[Federal Register Volume 64, Number 77 (Thursday, April 22, 1999)]
[Rules and Regulations]
[Pages 19700-19711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9841]
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FEDERAL TRADE COMMISSION
16 CFR Parts 239, 700, 701, 702, and 703
Final Action Concerning Review of Interpretations of Magnuson-
Moss Warranty Act; Rule Governing Disclosure of Written Consumer
Product Warranty Terms and Conditions; Rule Governing Pre-Sale
Availability of Written Warranty Terms; Rule Governing Informal Dispute
Settlement Procedures; and Guides For the Advertising of Warranties and
Guarantees
AGENCY: Federal Trade Commission.
ACTION: Notice of final action.
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SUMMARY: The Federal Trade Commission (``the Commission'') is
announcing its final action in connection with the review of a set of
warranty-related rules and guides: the Interpretations of the Magnuson-
Moss Warranty Act, (``Interpretations''); the Rule Governing Disclosure
of Written Consumer Product Warranty Terms and Conditions, (``Rule
701''); the Rule Governing Pre-Sale Availability of Written Warranty
Terms, (``Rule 702''); the Rule Governing Informal Dispute Settlement
Procedures, (``Rule 703''); and the Guides for the Advertising of
Warranties and Guarantees, (``Guides'').
The Interpretations represent the Commission's views on various
aspects of the Magnuson-Moss Warranty Act (``the Act''), 15 U.S.C. 2301
et seq., and are intended to clarify the Act's requirements. They are
similar to industry guides in that they are advisory in nature,
although failure to comply with the Act and the Rules under the Act as
elucidated by the Interpretations may result in corrective action by
the Commission. Rule 701 specifies the information that must appear in
a written warranty on a consumer product. Rule 702 details the
obligations of sellers and warrantors to make warranty information
available to consumers prior to purchase. Rule 703 specifies the
minimum standards which must be met by any informal dispute settlement
mechanism that is incorporated into a written consumer product warranty
and which the consumer must use prior to pursuing any legal remedies in
court. The Guides are intended to help advertisers avoid unfair or
deceptive practices in the advertising of warranties or guarantees.
EFFECTIVE DATE: April 22, 1999.
FOR FURTHER INFORMATION CONTACT: Carole I. Danielson, Investigator,
Division of Marketing Practices, Federal Trade Commission, Washington,
DC 20580, (202) 326-3115.
SUPPLEMENTARY INFORMATION: On April 3, 1996, the Commission published a
Federal Register notice \1\, soliciting written public comments
concerning four warranty rules and guides: (1) The Commission's
Interpretations of the Magnuson-Moss Warranty Act, 16 CFR part 700; (2)
the Rule Governing Disclosure of Written Consumer Product Warranty
Terms and Conditions, 16 CFR part 701; (3) the Rule Governing Pre-Sale
Availability of Written Warranty Terms, 16 CFR part 702; and (4) the
Guides for the Advertising of Warranties and Guarantees, 16 CFR part
239. On April 2, 1997, the Commission published a second Federal
Register notice, this time soliciting written public comments
concerning Rule 703.2 On June 13, 1997, the Commission
extended the comment period on Rule 703 until August 1,
1997.3 The Commission requested comments on these rules and
guides as part of its regulatory review program, under which it reviews
rules and guides periodically in order to obtain information about the
costs and benefits of the rules and guides under review, as well as
their regulatory and economic impact. The information obtained assists
the Commission in identifying rules and guides that warrant
modification or rescission. After careful review of the comments
received in response to both requests, the Commission has determined to
retain the Interpretations, Rules 701, 702, and 703, and the Guides
without change.
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\1\ 61 FR 14688 (April 3, 1996).
\2\ 62 FR 15636 (April 2, 1997).
\3\ 62 FR 32338 (June 13, 1997).
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A. Background
1. 16 CFR Part 700: Interpretations of the Magnuson-Moss Warranty Act
(``Interpretations'')
The Magnuson-Moss Warranty Act, 15 U.S.C. 2301 et seq., which
governs written warranties on consumer products, was signed into law on
January 4, 1975. Soon thereafter, the Commission received many
questions concerning the Act's requirements. In response to these
inquiries, the Commission decided to provide guidance in order to
facilitate compliance with the requirements of the Act. The Commission
published a policy statement in the Federal Register (40 FR 25721) on
June 18, 1975, to provide interim guidance during the initial
implementation of the Act. As the Commission continued to receive
questions and requests for advisory opinions, however, it determined
that guidance of a more permanent nature was appropriate. Therefore, on
July 13, 1977, the Commission published in the Federal Register (42 FR
36112) its Interpretations of the Magnuson-Moss Warranty Act.
The Interpretations apply to written warranties on consumer
products. They set forth the Commission's views on various terms and
provisions of the Act that are not entirely clear on the face of the
statute. Thus, the Interpretations clarify the Act's requirements for
all who are affected by them--consumers, manufacturers, importers,
distributors, and retailers. The Interpretations are not substantive
rules, and do not have the force or effect of such rules; like industry
guides, they are advisory in nature. Nonetheless, failure to comply
with the requirements of the Act and the substantive Rules adopted
under the Act as elucidated by the Interpretations could result in
enforcement action by the Commission.
The Interpretations cover a wide range of subjects covered by the
Act and terms used in the Act, including what types of products are
considered ``consumer products'' under the Act; what constitutes an
``expression of general policy'' under section 103(b) of the Act
4 and what the Act requires with respect to such expressions
of general policy; how warranty registration cards may be used in
connection with full and limited warranties; what constitutes an
illegal tying arrangement under section 102(c) of the Act;\5\ and how
to distinguish between ``written warranty,'' ``service contract,'' and
``insurance.''
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\4\ 15 U.S.C. 2303(b).
\5\ 15 U.S.C. 2302(c).
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2. 16 CFR Part 701: Disclosure of Written Consumer Product Warranty
Terms and Conditions (``Rule 701'')
The language of the Act and its legislative history make it amply
clear that Congress intended that the Commission promulgate rules
regarding the disclosure of written warranty terms and conditions.
Accordingly, on December 31, 1975, the Commission published Rule 701 in
the Federal Register.6 Rule 701 sets forth what warrantors
must disclose about the terms and conditions of the written warranties
they offer on consumer products that actually cost the consumer more
than $15.00. Rule 701 tracks the disclosure requirements suggested in
[[Page 19701]]
section 102(a) of the Act, 7 specifying information that
must appear in the written warranty, and, for certain disclosures,
mandates the exact language that must be used. Rule 701 requires that
the information be disclosed in a single document in simple, easily
understood, and concise language. In promulgating Rule 701, the
Commission determined that the items required to be disclosed are
material facts about product warranties, the non-disclosure of which
would be deceptive or misleading.8
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\6\ 40 FR 60168, 60188.
\7\ 15 U.S.C. 2302(a).
\8\ 40 FR 60168, 60169-60170.
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In addition to specifying the information that must appear in a
written warranty, Rule 701 also requires that, if the warrantor uses a
warranty registration or owner registration card, the warranty must
disclose whether return of the registration card is a condition
precedent to warranty coverage. (16 CFR 701.4) Finally, it clarifies
that, in connection with some ``seal of approval'' programs, the
disclosures required by the Rule need not be given in the actual seal
itself, if they are made in a publication. (16 CFR 701.3(b))
3. 16 CFR Part 702: Pre-Sale Availability of Written Warranty Terms
(``Rule 702'')
Section 102(b)(1)(A) of the Act directs the Commission to prescribe
rules requiring that the terms of any written warranty on a consumer
product be made available to the prospective purchaser prior to the
sale of the product. Accordingly, on December 31, 1975, the Commission
published Rule 702 in the Federal Register. 9 Subsequently,
the Commission amended the Rule on March 12, 1987, to provide sellers
with greater flexibility in how to make warranty information
available.\10\
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\9\ 40 FR 60168, 60189.
\10\ 52 FR 7569.
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Rule 702 establishes requirements for sellers and warrantors to
make the text of any written warranty on a consumer product available
to the consumer prior to sale. Among other things, the Rule (as
amended) requires sellers to make the text of the warranty readily
available either by (1) displaying it in close proximity to the product
or (2) furnishing it on request and posting signs in prominent
locations advising consumers that the warranty is available. The Rule
requires warrantors to provide materials to enable sellers to comply
with the Rule's requirements, and also sets out the methods by which
warranty information can be made available prior to the sale if the
product is sold through catalogs, mail order or door-to-door sales.
4. 16 CFR Part 703: Informal Dispute Settlement Procedures (``Rule
703'')
In enacting the Warranty Act, Congress recognized the potential
benefits of consumer dispute mechanisms as an alternative to the
judicial process. Section 110(a) of the Act sets out the Congressional
policy to ``encourage warrantors to establish procedures whereby
consumer disputes are fairly and expeditiously settled through informal
dispute settlement mechanisms'' and erected a framework for their
establishment. As an incentive to warrantors to establish such informal
dispute settlement mechanisms (``IDSMs''), Congress provided in section
110(a)(3), 15 U.S.C. 2310(a)(3), that warrantors may incorporate into
their written consumer product warranties a requirement that a consumer
must resort to an IDSM before pursuing a legal remedy under the Act 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
Rule 703, 16 CFR part 703.11
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\11\ 40 FR 60190.
