[Federal Register Volume 62, Number 63 (Wednesday, April 2, 1997)]
[Proposed Rules]
[Pages 15636-15639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8411]


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FEDERAL TRADE COMMISSION

16 CFR Part 703


Request for Comments Concerning Rule Governing Informal Dispute 
Settlement Procedures

AGENCY: Federal Trade Commission.


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ACTION: Proposed rule; request for public comments.

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SUMMARY: The Federal Trade Commission (``the Commission'') is 
requesting public comment on its Rule Governing Informal Dispute 
Settlement Procedures (``Rule 703''). The Commission is also requesting 
comments about the overall costs and benefits of Rule 703 and its 
overall regulatory and economic impact as part of its systematic review 
of all current Commission regulations and guides.
    Rule 703 specifies the minimum standards which must be met by any 
informal dispute settlement mechanism that is incorporated into the 
written warranty of a consumer product and which the consumer must use 
prior to pursuing any legal remedies in court.

DATES: Written comments will be accepted until June 2, 1997.

ADDRESSES: Comments should be directed to: Secretary, Federal Trade 
Commission, Room H-159, Sixth and Pennsylvania Ave., NW., Washington, 
DC 20580. Comments should be identified as ``Rule 703--Comment.''

FOR FURTHER INFORMATION CONTACT:
Carole I. Danielson, Investigator, Division of Marketing Practices, 
Federal Trade Commission, Washington, DC 20580, (202) 326-3115.

SUPPLEMENTARY INFORMATION: The Commission has determined, as part of 
its oversight responsibilities, to review rules and guides 
periodically. Pursuant to these reviews, the Commission seeks 
information about the costs and benefits of the rules and guides under 
review, as well as their regulatory and economic impact. The 
information obtained will assist the Commission in identifying rules 
and guides that warrant modification or rescission. At this time, the 
Commission solicits written public comments concerning its Rule 
Governing Informal Dispute Settlement Procedures, 16 CFR Part 703 
(``Rule 703'').

A. Background

    In enacting the Magnuson-Moss Warranty Act (``Warranty Act'' or 
``Act''),\1\ which governs written warranties on consumer products, 
Congress recognized the growing importance of alternatives to the 
judicial process in the area of consumer dispute resolution. In Section 
110(a)(1) of the Act, Congress announced a policy of ``encourag[ing] 
warrantors to establish procedures whereby consumer disputes are fairly 
and expeditiously settled through informal dispute settlement 
mechanisms'' (``IDSMs'') and erected a framework for their 
establishment. As an incentive to warrantors to establish such IDSMs, 
Congress provided in Section 110(a)(3) that warrantors may incorporate 
into their written warranties a requirement that a consumer must resort 
to an IDSM before pursuing any of his or her legal remedies for breach 
of warranty. To ensure fairness to consumers, however, Congress also 
directed that, if a warrantor were to incorporate such a ``prior resort 
requirement'' into its written warranty, the warrantor must comply with 
the minimum standards set by the Commission for such IDSMs; Section 
110(a)(2) directed the Commission to establish those minimum standards. 
Accordingly, on December 31, 1975, the Commission published its Rule 
Governing Informal Dispute Settlement Procedures, 16 CFR Part 703.\2\
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    \1\ 15 U.S.C. 2301 et seq. (1975).
    \2\ 40 FR 60,190.
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    Rule 703 contains extensive procedural standards that must be 
followed by every warrantor who wishes to incorporate an IDSM, through 
a prior resort clause, into the terms of a written warranty. These 
standards include requirements concerning the mechanism's structure 
(e.g., funding, staffing, and neutrality), the qualifications of staff 
or decision makers, the mechanism's procedures for resolving disputes 
(e.g., notification, investigation, time limits for decisions, and 
follow-up), recordkeeping, and annual audits. The Rule is unique among 
Commission rules because it is a voluntary regulation; that is, the 
Rule applies only to those firms that choose to be bound by it by 
placing a ``prior resort requirement'' in their warranties. The Act 
does not require warrantors to set up IDSMs. Furthermore, a warrantor 
is free to set up an IDSM that does not comply with Rule 703 as long as 
the warranty does not contain a ``prior resort requirement.''
    In the twenty years since Rule 703 was promulgated, most of the 
activity in developing mediation and arbitration programs for the 
resolution of consumer warranty disputes has taken place in the 
automobile industry. It is unclear how many companies, if any continue 
to participate in a Rule 703 mechanism.\3\ Most vehicle manufacturers 
no longer include a ``prior resort requirement'' in their warranties; 
thus, they and any dispute resolution programs in which they 
participate are not required to comply with Rule 703.
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    \3\ General Motors ceased incorporating an IDSM in its warranty 
beginning with its 1986 models and no longer operates a 703 program. 
Ford discontinued operation under Rule 703 with its 1988 model year 
cars. Chrysler discontinued its Rule 703 program with its 1991 
models. Similarly, American Honda, Nissan, Volvo, and other auto 
manufacturers have all discontinued operating Rule 703 programs. 
Although they are not required to do so, the IDSMs for the major 
auto manufacturers continue to file annual audits with the 
Commission. These audits are placed on the public record and can be 
obtained from the FTC's Public Reference Branch, Room 130, 6th St. 
and Pennsylvania Ave., NW., Washington, DC 20580; (202) 326-2222. 
(FTC File No. R711002)
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    The fact that most warrantors do not include ``prior resort 
requirements'' in their warranties does not mean, however, that 
warrantors have abandoned informal dispute resolution programs. On the 
contrary, due to the terms of state lemon laws (as explained more fully 
below), all major automakers participate in either manufacturer-
sponsored or state-run dispute resolution programs that frequently are 
modeled on the minimum standards set out in Rule 703 even though they 
are not required to do so under any provision of federal law. Today, 
most automobile warranty disputes are handled either by state-operated 
programs not subject to Rule 703 or by private programs which choose 
not to operate under the Rule. As a result of these trends, the 
Commission's enforcement responsibility for Rule 703 has virtually 
ceased.
    Since Rule 703 was promulgated, warrantors, consumer groups, state 
governments and IDSMs have criticized the Rule. Some warrantors and 
IDSMs have argued that the Rule is unduly burdensome, discourages the 
formation of new IDSMs, and hinders the efficient operation of existing 
ones. These critics have alleged high compliance costs of the 
procedural provisions and burdensome recordkeeping requirements. Other 
parties, by contrast, have asserted that the Rule is insufficiently 
stringent in many respects. For example, consumer groups and state law 
enforcement offices have alleged that decisionmakers are not adequately 
trained and that the recordkeeping requirements are insufficient to 
evaluate the programs' performance. Finally, because few, if any, 
programs actually operate under Rule 703, some might argue that the 
Rule no longer serves a useful purpose and has become irrelevant to 
today's market.
    In 1986, the Commission decided to evaluate Rule 703 in an effort 
to address criticisms of the Rule and to develop proposals for reform. 
In order to assist in this evaluation, the Commission conducted a 
``regulatory negotiation'' with an advisory committee of 25 
organizations representing the major

