting
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Goupstate.com. Sears Admits Auto Repair Mistakes
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Washington Post. Sears Halts Commission System After Car Charge Complaints
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C-SPAN. Auto Repair Fraud
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Washington Post. Sears Settles States’ Charges Over Auto Repair Centers
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Chicago Tribune. Sears, NJ Settle Over Car Repairs
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The New York Times. Sears Will Pay $8 Million to Settle Repair Complaints
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Chicago Tribune. Sears Settlement Seeks to Fix Car Repair Image
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U.S. Court of Appeals, Eleventh Circuit. Twigg v. Sears, Roebuck and Co.
17
Tire Business. Sears Auto Centers Close Last 15 Locations
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AL.com. Sears Closing 50 Auto Centers