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Rule 703 contains extensive procedural standards for IDSMs, which
must be followed by any warrantor who wishes to incorporate an IDSM,
through a prior resort requirement, into the terms of a written
consumer product 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 applies only to those firms
that choose to be bound by it by placing a prior resort requirement in
their written consumer product warranties. Neither Rule 703 nor the Act
requires 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
developments in 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 utilize
a Rule 703 mechanism.12 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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\12\ 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. The
Commission has not been notified that any of these manufacturers has
reinstituted a prior resort requirement in their warranties.
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 13 (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.
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\13\ State lemon laws give consumers the right to a replacement
or a refund if their new cars cannot be repaired under warranty.
Under these lemon laws, if a reasonable number of repair attempts
fails to correct a major problem, the manufacturer must either
replace the car or refund the full purchase price, less a reasonable
allowance for the consumer's use of the car prior to reporting the
defect. Most of these laws define a ``reasonable number of repair
attempts'' to be four or more times during the first year of
ownership. Consumers may also be entitled to a refund or replacement
remedy when a new car has been out of service for repair for the
same problem for a cumulative period of thirty days or more within
one year following delivery of the vehicle.
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5. 16 CFR Part 239: Guides for the Advertising of Warranties and
Guarantees (``Guides'')
In May, 1985, the Commission published the Guides in the Federal
Register.14 The Guides were intended to help advertisers
avoid unfair or deceptive practices when advertising warranties or
guarantees. They took the place of the Commission's ``Guides Against
Deceptive Advertising of
[[Page 19702]]
Guarantees,'' 16 CFR part 239, adopted April 26, 1960, which had become
outdated due to developments in Commission case law and, more
importantly, changes in circumstances brought about by the Magnuson-
Moss Warranty Act and by Rules 701 and 702 under that Act. The 1985
Guides advise that advertisements mentioning warranties or guarantees
should contain a disclosure that the actual warranty document is
available for consumers to read before they buy the advertised product.
In addition, the Guides set forth advice for using the terms
``satisfaction guarantees,'' ``lifetime,'' and similar representations.
Finally, the Guides advise that sellers or manufacturers should not
advertise that a product is warranted or guaranteed unless they
promptly and fully perform their warranty obligations.
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\14\ 50 FR 18470 (May 1, 1985); 50 FR 20899 (May 21, 1985).
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B. Analysis of the Comments on the Interpretations, Rule 701, Rule
702, and the Guides
Seven (7) organizations submitted comments in response to the April
3, 1996, Federal Register notice.15 The small number of
comments likely reflects that compliance with these Rules and Guides is
not burdensome and that seeking rescission or modification of them is
therefore not a high priority for industry members most closely
affected by them. In fact, the comments generally reflect a strong
level of support for the view that the Warranty Rules and Guides are
achieving the objectives they were fashioned to achieve--i.e., to
facilitate the consumer's ability to obtain clear, accurate warranty
information, as well as the consumer's ability to enforce a warrantor's
contractual obligations under any written warranty. Some commenters
enthusiastically supported the current regulatory regime. For example,
AAMA stated that the current system is working well and is not
unreasonably costly to warrantors. AAMA stated that the Rules are
workable and understood by industry and that there is no evidence that
either the adequacy of warranty disclosure or that the legal
sufficiency of the warranties given is a major source of complaints;
nor is there evidence that customers are unaware of their warranty
rights. AAMA cautioned:
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\15\ The seven commenters are: (1) American Automobile
Manufacturers Association (``AAMA''); (2) Association of
International Automobile Manufacturers, Inc. (``AIAM''); (3) Cohen,
Milstein, Hausfeld & Toll (``Cohen'') by Gary Mason, Esq.; (4)
National Consumer Law Center (``NCLC''); (5) National Retail
Federation (``NRF''); (6) North American Insulation Manufacturers
Association (``NAIMA''); and (7) North American Retail Dealers
Association (``NARDA'') by James M. Goldberg, Esq., Goldberg &
Associates.
In view of the effectiveness of the current system, AAMA and its
members * * * urge the Commission to proceed cautiously in
considering a major overhaul to the Rules. Any comprehensive changes
will unavoidably involve substantial compliance costs as warrantors
and their staffs will have both to unlearn the current system and to
assimilate the new provisions. * * * The Magnuson-Moss Warranty Act
and the Rules promulgated under it provide an important avenue for
consumer protection and establishing consumer confidence in the
marketplace and the products they buy. As presently structured,
these Rules are workable and effective, and permit warrantor
compliance without unreasonable expense. * * * (A) major overhaul of
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the system is neither necessary or appropriate.
AAMA recommended that, before making any significant changes to the
system, the Commission should first conduct a formal study of the
marketplace to ensure that changes are needed, the specific proposed
revisions would help, and the benefits achieved would outweigh the
costs of the changes to industry and to consumers.16
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\16\ AAMA at 2.
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NAIMA echoed AAMA's positive appraisal of the benefits derived from
the Warranty Rules and Guides. NAIMA cautioned that, in the absence of
such guides, there would be an increase in unfair and deceptive uses of
warranties to promote products.17 NAIMA believes that the
warranty regulations benefit both consumers and warrantors: the
requirements ``increase the consumer's confidence in a warranty and
increase the likelihood that a consumer will rely on the warranty * * *
(T)he honest warrantor also benefits because of increased consumer
confidence in warranties.'' 18 NAIMA noted that the costs of
the warranty regulations are not imposed upon businesses by government,
but rather are voluntarily assumed by companies that choose to offer
written warranties. As such, NAIMA states that ``any cost incurred by a
firm would be calculated into a business decision to offer a warranty
or guarantee and should not be weighed as a factor to eliminate or
diminish the requirement.'' 19
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\17\ NAIMA at 2.
\18\ NAIMA at 4.
\19\ NAIMA at 3.
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Four other commenters, although not expressly endorsing retention
of the present regulatory regime, supported such retention by
implication in suggesting modifications to the rules and guides which
they believed would provide greater consumer protections and/or
minimize burdens on firms subject to the regulations. One commenter
(NRF) recommended that the Commission report to Congress that the Rule
702 was no longer necessary and recommend that Congress amend that
portion of Magnuson-Moss requiring a pre-sale availability rule so that
Rule 702 could be repealed.20 However, for the reasons
discussed herein, the Commission has decided that both Rule 702 and the
other Rules and Guides should be retained. In the following, we discuss
in more depth each of the suggestions and the basis for the
Commission's decision.
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\20\ NRF at 2.
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1. 16 CFR Part 700: Interpretations.
a. ``Building materials'' exemption. Under Secs. 700.1(c)-(f) of
the Commission's Interpretations, building materials are not ``consumer
products'' covered by the Act when they are already incorporated into
the structure of a dwelling at the time the consumer buys the home.
These same building products are ``consumer products'' covered by the
Act when they are sold over-the-counter directly to the consumer by a
retailer. Two commenters (Cohen and NAIMA) argued that the dichotomy
created by this interpretation is confusing and irrational. They
asserted that the current interpretation deprives consumers of the
benefits and protections of the Act and its Rules when they purchase a
home.
Cohen argued that the current interpretation is counter to the
legislative history, intent, and language of the Act. The Act defines
``consumer product'' as ``any personal property * * * which is normally
used for personal, family, or household purposes (including any such
property intended to be attached to or installed in any real property
without regard to whether it is so attached or installed). (15 U.S.C.
2301(1)) Cohen asserted that building materials fall within the
category of personal property intended to be attached to or installed
in any real property. Cohen also cited the House Committee's discussion
of the definition as support for the proposition that Congress intended
that items that were to become part of realty were to be covered by
Magnuson-Moss as ``consumer products.'' 21
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\21\ ``There are many products which fall within this
definition (tangible personal property normally used for personal,
family, or household purposes) which are also used for other than
personal, family, or household purposes * * *. Under concepts of
property law, fixtures such as hot water heaters and air
conditioners when incorporated into a dwelling become a part of the
real property. It is intended that the provisions of Title I
continue to apply to such products regardless of how they are
classified.'' H.R. Rep. No. 93-1107, 93rd Cong., 2d Sess., (1974)
reprinted in 1974 U.S.C.C.A.N. 7702, at 7716-7717.
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[[Page 19703]]
The Commission is not persuaded by these arguments. The
Commission's analysis starts with the statute. The Commission believes
that there are three conclusions that can be drawn based on the
language used in the statutory definition of ``consumer product.''
First, the definition assumes the traditional legal distinction between
real property and personal property. Second, it clearly places
``personal'' property within the scope of the Act's coverage. Third,
through the drafters' choice of language, the definition obviously
stops short of sweeping within the scope of the Act's coverage all
property, real and personal. In this connection, the legislative
history includes the following instructive colloquy, which was part of
the floor debate on the legislation by Congressmen Broyhill and Moss,
two members of the Conference Committee and of the House Committee
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responsible for the Act: 22
\22\ Congressional Record, Vol. 120, No. 139 (September 17,
1974) p. H9316.