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interests affected by the Rule.\4\ The Commission agreed to publish a 
Notice of Proposed Rulemaking (``NPR'') to amend Rule 703 if the 
advisory committee could reach a consensus recommendation regarding 
revisions. The Commission agreed to incorporate any consensus 
recommendation coming out of the negotiated rulemaking into any NPR. 
However, the regulatory negotiation was unable to reach a consensus on 
a proposed revision of the Rule and concluded its meetings in 1987.\5\ 
Since no consensus recommendation was reached, the Commission did not 
publish an NPR.
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    \4\ The notice of intent to form an advisory committee for 
regulatory negotiation appears at 51 FR 5205 (February 12, 1986). 
The notice of formation of the advisory committee and notice of the 
first meeting appears at 51 FR 29666 (August 20, 1986).
    \5\ The record of that negotiated rulemaking and the 
facilitators' final report were placed on the public record and is 
available through the FTC's Public Reference Branch, Room 130, 6th 
and Pennsylvania, N.W., Washington, D.C. 20580; 202-326-2222. (FTC 
File No. R711002)
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    A second evaluation began in 1988, after the auto manufacturers 
petitioned the Commission to initiate a rulemaking proceeding to amend 
Rule 703.\6\ Among other things, the petitioners proposed that the 
Commission institute a national certification program for IDSMs and 
that the Commission preempt those provisions of state laws which impose 
requirements upon warrantors' private IDSMs which differ from the 
requirements specified in Rule 703. This petition was followed by a 
Memorandum in Opposition to the petition filed by the Attorneys General 
of 41 states.\7\ Because of the continuing interest in the issues 
surrounding Rule 703 (as evidenced by the petition and the Memorandum 
in Opposition), the Commission published an Advance Notice of Proposed 
Rulemaking (``ANPR'') in order to generate a broad range of views on 
which dispute resolution practices are sound and could form the basis 
for possible revisions to the Rule.\8\ In addition, the Commission's 
ANPR requested economic or cost data to buttress the petitioners' 
allegations of injury due to non-uniformity and the costs and benefits 
associated with a national certification program. On June 13, 1991, the 
Commission denied the automakers' petition because the record failed to 
provide the adequate factual basis regarding the costs of non-
uniformity that would have been necessary to justify a rulemaking 
procedure, preemption of state laws governing IDSMs, or federal 
certification of IDSMs.\9\
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    \6\ On April 11, 1988, the Motor Vehicle Manufacturers 
Association of the United States, Inc. and the Automobile Importers 
of America, Inc. filed their petition together with a proposed 
revised Rule. The petition and the record of the ANPR which followed 
is available through the FTC's Public Reference Branch, Room 130, 
6th and Pennsylvania, N.W., Washington, D.C. 20580; 202-326-2222. 
(FTC File No. R711002)
    \7\ The Memorandum in Opposition was filed on June 22, 1988.
    \8\ 54 FR 21070 (May 16, 1989).
    \9\ The record for the ANPR proceeding was placed on the public 
record and is available through the FTC's Public Reference Branch, 
Room 130, 6th and Pennsylvania, N.W., Washington, D.C. 20580; 202-
326-2222. (FTC File No. R711002)
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    Rule 703 is brought into play only if the warranty includes a 
``prior resort requirement.'' Because few warrantors have a ``prior 
resort requirement'' in their warranties, they and their dispute 
resolution programs are not governed by Rule 703. Nonetheless, although 
few warrantors operate Rule 703 IDSMs today, there is a recurring issue 
that arise from the interplay between Rule 703 and state ``lemon 
laws.'' Many state lemon laws, paralleling Section 110(a)(3) of the 
Warranty Act, prohibit the consumer from pursuing any state lemon law 
rights in court unless the consumer first seeks a resolution of the 
claim to the manufacturer's (or a state-operated) IDSM.\10\ Those 
statutes also provide that the consumer is required to use the 
manufacturer's IDSM only if it complies with the FTC's standards set 
out in Rule 703. Thus, in effect, these states incorporate Rule 703 
into their lemon laws.\11\ A threshold question for many state lemon 
law suits is whether the IDSM complies with Rule 703 and thus whether 
the consumer must use that IDSM or may proceed directly to a court 
action.
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    \10\ ``Lemon Laws'' entitle the consumer to obtain a replacement 
or a refund for a defective new car if the warrantor is unable to 
repair the car after a reasonable number of repair attempts.
    \11\ Some state lemon laws also require that the IDSM comply 
with additional state standards in addition to complying with the 
Rule 703 provisions.
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B. Issues for Comment

