FTC Affirms Consumers’ Right To Go To Court Over Warranty Disputes

In just the last four years, the U.S. Supreme Court has twice ruled against consumers’ rights and in favor of companies that use fine print in their contracts to block wronged customers from suing in court and from joining together as a class action. In spite of these rulings, the Federal Trade Commission recently upheld rules that give warranty buyers the right to a day in court, even if they have to go through arbitration first.

Under the Magnuson-Moss Warranty Act of 1975, the FTC is responsible for interpreting and reviewing the rules guiding warranties.

While these rules don’t bar warranty providers from requiring that customers enter into arbitration for dispute settlements, § 703.5(j) states that an arbitrator’s decisions “shall not be legally binding on any person.”

This is very different from the increasingly popular mandatory binding arbitration that so many companies — particularly financial institutions and telecom providers — have been inserting into their terms of service and contracts.

In those binding situations, not only is the customer forced into individual arbitration — a process that is heavily unbalanced in favor of the larger company — but the decision of the arbitrator is final.

§ 703.5(j) makes sure that warranty customers still have the right to take their matter before a court. The arbitrator’s decision can be introduced as evidence, but that’s it.

During the FTC’s recent review process of the warranty rules, the Association of Home Appliance Manufacturers called for the removal of § 703.5(j), saying “it creates disincentives for manufacturers or sellers” to offer arbitration in the first place.

While two federal appeals courts have ruled that the Magnuson-Moss act doesn’t prohibit binding arbitration, the FTC has repeatedly held that the 1975 law never intended for arbitration rulings to be the ultimate say in a dispute.

The Commission points to § 2310(a)(3)(C) of this law, which deals with informal dispute settlement procedures.

The law states that “any decision in such procedure may be admissible in evidence” in “any civil action arising out of a warranty obligation.” To the FTC, this clearly implies that the legislators saw arbitration as a first step that could resolve some disputes, but not the final, binding word on all disputes.

Some opponents of this rule also claim that arbitration doesn’t come under the umbrella of “informal dispute settlement mechanisms” [IDSM] and therefore Magnuson-Moss doesn’t apply to these procedures.

“[A]ny arbitration proceeding is, by comparison to judicial proceedings, an ‘informal’ ‘mechanism’ for ‘dispute settlement,'” counters the FTC, “and it thus falls squarely within the plain meaning of the term ‘informal dispute settlement mechanism.'”

In addition to retaining the prohibition on binding arbitration, the FTC is adding to § 700.10, which that limits warrantors’ tying of warrantees to select parts or service providers.

In its current form, that rule prohibits a company from voiding a warranty just because a customer uses someone other than an authorized dealer or authorized replacement parts for non-warranty work. In other words, if your laptop screen dies while under warranty, the manufacturer shouldn’t be able to say the warranty was voided just because you replaced the sound card.

The revised rule clarifies that this extends to the mere implication of voiding the warranty for customers who choose to use parts and services unrelated to the manufacturer.

“[W]arranty language that implies to a consumer acting reasonably in the circumstances that warranty coverage requires the consumer’s purchase of an article or service identified by brand, trade or corporate name is similarly deceptive,” reads the revised rule. “For example, a provision in the warranty such as, ‘use only an authorized ‘ABC’ dealer’ or ‘use only ‘ABC’ replacement parts,’ is prohibited where the service or parts are not provided free of charge pursuant to the warranty.”

A real life example of this case occurred recently, with BMW reaching a settlement deal with the FTC for telling drivers of the company’s Mini vehicles that the only way to maintain a vehicle’s safe operation and value is to “have routine maintenance performed only by Mini dealers unless the representation is true and BMW can substantiate it with reliable scientific evidence.”