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Mr. Broyhill of North Carolina. I would like to address a
question to Mr. Staggers or Mr. Moss concerning the definition of
``consumer product'' in section 101(1) of the bill. Would a house be
in the definition of consumer product?
Mr. Moss. A house would not fall within the definition of
consumer product since a house is not quite ``tangible personal
property.''
Mr. Broyhill of North Carolina. If a warranty applied to
component parts of a home such as dry wall, plumbing, heating and
air conditioning, would these items be in the definition of
``consumer product''?
Mr. Moss. The definition of consumer product in section 101
includes ``tangible personal property which is distributed in
commerce and which is normally used for personal, family or
household purposes--including any such property intended to be
attached to or installed in any real property.'' This definition
would apply to any separate equipment such as heating and air
conditioning systems which are sold with a new home. However, such a
definition would not apply to items such as dry walls, pipes, or
wiring which are not separate items of equipment but are rather
integral components of a home.
The Commission believes that the Interpretations embody the same
practical rationale as that espoused by the Act's sponsor in the above-
quoted exchange. The Interpretations draw the line, apparently
contemplated by the language of the statute, to separate personalty
(covered by the Act) and realty (not covered) in a manner that is clear
and workable, and that is consistent with the intent of Congress, to
the extent it can be determined. Thus, after having reconsidered this
issue, the Commission adheres to the view that its original
interpretation is correct and should be retained as written: Structural
components of a new home such as lumber, dry wall, pipes or electrical
conduit or wiring are not considered separate items of equipment and
are not considered consumer products within the meaning of section 101
of the Act. Insulation is another item that is a structural component
of a new home and thus would not be a consumer product. These items are
not functionally separate from the realty. In contrast, such items
would be ``consumer products'' and within the scope of the Act were
they purchased either separately or in combination to improve, repair,
replace or otherwise modify an existing structure. This distinction
holds true regardless of whether the consumer purchased the items for
new home construction directly from a retail supplier.
b. Coverage of export items. In its comment, NCLC asked the
Commission to reconsider whether its warranty regulations should apply
to goods exported to foreign countries. In Sec. 700.1(i) of its
Interpretations, the Commission stated that, although the Act arguably
applies to products exported to foreign jurisdictions:
the public interest would not be served by the use of Commission
resources to enforce the Act with respect to such products.
Moreover, the legislative intent to apply the requirements of the
Act to such products is not sufficiently clear to justify such an
extraordinary result.
No evidence has been submitted to the Commission that would justify
changing its stated position. The Commission's enforcement
responsibilities have expanded since adoption of the Interpretations in
1976, spreading scarce law enforcement resources further. Therefore,
the Commission has decided to retain Sec. 700.1(i) remain as written.
c. Warrantor's decision as final. Section 700.8 prohibits the
warrantor from indicating in any warranty or service contract that the
decision of the warrantor, service contractor, or any designated third
party is final or binding in any dispute involving the warranty or
service contract. NCLC expressed the fear that a warrantor who is also
the seller could circumvent this prohibition by placing such a
restriction in a document other than the warranty or service contract
and, therefore, suggested that the Commission reword this section in
order to bar such a possibility. No evidence has been provided,
however, to indicate that this hypothetical situation occurs, or that
it occurs with a frequency that would merit the expenditure of
Commission resources necessary to make the wording change. Absent such
evidence, the Commission has decided to retain Sec. 700.8 unchanged.
d. Tying arrangements. Section 700.10 sets out the Commission's
interpretations regarding the use of tying arrangements in connection
with warranties. Among other things, Sec. 700.10 prohibits conditioning
the continued validity of a warranty on the use of authorized repair
service for non-warranty service and maintenance. NCLC recommended that
the Commission amend Sec. 700.10 to prohibit used car warranties which
provide for a percentage (e.g., 25 percent) of parts and labor costs
provided the repair is done by the dealer or a place of the dealer's
choosing. According to NCLC, these warranties allegedly are for a short
term, often 30-days or 1,000 miles. NCLC stated that these warranties
are common among ``low-end'' used car dealers and alleges that the
warranties harm consumers because they provide little value and that
the consumer has little control over the prices charged for the repair.
Since the consumer is paying 75 percent of the repair cost under the
warranty, the consumer may actually lose money by using the warranty to
obtain repairs, according to NCLC.
The Commission has determined not to incorporate the change NCLC
proposed into the Interpretations for two reasons. First, a drafting
change probably is not necessary to accomplish what NCLC advocated,
since such warranties already likely violate section 102(c) of the Act.
Section 102(c) prohibits arrangements that condition warranty coverage
on the use of an article or service identified by brand, trade, or
corporate name unless that article or service is provided without
charge to the consumer. Since the consumer must pay a significant
charge for parts and labor under these warranties, the warranties may
violate section 102(c) by restricting the consumer's choices for
obtaining warranty service. Second, the Commission notes that, although
consumers may have little control over the prices charged for repairs
under such warranties, they do have a choice of whether to use the
warranty. Many states have enacted legislation requiring auto servicers
to give estimates on any repair to be done. These estimates allow the
consumer to shop for the best price. If the consumer realizes that
having a repair done under the warranty may actually cost more than
having the repair done by an independent servicer, the consumer can go
elsewhere for the
[[Page 19704]]
work. For these reasons, the Commission has decided to retain
Sec. 700.10 as written.
2. 16 CFR Part 701: Disclosure of Terms and Conditions (Rule 701).
a. ``On the face of the warranty'' requirement. Two commenters
(AAMA and AIAM) suggested that the Commission modify the requirement in
Sec. 701.3(a)(7) that limitations on the duration of implied warranties
be ``disclosed on the face of the warranty.'' In the case of multi-page
warranty documents, Sec. 701.1(i)(1) of the Rule defines ``face of the
warranty'' to mean ``the page on which the warranty text begins.'' The
commenters stated that this restriction constrains the warrantor's
ability to make the warranty document more user-friendly. They maintain
that a warranty booklet is more difficult for consumers to read when
the limitations come before complete descriptions of all warranty
coverage. These commenters suggest that Sec. 701.3(a)(7) be modified to
permit the limitations to appear anywhere within the text of the
warranty, provided that the limitations are displayed prominently,
clearly and conspicuously.
The Commission believes that Sec. 701.3(a)(7) should be retained
without change. One of the problems that led to passage of the
Magnuson-Moss Warranty Act was that warrantors frequently gave
warranties which at first appeared to offer very expansive coverage,
which was in fact severely eroded by provisions buried further on in
the document limiting coverage of the written warranty, or of the
implied warranties of merchantability or fitness for a particular
purpose. Such warranties were deceptive, since they could mislead
consumers into thinking that coverage is greater than it actually is.
Protection of the consumer's implied warranty rights is the bedrock of
the Magnuson-Moss Warranty Act regulatory scheme. Accordingly, it is
essential that any limitation on these rights be disclosed up-front and
not buried elsewhere in a multi-page document. The Commission has been
provided with no evidence that would compel revision of this core
provision of Rule 701.
b. Value thresholds. Two commenters 23 suggested that
the Commission should modify Secs. 701.3(a) and 702.3 to increase the
threshold for products subject to the rules in order to account for the
impact of inflation. The AAMA suggested that the threshold be raised
from $15 to $25, and also suggested that the Commission report to
Congress, recommending that the corresponding value thresholds in the
statute itself also be adjusted (15 U.S.C. 2302(e) and
2303(d)).24 The Commission, however, believes that the
dollar thresholds set out in the rules and in the statute remain
appropriate. The statute and the rules were drafted to be flexible.
There is no requirement that a company offer a written warranty.
Therefore, a company that sells a product costing less than $15 is
under no obligation to give a written warranty. The costs of compliance
are minimal for those products that cost under $15--i.e., principally a
prohibition against warranty tying arrangements and a requirement that
the warranty be labeled either ``limited'' or ``full.''
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\23\ AAMA at 3; NAIMA at 5.
\24\ Section 102(e) of the Act provides that all written
warranties on consumer products costing $5 or more will be subject
to the provisions of section 102. This threshold serves two
purposes: First, it insures that any warrantor giving a written
warranty on a consumer product costing $5 or more may not condition
the warranty on the consumer's use of a specific brand or trade name
of product or service (15 U.S.C. 2302(c)). Second, this section sets
a floor for the written warranties to be covered by the Commission
rules which were to be promulgated under the Act. Those rules could
set the threshold higher than $5, but could not lower the threshold
to encompass all products. In addition, section 103(d) provides that
only those warranties on products costing $10 or more must adhere to
the labeling requirements of section 103 (i.e., labeling the
warranty either ``limited'' or ``full.'')