    There are issues surrounding Rule 703 that continue to be of 
interest to many parties. A review of the Rule and its provisions, 
including the specific issue of the interplay of Rule 703 and lemon law 
litigation, will be helpful in determining what direction the 
Commission might take in the area of setting standards for informal 
dispute settlement procedures. Therefore, at this time, the Commission 
solicits written public comments on the following questions with regard 
to Rule 703:
 1. Is there a continuing need for Rule 703? Does the Rule continue to 
serve a useful purpose?
    (a) What benefits has the Rule provided to consumers?
    (b) Has the Rule imposed costs on consumers?
2. What changes, if any, should be made to Rule 703 to increase the 
benefits of the Rule to consumers? How would these changes affect the 
costs that the Rule imposes on firms subject to its requirements?
3. What significant burdens or costs, including costs of compliance, 
has Rule 703 imposed on firms subject to requirements? Has the Rule 
provided benefits to such firms?
4. What changes, if any, should be made to Rule 703 to reduce the 
burdens or costs imposed on firms subject to its requirements? How 
would these changes affect the benefits provided by the rule?
5. Does Rule 703 overlap or conflict with other federal, state, or 
local government laws or regulations?
6. Since Rule 703 was issued, what effects, if any, have changes in 
relevant technology or economic conditions had on the Rule? Are there 
ways in which new electronic technology, such as the Internet, could be 
used to further the purpose of the Rule?
7. What are the aggregate costs and benefits of Rule 703? Are there 
provisions in the Rule that are not necessary to implement the 
Magnuson-Moss Warranty Act or that have imposed costs not outweighed by 
benefits? Who has benefited and who has born the costs? Have the costs 
or benefits of the Rule changed over time?
8. Many state lemon laws require that, before the consumer pursues any 
legal remedies in court, the consumer first must resort to the 
manufacturers' informal dispute resolution mechanism if that mechanism 
complies with Rule 703.
    (a) What costs and benefits, if any, result to the parties in a 
state lemon law dispute from Rule 703 with respect to the issues of:
    (1) Whether a particular IDSM complies with the Rule; and
    (2) whether a plaintiff must first resort to such an IDSM before 
bringing suit in state court.
    (b) What changes, if any, could be made to Rule 703 that might 
minimize burdens and maximize benefits to parties in state lemon law 
disputes?

List of Subjects in 16 CFR Part 703

    Warranties, trade practices.

    Authority:  15 U.S.C. 41-58.


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    By direction of the Commission.
Benjamin I. Berman,
Acting Secretary.
[FR Doc. 97-8411 Filed 4-1-97; 8:45 am]
BILLING CODE 6750-01-M