[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]
=======================================================================
-----------------------------------------------------------------------
FEDERAL TRADE COMMISSION
16 CFR Part 703
Request for Comments Concerning Rule Governing Informal Dispute
Settlement Procedures
AGENCY: Federal Trade Commission.
[[Page 15637]]
ACTION: Proposed rule; request for public comments.
-----------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 2301 et seq. (1975).
\2\ 40 FR 60,190.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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)
---------------------------------------------------------------------------
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
[[Page 15638]]
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.
---------------------------------------------------------------------------
\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)
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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)
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
[[Page 15639]]
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