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Furthermore, the Commission believes that consumers might be
deprived of important protections if the threshold for rule coverage
were to be raised to $25. Although many warrantors voluntarily would
continue to disclose fully the terms and conditions of the warranty,
others might choose not to do so since the legal obligation would no
longer be present. It is true that, if a low-cost product were to
malfunction, some consumers might choose to simply throw it away and
purchase another. However, not all consumers view products costing $15-
$25 as disposable. Some consumers might choose to assert their warranty
rights in getting the product repaired or replaced.25
Therefore, the Commission has decided that the threshold values for
coverage by the statute and the rules shall remain unchanged.
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\25\ This position has some support from the 1984 Warranty
Consumer Follow-Up Study, (``Warranty Rules Consumer Follow-Up:
Evaluation Study Final Report'' (1984), at ES-4. (``Warranty
Study'')), in which over 30 percent of the respondents felt that it
was important to see the warranty for products costing as little as
$15.
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c. Use of owner registration cards. One commenter 26
recommended that Sec. 701.4 27 should be eliminated due to
perceived conflict with the Commission's interpretations in 16 CFR
700.7(b) regarding the use of owner registration cards in connection
with a full warranty, and with the intent of Section 104(b)(1) of the
Act.28 NARDA stated the view that retaining 701.4 would
allow manufacturers to continue ``raiding'' retailer customer lists
under the guise of ``warranty card registration.'' NARDA opined that
such customer information can be used by manufacturers to compete
directly with the retailer in offering service contracts and other
products. NARDA did not oppose that manufacturers be allowed to collect
demographic and similar market information on consumers, but urged that
they should not be allowed to do so under the premise of conditioning
warranty coverage on the furnishing of that information.
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\26\ NARDA at 1-2.
\27\ Section 701.4 requires a warrantor to disclose in the
warranty if an owner or warranty registration card is a condition
precedent to warranty coverage. The section also requires the
warrantor to disclose that the return of the card is not necessary
for warranty coverage if the return of such a card reasonably
appears to be a condition precedent to warranty coverage and
performance, but is not such a condition.
\28\ Section 104(b)(1) of the Act prohibits a warrantor that
offers a ``full'' warranty (i.e., one that meets the minimum
standard of coverage set out in section 104(a)) from imposing on the
consumer any duty other than notification in order to obtain
warranty service. Section 770.7 of the Interpretations cover the use
of warranty registration cards as a condition precedent to perform
obligations under a full warranty and whether the use of such cards
constitutes an ``unreasonable duty'' in violation of section
104(b)(1). The Interpretations state that the use of such cards
constitute an ``unreasonable duty'' when their return is a condition
precedent to warranty performance and coverage under a full
warranty. However, warrantors may suggest the use of such cards as
one possible means of proof of the purchase date of the product. In
addition, sellers can use these cards to obtain information from
purchasers at the time of sale on behalf of the warrantor.
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A second commenter (NCLC) suggested that Sec. 700.7(c) should be
clarified to prohibit return instructions for registration cards that
imply that returning the card is necessary in order to obtain warranty
coverage. NCLC cites language such as ``Return this card to ensure
warranty registration'' as misleading because consumers are led to
believe that registration is necessary to obtain coverage.
The Commission is aware that warrantors commonly request that
purchasers return owner or warranty registration cards in order to
obtain marketing and demographic information. The required return of
such owner registration cards is prohibited as an ``unreasonable duty''
only when the warrantor gives a full warranty; requiring return of such
cards is permitted under a limited warranty as long as the warrantor
discloses in the
[[Page 19705]]
warranty that the consumer must return the card in order to get
coverage.
However, no evidence submitted to the Commission identified
specific situations where the return of such a card is a condition
precedent for warranty coverage, or how often this occurs, if at all.
Nor has any evidence been provided that consumers actually are being
misled by the language used on owner registration cards. The record,
therefore, contains no indication that such language is inherently
deceptive or misleading and as such should be banned. (Of course,
particular language or instructions could still be challenged as
deceptive or unfair under section 5 of the FTC Act (15 U.S.C. 45)).
In sum, in the absence of specific evidence that these cards are
being misused by warrantors and/or that the language used is inherently
deceptive or misleading, the commission believes that Secs. 701.4 and
700.7 should remain unchanged.
3. 16 CFR 702: Pre-Sale Availability (Rule 702)
a. Should the Rule be Rescinded? The NRF proposed that Rule 702 no
longer serves the purpose for which it was intended and that it should
be rescinded. Section 102(b)(1)(A) of the Magnuson-Moss Warranty Act
29 directs the Commission to promulgate rules requiring that
the terms of any written warranty be made available to the consumer
prior to sale. Because the Act specifically requires a pre-sale
availability rule, the NRF recommended that the Commission report to
Congress that the rule is no longer necessary to ensure that consumers
are informed about warranties and request that Congress repeal section
102(b)(1)(A) of the Act.
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\29\ 15 U.S.C. 2302(b)(1)(A).
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The NRF asserted that consumers no longer need Rule 702 in order to
obtain information about warranties since a variety of sources exist
for consumers to educate themselves about consumer issues in general,
including warranties. To buttress this argument, the NRF cited an
anecdotal survey conducted by three of its members indicating that
consumers rarely request warranty information from
retailers.30 The NRF also cited the Commission's 1984
Warranty Study as further support for rescinding the rule. According to
NRF, that study indicated that the primary reason consumers did not ask
retailers for warranty information was that they already knew all they
needed to know about the warranty for the particular product they were
buying.31 The NRF reasoned that since few consumers request
warranty information from retailers, most consumers are aware of
warranties. Therefore, according to NRF, the Commission is imposing
unnecessary costs on retailers to maintain product warranties on hand
and up to date.
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\30\ The NRF also cites the Commission's statement in its 1987
amendment of Rule 702 that ``consumers rarely consult warranty
binders.'' (NRF at 2, citing 52 FR 7569, 7569 (March 12, 1987).
However, the Commission notes that it made this statement in the
context of explaining why the specific detailed methods of
compliance were not needed and why detailed regulatory requirements
were unnecessary. While the statement is useful in explaining why
more flexible methods are necessary to provide warranty information,
Commission believes that it would be incorrect to infer from that
statement that it is unnecessary to ensure that warranty information
is available.
\31\ Warranty Study at 57.
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The Commission believes that NRF is misguided in its interpretation
of the Warranty Study results. The Commission believes that the
Warranty is more a measure of the importance of warranties in making a
purchase decision on certain products rather than the importance to
consumers of pre-sale availability of warranty information generally on
all products. The study shows that warranties were considered in the
purchase decision for 54.2 percent of the products for which buyers
comparison shopped.32 In 40 percent of those cases,
consumers reported having information about the warranty prior to
purchasing the product. Of those 40 percent, 23.1 percent said that
they received at least some of that information from reading the
warranty.33 The study goes on to state:
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\32\ The Warranty Study implies that one reason many consumers
do not read warranties before buying a product is because they
rarely experience problems with the products they purchase and,
those who do, had few problems in obtaining satisfactory repairs
under the warranty. (Warranty Study at ES-3)
\33\ Warranty Study at ES-2. The Warranty Study also indicates
that more people apparently learn about warranties from salespersons
and newspaper or magazine articles than from an actual reading of
the document. However, more people will seek out warranty
information on high-priced goods. (Warranty Study at 50)
Most consumers [who did not read warranties before buying] did
not believe pre-purchase warranty reading was important in that
particular instance. * * * While very few consumers appear to engage
in serious warranty reading, most feel that it is important to see
the written warranty before buying--only 11.8 percent of the
respondents believed that it was never important to see the warranty
before buying. [emphasis added] 34
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\34\ Warranty Study at ES-4.
If most consumers believe that it is important to see the warranty
before buying in some instances, the Commission believes that it would
not be in the public interest to recommend legislative action that
would permit rescission of Rule 702. Certainly, before recommending
that such a drastic step be taken, the Commission would require more
up-to-date factual evidence countering the results of the 1984 Warranty
Study regarding the importance to consumers of having warranty
information available before the sale.
The Commission believes that Rule 702 continues to serve the
purpose for which it was intended: to ensure that full and accurate
warranty information is available prior to sale when consumers want it.
In some instances and with respect to some purchases, consumers might
be satisfied with general information about a warranty that can be
gleaned from other sources such as advertising or a salesperson's oral
presentation. Nonetheless, the warranty survey indicates that, in a
substantial number of instances, such information will not satisfy
consumers' needs. Because a warranty is a legally enforceable document
that defines the respective rights and obligations of the purchaser and
the warrantor, a summary description of the warranty, derived from
advertising or from a salesman's oral representations, may or may not
completely and accurately convey material terms of coverage. Such
alternative sources of information are an inadequate substitute for the
actual text of the warranty.
Furthermore, the 1987 amendment to Rule 702 gave retailers a great
deal of flexibility in how to comply with the rule and alleviated much
of the burden imposed by the original rule. The Commission believes
that this flexibility has made compliance costs minimal. Anecdotal
information provided by the NRF for three members regarding compliance
costs does not provide an adequate basis to conclude that compliance
costs outweigh benefits and that Congress should repeal the Act's
requirements for a rule on pre-sale availability of warranty
information.
b. Posting requirement. NARDA recommends that the Commission should
amend Sec. 702.3(a) to eliminate the requirement that retailers post
signs notifying customers where actual copies of the warranties may be
obtained.35 NARDA maintains that since the rule was adopted
in 1975, compliance with
[[Page 19706]]
the posting requirement has ebbed to the point where few retailers
comply. However, despite the alleged non-compliance, NARDA believes
that there has been no corresponding decrease in information made
available to consumers. NARDA recommends that the rule should be
amended to eliminate the posting requirement and simply require
retailers to make warranty information available upon
request.36 NARDA believes that this modification would cause
no consumer harm and would eliminate compliance costs for those
retailers who do attempt to comply with the requirement.
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\35\ Section 702.3(a) requires the retailer to either display
the actual product warranty in close proximity to the product, or to
furnish it upon request. If the retailer chooses to furnish it on
request, the retailer must place signs in prominent locations
advising buyers that copies of warranties are available upon
request.
\36\ NARDA at 2-3.
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Commission has been concerned about the non-compliance with the
Rule 702 that NARDA alleges is commonplace. As a result, the Commission
has brought several actions against major retailers in recent years for
failing to comply with the rule's requirements.37 These
actions place all retailers on notice that they risk Commission action
by ignoring their compliance responsibilities under Rule 702. If NARDA
is correct that there is widespread non-compliance with the posting
requirements of Rule 702, such non-compliance would not support
eliminating the requirement as much as it would support an argument for
increased enforcement activity.38
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\37\ See, e.g., Circuit City Stores, Inc., FTC Docket No. C-3389
(1992); Nobody Beats the Wiz, FTC Docket No. C-3329 (1991); The Good
Guys, FTC Docket No. C-3388 (1992); Sears, Roebuck & Co., FTC Docket
No. C-3529 (1994); Montgomery Ward & Co., FTC Docket No. C-3528
(1994); and R.H. Macy & Co., Inc., FTC Docket No. C-3115 (1994). In
addition, the Commission brought an action against a mail order
company which included charges that the company had violated Rule
702 See, Advance Watch Co., Civil Action No. 94 CV601 78AA (E.D.
Mich. 1994).
\38\ Interestingly, the NRF recognized the Commission's
commitment to enforcing Rule 702 and asked the Commission to
``reexamine its enforcement priorities in this area.'' (NRF at 2).
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NARDA does not offer any empirical evidence regarding the
compliance costs of posting signs regarding the availability of
warranty information. When the Commission amended Rule 702 in 1987, it
substituted the posting requirement for the requirement in the original
rule that specified the particular methods by which retailers should
make the warranty information available (e.g., by the use of a binder).
At that time, the evidence available to the Commission indicated that
the cost of posting signs is relatively low. The Commission concluded
that, on balance, this low compliance cost was substantially outweighed
by the potential benefit of raising consumer awareness about their
ability to obtain warranty information. The Commission has seen no
evidence which would challenge this conclusion and, therefore, has
determined that Sec. 702.3(a) be retained unchanged.
c. Plain language warranties. One commenter (NCLC) suggested that
the Commission amend Sec. 702.3 to require the display of ``key
points'' of warranties, especially on big-ticket items.39
NCLC also suggested that the Commission consider creating model
``plain-language'' warranty forms as a guide on how to write warranties
that can be easily understood.
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\39\ Section 702.3 is the core section of Rule 702 that sets out
the duties of the seller and the warrantor in making warranty
information available prior to sale.
---------------------------------------------------------------------------
The Commission believes that market forces already drive many
warrantors and retailers to promote the key points of their warranties,
in print and broadcast media as well as in point-of-sale promotional
pieces. In fact, because of this competition, the Commission issued its
Guides for the Advertising of Warranties and Guarantees to ensure that
consumers are not misled into thinking that the ``key points''
mentioned constitute all material terms of coverage. The Guides require
a statement directing consumers to where they can obtain full details
of the warranty. Given the apparent healthy competition in promoting
warranties, the Commission sees no basis for government intervention to
impose such a ``key points'' disclosure requirement. With regard to
creating model ``plain-language'' warranty forms, the Commission
believes that the examples and guidance set out in the FTC business
education publications, A Businessperson's Guide to Federal Warranty
Law and Writing Readable Warranties, are sufficient to assist those who
want to make their warranties readable.40
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\40\ These publications as well as other consumer and business
education brochures and other materials are available online in the
FTC Consumer Publications and FTC Business Publications sections of
the FTC's Home Page, located at http://www.ftc.gov/ftc/news.htm.
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4. 16 CFR Part 239: Warranty Guides
One commenter (AIAM) suggested that the Commission amend the
Warranty Guides to eliminate the requirement that an advertisement
mentioning a warranty also include a statement of where the consumer
can find complete details about the warranty. The AIAM believed that,
at least for automobiles, the statement ``See your dealer for details''
is a ``statement of the obvious and accordingly unnecessary.''
The Commission does not believe the disclosure of such information
is unnecessary. The message intended is not just that the dealer or
other retailer has the warranty; that much is obvious. What may not be
obvious is the remainder of the message: that prospective purchasers
have a right to read the warranty, if they desire, before purchasing.
Because the aspects of warranty coverage touted in an advertisement may
not necessarily provide a complete understanding of a warranty's
overall coverage, the Commission believes that it is important to alert
consumers that the actual warranty text is available for review, to
obtain an accurate and complete understanding of the coverage.
Accordingly, the Commission has determined to retain the Warranty
Guides unchanged.
C. Analysis of Comments on Rule 703
Thirteen (13) organizations submitted comments in response to the
April 2, 1997 Federal Register notice.41 The comments
generally reflected strong support for the Rule 703 and indicated that
the Rule is achieving the objectives it was fashioned to achieve--i.e.,
to encourage the fair and expeditious handling of consumer disputes
through the use of informal dispute settlement mechanisms.42
Commenters pointed to the importance of Rule 703 in serving as a
standard for IDSMs in general (particularly in the absence of any other
standards from private or government organizations) and, more
specifically, in providing a benchmark for the state lemon law
IDSMs.43 Commenters noted that, for those 45 states that
incorporate Rule 703 into their lemon laws or reference the Rule in
these laws, 44 Rule
[[Page 19707]]
703 provides either the sole standard or a critical part of the
standards that are used to determine the threshold acceptability of a
dispute resolution program in accordance with state law prior resort
requirements.45 Commenters believed that the minimum
standards set out in Rule 703 were developed with forethought and have
withstood the test of time and usage.46 As one commenter put
it, ``Rule 703 is an integral part of a wide-ranging system of informal
dispute resolution procedures * * * (which) functions smoothly and
provides quick, inexpensive and informal dispute resolution.''
47
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\41\ The thirteen commenters are: (1) American Automobile
Manufacturers Association (``AAMA''); (2) Association of
International Automobile Manufacturers, Inc. (``AIAM''); (3)
California Arbitration Review Program (``California''); (4) The CIT
Group (``CIT''); (5) Consumers for Auto Reliability and Safety
Foundation (``CARS''); (6) Council of Better Business Bureaus, Inc.
(``BBB''); (7) Jay R. Drick, Esq. (``Drick''); (8) Manufactured
Housing Institute (``MHI''); (9) Frank E. McLaughlin
(``McLaughlin''); (10) National Association of Consumer Advocates
(``NACA''); (11) National Consumer Law Center, Inc. (``NCLC''); (12)
P.R. Nowicki & Company (``Nowicki''); and (13) Donald Lee Rome,
Esq., Robinson & Cole (``Rome'').
\42\ AAMA at 1; AIAM at 1; BBB at 1-2; California at 1; CARS at
2; McLaughlin at 2-3; NACA at 1; NCLC at 1; Nowicki at 2. Although
not expressly endorsing retention of the present regulatory regime,
three other commenters (CIT, MHI, and Rome) supported such retention
by implication in suggesting modifications to the Rule which they
believed would provide greater consumer protections or would reduce
burdens on firms subject to the regulations. CIT, MHI, and Rome.
Only one commenter (Drick) recommended that Rule 703 be rescinded,
stating that the Rule serves no useful purpose since few if any
programs actually operate under Rule 703. Drick at 2.
\43\ AAMA at 1; BBB at 2.
\44\ Many state lemon laws prohibit consumers from pursuing a
state lemon law action in court unless the consumer first attempts
to resolve the claim through the manufacturer's IDSM, if it complies
with Rule 703.
\45\ BBB at 2.
\46\ McLaughlin at 2; Nowicki at 2.
\47\ AIAM at 1.
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Commenters cautioned the Commission that rescinding the Rule would
create significant problems for consumers and manufacturers because of
the impact such action would have on the functioning of state lemon
laws.48 Rescission would create a vacuum in the 45 states
that reference Rule 703 in their lemon laws, thus requiring massive
efforts to alter existing state laws and reconfigure auto maker
programs.49 The uniformity in dispute resolution programs
which Rule 703 promotes would be lost, to the detriment of consumers,
warrantors, IDSMs, and state governments.50
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\48\ AIAM at 1; McLaughlin at 2-3; Nowicki at 2. As mentioned,
many state lemon laws require consumers to resort to a
manufacturer's IDSM before pursuing a legal remedy in court.
However, the consumer is required to do so only if the IDSM
complies with Rule 703.
\49\ AIAM at 1; Nowicki at 2.
\50\ McLaughlin at 2.
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Commenters generally did not think that compliance with the Rule
was particularly burdensome or costly. The AAMA estimated that its
three member companies pay the independent suppliers that administer
their IDSMs an estimated $10 million, in addition to corporate staff
support or related filing, recordkeeping or administrative
costs.51 However, other commenters noted that, except for
the annual audit and specific record keeping requirements in Rule 703,
most of the costs involved are the administrative costs that would be
associated with the operation of any dispute resolution
program.52 The only IDSM to submit a comment was the BBB
which operates the BBB AUTOLINE program. The BBB estimated that the
annual costs of Rule 703's audit and record keeping requirements were
less than $100,000 for the entire AUTOLINE program.53
California stated that manufacturers have indicated that IDSM programs
are a cost effective way to avoid expensive litigation and that they
would continue to use these programs for warranty disputes even if not
required to do so by state lemon laws.54
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\51\ AAMA at 2-3. Another report indicated that GM alone spent
$8.4 million in 1994 on its BBB AUTOLINE program. Leslie Marable,
``Better Business Bureaus Are A Bust,'' Money, October 1995, p. 108,
cited in Nowicki at 5, fn. 5.
\52\ BBB at 3; California at 2. CARS noted that any discussion
of cost burdens by the manufacturers should be viewed with
skepticism since most have opted not to offer Rule 703 programs and
thus they are not in a position to calculate any additional costs
that a 703 program would cause them to incur. CARS at 6, 7.
\53\ BBB at 3. The AAMA estimated that the annual aggregate cost
for its three members to conduct the annual audits is about
$160,000. AAMA at 3. (One of the three members of AAMA is General
Motors, which uses the BBB AUTOLINE as its dispute resolution
mechanism; thus, there may be some duplication between the BBB
figures and the AAMA figures.)
\54\ California at 2.
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Based on its review of the comments and on its experience with the
evolving area of alternative dispute resolution, the Commission has
decided to retain Rule 703 unchanged. Although most commenters
supported retention of Rule 703, they also recommended certain
modifications that they believed would benefit consumers or reduce the
burden on warrantors and IDSMs. These recommendations fall into four
major categories: (1) Certification or other oversight of IDSM
compliance; (2) mandatory pre-dispute arbitration clauses; (3)
increasing the time limit for rendering a decision from 40 days to 60
days; (4) encouraging a mediation approach to dispute resolution; and
(5) other suggested modifications (e.g., allowing electronic storage of
records and changing the nature of the required statistical
compilations).
1. Certification and oversight of IDSMs. Commenters generally
expressed the view that a need exists for stronger government oversight
both on the federal and state levels and for increased funding to
monitor IDSM and warrantor operations to ensure that their procedures
comply with Rule 703.55 However, commenters did not suggest
how such increased oversight or monitoring could, as a practical
matter, be achieved given the voluntary nature of the Rule. As noted,
the Rule applies only to warrantors who ``give or offer to give a
written warranty which incorporates an informal dispute settlement
mechanism,'' 56 but few warrantors incorporate an IDSM into
their warranties--i.e., few include a prior resort requirement in their
warranties. Therefore, there are few IDSMs that come within the ambit
of the Rule's existing monitoring requirement (in Sec. 703.7), which
mandates an annual audit for compliance with the Rule.57 The
comments do not support radically revising the Rule to mandate use of
IDSMs across the board, regardless of whether a warrantor incorporates
an IDSM into its warranty.
---------------------------------------------------------------------------
\55\ CARS at 3; McLaughlin at 3-4; Nowicki at 4-5. One
suggestion was to use the model of California and Florida where
manufacturers pay between 25-28 cents on each car sale to fund the
state lemon law programs, including the annual review of IDSM
operations. Nowicki at 5. Another commenter suggested that increased
warrantor and IDSM compliance might be achieved at a lower cost by
establishing a voluntary offenders program similar to the Funeral
Rule Offenders Program (``FROP''), which is used in conjunction with
law enforcement actions under the Commission's Funeral Rule, 16 CFR
part 453. McLaughlin at 4.
\56\ 16 CFR 703.1(d).
\57\ Nonetheless, the manufacturer IDSMs continue to submit
annual audits to the FTC on a voluntary basis.
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Despite the fact that the Rule seldom comes into play in the manner
originally contemplated (i.e., by inclusion of prior resort
requirements in warranties), the Rule now serves as an essential
reference point for state lemon laws. Specifically, 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.58 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.59 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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\58\ ``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.
\59\ Some state lemon laws require that the IDSM comply with
additional state standards in addition to complying with the Rule
703 provisions. For example, approximately ten states (CA, CT, FL,
GA, IA, NJ, NY, OH, OR, WI) require manufacturer IDSMs to maintain
state-specific records in addition to the recordkeeping requirements
in Rule 703.
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The problem of determining compliance is not a new
one.60 The auto manufacturers recommended nationwide
certification of IDSM compliance with Rule 703, possibly through a
neutral third-party organization, that would preempt state
[[Page 19708]]
certification standards.61 The manufacturers argued that a
federal certification program would be an incentive to warrantors to
set up Rule 703 IDSMs because, among other benefits, it would eliminate
the uncertainty of conflicting state certification standards and the
risk of litigation over the issue of whether a mechanism complies with
Rule 703.62 Manufacturers further argued that not only does
the lack of a national certification program lead to economic
inefficiencies, but it also harms consumers by prolonging the dispute
settlement process through fostering litigation over the issue of
compliance.63 The manufacturers maintained that non-
uniformity in federal and state laws increases costs to warrantors, to
IDSMs, and to consumers, thus frustrating the Congressional policy
stated in the Warranty Act 64 of encouraging the development
of IDSMs.
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\60\ In 1988, the auto manufacturers petitioned the Commission
to initiate a rulemaking proceeding to amend Rule 703, proposing,
among other things, that the Commission institute a national
certification program for IDSMs in order to determine whether a
specified warrantor or IDSM complies with Rule 703's standards.
\61\ See, generally, AAMA and AIAM.
\62\ AAMA at 2, 5-6; AIAM at 2.
\63\ AAMA at 2. No data was supplied as to the actual number of
cases in which compliance with Rule 703 is litigated.
\64\ 15 U.S.C. 2310(a)(1).
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The Commission recognizes that a uniform certification program
could possibly diminish uncertainty as to whether an IDSM complies with
Rule 703 and, thus, whether the consumer must use the IDSM before
pursuing a court action. Nonetheless, for the reasons stated below, the
Commission has decided to reject the suggestion that it institute a
national certification program.
First, it is possible that FTC certification would not eliminate an
IDSM's alleged non-compliance with Rule 703 as an issue for litigation,
but merely shift the focus for consumer litigants to challenge FTC
certifications.65 Such an outcome would not likely curtail
the litigation that the manufacturers allege makes final resolution of
disputes elusive; in fact, such a certification program might well
prolong and further complicate such litigation.
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\65\ Conceivably, auto manufacturer litigants also might
challenge the denial of certification.
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Second, as a general matter, the Commission traditionally has been
unwilling to commit its limited law enforcement resources to regulatory
schemes that entail licensing or prior approval, such as the
certification program recommended by some commenters. The Commission,
moreover, would be loathe to take regulatory action likely to exert a
chilling effect on competition and on experimentation by IDSMs,
warrantors, and state governments in setting up and administering these
programs.
Finally, were the Commission to follow some commenters'
recommendation to preempt state certification standards through a
federal certification program, it could jeopardize the very laws that
give force to Rule 703's IDSM standards by incorporating them into
state lemon law statutory schemes. For these reasons, the Commission
has determined not to undertake a national certification program for
IDSMs.
2. Binding arbitration clauses. Two commenters urged that the Rule
be amended to permit mandatory binding arbitration clauses in consumer
contracts,\66\ while comments from two consumer advocacy groups (NACA
and NCLC) urged the Commission to continue the Rule's current
prohibition against binding arbitration.\67\ NACA and NCLC pointed to
the increased use by corporations of mandatory binding arbitration
clauses in standard form contracts with consumers. They expressed the
belief that the use of binding arbitration is more favorable to
institutional interests than to the consumer and that it provides the
corporation with a way to avoid class actions, punitive damage awards,
attorney fee awards, discovery, and juries.\68\ NACA and NCLC indicated
that the use of mandatory binding arbitration clauses is expanding in
the securities, credit, and health care industries and expressed the
fear that, without the protection of Rule 703 in its current form,
warrantors may begin to require mandatory binding arbitration as a
precondition of warranty coverage on consumer products.
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\66\ MHI and CIT proposed a ``streamlined'' warranty dispute
resolution process when the dispute is related to manufactured
homes. Among other characteristics of such a process, MHI
recommended that the process allow the decision of the IDSM to be
binding on the parties.
\67\ See, generally, NACA and NCLC. Section 703.5(j) of the Rule
states that the informal dispute settlement procedure cannot be
legally binding on any person.
\68\ NACA at 1-2; NCLC at 2-3.
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The Commission examined the legality and the merits of mandatory
binding arbitration clauses in written consumer product warranties when
it promulgated Rule 703 in 1975. Although several industry
representatives at that time had recommended that the Rule allow
warrantors to require consumers to submit to binding arbitration, the
Commission rejected that view as being contrary to the Congressional
intent.
The Commission based this decision on its analysis of the plain
language of the Warranty Act. Section 110(a)(3) of the Warranty Act
provides that if a warrantor establishes an IDSM that complies with
Rule 703 and incorporates that IDSM in its written consumer product
warranty, then ``(t)he consumer may not commence a civil action (other
than a class action) * * * unless he initially resorts to such
procedure.'' (Emphasis added.) This language clearly implies that a
mechanism's decision cannot be legally binding, because if it were, it
would bar later court action. The House Report supports this
interpretation by stating that ``(a)n adverse decision in any informal
dispute settlement proceeding would not be a bar to a civil action on
the warranty involved in the proceeding.'' \69\ In summarizing its
position at the time Rule 703 was adopted, the Commission stated:
\69\ House Report (to accompany H.R. 7917), H. Report, No. 93-
1107, 93d Cong., 2d Sess. (1974), at 41.
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The Rule does not allow (binding arbitration) for two reasons.
First * * * Congressional intent was that decisions of section 110
Mechanisms not be legally binding. Second, even if binding
Mechanisms were contemplated by section 110 of the Act, the
Commission is not prepared, at this point in time, to develop
guidelines for a system in which consumers would commit themselves,
at the time of product purchase, to resolve any difficulties in a
binding, but nonjudicial proceeding. The Commission is not now
convinced that any guidelines which it set out could ensure
sufficient protection for consumers. (Emphasis added.) \70\
\70\ 40 FR 60168, 60210 (1975). The Commission noted, however,
that warrantors are not precluded from offering a binding
arbitration option to consumers after a warranty dispute has arisen.
40 FR 60168, 60211 (1975).
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Based on its analysis, the Commission determined that ``reference
within the written warranty to any binding, non-judicial remedy is
prohibited by the Rule and the Act.'' \71\ The Commission believes that
this interpretation continues to be correct.\72\ Therefore, the
Commission has determined not to amend Sec. 703.5(j) to allow for
binding arbitration. Rule 703 will continue to prohibit warrantors from
including
[[Page 19709]]
binding arbitration clauses in their contracts with consumers that
would require consumers to submit warranty disputes to binding
arbitration.
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\71\ 40 FR 60168, 60211 (1975).
\72\ At least one federal district court has upheld the
Commission's position that the Warranty Act does not intend for
warrantors to include binding arbitration clauses in written
warranties on consumer products. Wilson v. Waverlee Homes, Inc., 954
F. Supp. 1530 (M.D. Ala. 1997). The court ruled that a mobile home
warrantor could not require consumers to submit their warranty
dispute to binding arbitration based on the arbitration clauses in
the installment sales and financing contracts between the consumers
and the dealer who sold them the mobile home. The court noted that a
contrary result would enable warrantors and the retailers selling
their products to avoid the requirements of the Warranty Act simply
by inserting binding arbitration clauses in sales contracts. Id. at
1539-1540.
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3. Increase time limit for rendering a decision from 40 days to 60
days. The BBB recommended that the time limit for rendering a decision
be increased from 40 days to 60 days, at least for those dispute
resolution programs that provide for oral hearings.\73\ The BBB stated
that BBB and State experience with arbitration programs indicates that
time requirements should be more flexible in order to provide for an
arbitration hearing, and notes that several states with state-run
programs (e.g., Florida, Connecticut, and Texas) allow for a 60-day
time period to render decisions.\74\
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\73\ BBB at 2.
\74\ BBB at 2. Twelve states offer consumers the opportunity to
use a state-run arbitration program in addition to, or in lieu of, a
manufacturer-sponsored IDSM. Although those states require that the
manufacturer-sponsored IDSM comply with Rule 703's 40-day
requirement, ten of them allow their state-run panels longer than 40
days to render a decision. The time limits for state-run panels in
those twelve states are as follows: 40 days: NJ, NY; 45 days: HI,
ME, MA. The remaining states require decisions within 50-150 days:
50 days: VT (30 days to hold hearing and 20 days thereafter to
render decision); 60 days: CT, FL; 70 days: NH (40 days to hold
hearing and 30 days thereafter to render decision) and WA (10 days
to forward application to Board, 45 days thereafter to hold hearing,
and 15 days after hearing to render decision); 150 days: TX (60 days
to render decision after hearing; if process not completed within
150 days of date consumer application and fee received, consumer can
go into court); no stated time limit: GA.
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The BBB argued that the 40-day time frame set by Rule 703 may work
to the detriment of consumers because the BBB is often unable to
accommodate consumer requests for delay or postponement of hearings
because the Rule requires that disputes be resolved within 40 days.
Furthermore, the BBB maintained that the 40-day time period often
constrains their efforts to mediate disputes for those consumers who
prefer a mediated resolution rather than the more formal arbitration
process that Rule 703 sets forth.
When the Rule was promulgated in 1975, the Commission received many
comments on its proposal that decisions must be rendered within 40
days. Many consumer commenters believed that 40 days was too long to
wait when there is a malfunctioning product, while industry comments
generally took the position that the time limit was too short.\75\
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\75\ 40 FR 60168, 60208. Consumer witnesses recommended a time
period of 10 to 30 days, while industry recommended a 90-day limit.
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The goal of encouraging fair and expeditious informal handling of
consumer warranty disputes remains an important step in providing
consumers a means to obtain relief for defective products. The
Commission's intent in promulgating the requirements set out in Rule
703 was to avoid creating artificial or unnecessary procedural burdens
so long as the basic goals of speed, fairness, and independent
participation are met.\76\ The Commission is concerned that by the time
a dispute has ripened to referral to an IDSM the consumer in many cases
has already had to contend with a defective product for a protracted
period. The Commission is concerned that any period longer than 40 days
would, in many cases, serve only to wear down consumers so they will
abandon their attempts to obtain redress. In the absence of firmer
evidence to the contrary, the Commission believes that the 40-day time
period, on balance, is beneficial to consumers most in need of an IDSM
remedy. The Commission believes that the 40-day time limit should
remain in effect.
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\76\ 40 FR 60168, 60193.
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4. Encourage the use of a mediation approach to settling disputes.
Two commenters sounded the theme that warrantors, consumers, and IDSMs
need flexibility to fashion dispute resolution procedures using
mediation and other forms of alternative dispute resolution mechanisms
so disputes can be resolved in an expeditious and cost effective
manner.\77\ MHI recommended that mediation be allowed in addition to,
or in lieu of, arbitration.\78\ Donald Rome recommended that the Rule
encourage mediation as an approach to facilitate the early resolution
of warranty disputes in a manner that would better meet the needs and
expectations of consumers than more formal arbitration proceedings.\79\
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\77\ See, Rome; MHI.
\78\ MHI, Appendix A at 3.
\79\ See, generally, Rome.
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The Commission supports the use of mediation to achieve a mutually-
agreed-upon settlement among the parties to the dispute prior to
initiating the more formal arbitration process outlined in the Rule.
Indeed, Sec. 703.5(d) itself implies that there will be ongoing
attempts to settle the dispute short of having the decision maker
render a decision.
If the dispute has not been settled, the Mechanism shall, as
expeditiously as possible, but at least within 40 days of
notification of the dispute * * * render a fair decision. (Emphasis
added.)
The Commission has made clear, however, that the use of mediation
must not impede those consumers who wish to pursue a remedy through
other avenues (e.g., arbitration and litigation). Those avenues must be
readily accessible if mediation does not produce a satisfactory
resolution of the dispute. In addition, consumers must not be obligated
to use mediation instead of the Rule 703 arbitration process, nor
should they be pressured into accepting a settlement that is
unsatisfactory to them. The Commission articulated its position on this
subject in 1984 when it granted limited exemptions from Rule 703, for a
two-year trial period, to the BBB, the Chrysler Customer Arbitration
Board, the Automotive Consumer Action Panel, and the Ford Consumer
Appeals Board programs.\80\ The exemptions suspended the 40-day time
limit and extended the Rule's time limit for arbitration decisions to
60 days in order to allow the programs up to 20 days to pursue
mediation prior to conducting arbitration. In granting the exemption,
however, the Commission imposed three conditions to ensure that
consumers retained control over the speed of the process.
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\80\ 49 FR 28397 (July 12, 1984) (Approval of Exemption for BBB,
Chrysler, and Automotive Consumer Action Panel); and 50 FR 27936
(July 9, 1985) (Approval of Exemption for Ford Consumer Appeals
Board). These programs did not renew their requests for exemptions
after the two-year trial period ended.
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(1) The mediation process must be optional. Consumers should not be
required to participate in mediation and must be allowed to terminate
mediation at any time during the process and still obtain a decision
from the IDSM.
(2) As soon as the consumer notifies the IDSM that he or she elects
to terminate mediation and begin the arbitration process, the IDSM must
render a decision within 40 days of that notification, or within 60
days of the date on which the IDSM first received notification of the
dispute, whichever is less.
(3) The above two conditions must be disclosed clearly and
conspicuously to the consumer after the mechanism has received notice
of the dispute and prior to beginning the arbitration process.
The Commission believed that these conditions would ensure that
consumers would not lose any of their protections under Rule 703 for a
speedy and fair resolution of their warranty disputes. Consumers would
retain control over which approach (mediation and/or arbitration) they
wished to use and also would control the speed of the process.
The Commission continues to believe that mediation's informality,
flexibility, and emphasis on the particular needs of
[[Page 19710]]
disputing parties makes it a useful tool in achieving a fair and
expeditious resolution of consumer product warranty disputes. However,
the Commission does not believe that it is necessary to amend the Rule
to specifically encourage the use of mediation since the Rule's
provisions already allow for such settlements before a decision is
rendered.
5. Other recommendations.
a. Changes in technology. The BBB notes that it is implementing an
electronic document management system that will enable all case records
and documents to be stored as electronic images. The BBB asks that Rule
703 be updated to specifically provide for storage of records as
electronic images. \81\
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\81\ BBB at 4.
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As the BBB notes, Rule 703's recordkeeping requirements do not
mandate the form in which records are stored. There is nothing in the
Rule to prohibit the use of electronic storage or any other new
technology, as long as the IDSM can meet its obligations under the Rule
to allow public inspection and copying of the statistical summaries and
other public records, to allow parties to the dispute to access and
copy the records relating to the dispute, and to allow an annual audit
of the IDSM's operations. It is not the Commission's intention that the
Rule be interpreted to restrict to antiquated technological methods the
form or format of records required to be kept under the Rule.
b. Changing the type of required statistical analyses. One
commenter (Nowicki) recommends that Sec. 703.6(e) be abolished. \82\
Section 703.6(e) requires the IDSM to maintain certain statistical
compilations, including the number and percent of disputes resolved or
decided and whether the warrantor has complied; the number of decisions
adverse to the consumer; and the number of decisions delayed beyond 40
days and the reasons for the delay. Mr. Nowicki argues that the
categories of statistical compilations the mechanism must maintain are
``either moot, nebulous, or even worse, misleading and deceptive.''
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\82\ Nowicki at 3-4.
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Mr. Nowicki maintains, for example, that the statistical
compilations underreport the number of decisions that are not resolved
within 40 days because many manufacturer IDSMs assign a new file each
time a consumer files a complaint, even if the consumer previously had
filed a complaint for the same vehicle and the same problem. Thus, if a
consumer was awarded an interim repair and refiles because the repairs
did not cure the problem, the refiling is assigned a new case number
and triggers a new 40-day time period. Mr. Nowicki believes the
statistics would be more meaningful if they tracked the entire process
of resolving the consumer's complaint about a particular vehicle,
regardless of how many times the consumer refiles. Similarly, he
maintains that the statistical compilations understate the level of
compliance by warrantors with settlements and decisions and that the
category that reports the number of ``adverse decisions'' under reports
the number of consumers who are not awarded the relief they sought
(e.g., the consumer is awarded further repairs instead of a
replacement).
The Commission appreciates that the statistical compilations
required by Sec. 703.6(e) cannot provide an in-depth picture of the
workings of a particular IDSM. However, the statistics were not
intended to serve that function. The statistical compilations attempt
to provide a basis for minimal review by the interested parties to
determine whether the IDSM program is working fairly and expeditiously.
Based on that review, a more detailed investigation could then be
prompted. In addition, in adopting the recordkeeping requirements, the
Commission was mindful that substantial recordkeeping costs might
dissuade the establishment of IDSMs. Therefore, the Commission sought
to minimize the costs of the recordkeeping burden on the IDSM while
ensuring that sufficient information was available to the public to
provide a minimal review. The Commission does not believe that there is
sufficient record evidence to prompt changes in the statistical
compilations required under Sec. 703.6(e). Accordingly, the Commission
has determined to retain Sec. 703.6(e) unchanged.
D. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act provides for analysis of the
potential impact on small businesses of Rules proposed by federal
agencies. (5 U.S.C. 603, 604). Rules 701 and 702 are the only warranty-
related matters currently under review that require such an analysis.
\83\ In 1987, the Commission conducted a Regulatory Flexibility Act
analysis of Rule 702 in connection with its amendment of that Rule. See
52 FR 7569. The April 3, 1996 request for comment was the first review
of Rule 701 since it was promulgated in 1975 and thus presented the
first opportunity to conduct such an analysis for that Rule. Therefore,
the April 3 notice included questions to elicit the necessary
information.
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\83\ Rule 703 does not require a Regulatory Flexibility Act
analysis because the only entities affected by the requirements of
Rule 703 are those warrantors and IDSMs who purport to follow Rule
703 standards (the auto manufacturers and their IDSM programs).
Currently, none of those entities fall within the definition of
``small'' based on Small Business Administration size standards.
Therefore, Rule 703 does not appear to have a significant effect on
a substantial number of small entities.
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The Commission believes that a very high percentage of businesses
subject to Rule 701 are ``small'' based on Small Business
Administration size standards. Unfortunately, the available data do not
provide a precise measurement of the impact Rule 701 has had on small
businesses nor the economic impact that would result from leaving the
Rule unchanged.
For example, in the regulatory analysis conducted for Rule 702, the
Commission's investigation found that nearly all the manufacturers
(11,365 companies or 97 percent) and nearly all retailers (952,916
companies or 99.3 percent) affected by Rule 702 were considered
``small'' using the size standards promulgated by the Small Business
Administration. That investigation indicated that, if the companies
were compared according to annual receipts, small retailers would
represent about 47 percent and small manufacturers about 23 percent of
the gross annual receipts in their respective industries.
In 1984, the FTC's Office of Impact Evaluation issued a study
evaluating the Impact of the Warranty Rules (Market Facts, Warranty
Rules Consumer Follow-Up: Evaluation Study. Final Report, Washington,
DC, July 1984 (``the Study'')). The Study found that some type of
warranty was offered for 87 percent of the consumer products surveyed.
Of those warranted products, almost 63 percent carried only a
manufacturer's warranty, about 12 percent were warranted only by the
retailer, and about 13 percent were covered by both a manufacturer's
and a retailer's warranty. Thus, the costs of Rule 701 would appear to
fall principally on manufacturers, since those entities are more likely
to provide a written warranty. However, it is unknown how many of those
manufacturers or retailers who give written warranties are also small
entities.
Much of the burden imposed on business by Rule 701 is statutorily
imposed. Section 102 of the Magnuson-Moss Warranty Act, 15 U.S.C. 2301
et seq., requires warrantors who use written warranties to disclose
fully and conspicuously the terms and conditions of the warranty. The
Act lists a number of items that may be included in any
[[Page 19711]]
rules requiring disclosure that the Commission might prescribe, and, in
Rule 701, the Commission tracked those items. Nonetheless, in
promulgating the Rule, the Commission attempted to comply with the
Congressional mandate in Section 102 of the Act while minimizing the
economic impact on affected businesses. For example, the Commission
limited the disclosure requirements to warranties on consumer products
actually costing the consumer more than $15.00. Furthermore, the
Commission exempted ``seal of approval'' programs from providing the
disclosures on the actual seal.
The comments provided some indication that the Commission succeeded
in drafting the Rule so as not to make it unduly burdensome to
business. The comments from AAMA and NAIMA indicate that Rule 701 is
not unreasonably costly to warrantors. These two commenters indicated
that the system is working well. The AAMA stated that the current
system is working well and is not unreasonably costly to warrantors:
The Rules are workable and understood by industry and that there is no
evidence that the adequacy of warranty disclosure nor that the legal
sufficiency of the warranties given is a major source of complaints,
nor is there evidence that customers are unaware of their warranty
rights. The AAMA stated ``As presently structured, these Rules are
workable and effective, and permit warrantor compliance without
unreasonable expense.'' 84
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\84\ AAMA at 2.
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The NAIMA echoed AAMA's opinion. NAIMA indicated that the costs of
the warranty regulations are not imposed upon businesses by government,
but rather are voluntarily assumed by companies that choose to offer
written warranties. As such, NAIMA states that ``any cost incurred by a
firm would be calculated into a business decision to offer a warranty
or guarantee and should not be weighed as a factor to eliminate or
diminish the requirement.'' 85
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\85\ NAIMA at 3.
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The other commenters were silent as to the effects of Rule 701 on
small businesses. Therefore, based on the information available, the
Commission has determined that, to the extent that Rule 701's
requirements are not Congressionally mandated, the current version of
Rule 701 does not unduly burden small businesses.
List of Subjects in 16 CFR Parts 239, 700, 701, 702, and 703.
Warranties, advertising, dispute resolution, trade practices.
Authority: 15 U.S.C. 41-58.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 99-9841 Filed 4-21-99; 8:45 am]
BILLING CODE 6750-01-P