[Federal Register Volume 80, Number 138 (Monday, July 20, 2015)]
[Rules and Regulations]
[Pages 42710-42723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14065]
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FEDERAL TRADE COMMISSION
16 CFR Parts 700, 701, and 703
RIN 3084-AB24; 3084-AB25; 3084-AB26
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: Final revised Interpretations; Final clerical changes to Rules;
and Conclusion of review proceedings.
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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'' or ``part 700''); 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 (``the Guides'' or ``part
239''). The Interpretations represent the Commission's views on various
aspects of the Magnuson-Moss Warranty Act (``the Act'' or ``MMWA''),
and are intended to clarify the Act's requirements. 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 required for any informal
dispute settlement mechanism that is incorporated into a written
consumer product warranty, and that 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.
[[Page 42711]]
DATES: The changes to the Interpretations and Rules will take effect on
July 20, 2015.
FOR FURTHER INFORMATION CONTACT: Svetlana S. Gans, Staff Attorney,
Division of Marketing Practices, Federal Trade Commission, Washington,
DC 20580, (202) 326-3708.
SUPPLEMENTARY INFORMATION: The MMWA, 15 U.S.C. 2301-2312, is the
federal law that governs consumer product warranties. Passed by
Congress in 1975, the Act requires manufacturers and sellers of
consumer products to provide consumers with detailed information about
warranty coverage before and after the sale of a warranted product.
When consumers believe they are the victim of an MMWA violation, the
statute provides them the ability to proceed through a warrantor's
informal dispute resolution process or sue in court. On August 23,
2011, the Commission published a Federal Register request for public
comment, soliciting written public comments concerning five 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; (4) the Rule Governing Informal Dispute
Settlement Procedures, 16 CFR part 703; and (5) the Guides for the
Advertising of Warranties and Guarantees, 16 CFR part 239.\1\ 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 the request, the Commission has determined to retain Rules 701, 702,
and 703, and the Guides without change, and to modify the
Interpretations in Sec. Sec. 700.10 and 700.11(a). The Commission is
also updating the citation format in the Interpretations and Rules.\2\
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\1\ 76 FR 52596 (Aug. 23, 2011).
\2\ These clerical changes do not involve any substantive
changes in the Rules' requirements for entities subject to the
Rules. Accordingly, the Commission finds that public comment is
unnecessary. See 5 U.S.C. 553(b)(3)(B).
In addition, under the APA, a substantive final rule is required
to take effect at least 30 days after publication in the Federal
Register unless an agency finds good cause that the rule should
become effective sooner. 5 U.S.C. 553(d). However, this is purely a
clerical change and is not a substantive rule change. Therefore, the
Commission finds good cause to dispense with a delayed effective
date.
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In addition, Commission staff has recently issued a number of
guidance documents to better educate consumers and businesses
concerning their rights and obligations under the MMWA. For example, in
order to cure perceived misconceptions in the marketplace, staff issued
and recently updated a consumer alert stating that the MMWA prohibits
warrantors from voiding an automotive warranty merely because a
consumer uses an aftermarket or recycled part or third-party services
to repair one's vehicle (subject to certain exceptions).\3\ Staff also
updated the .Com Disclosures to provide additional guidance concerning
online warranty disclosure obligations \4\ and issued letters to
various online sellers concerning their obligations under the pre-sale
availability rule.\5\ Staff will continue to evaluate whether
additional guidance is necessary to better inform both consumers and
business concerning their rights and responsibilities under the MMWA.
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\3\ FTC, Auto Warranties & Routine Maintenance (July 2011,
updated May 2015) (``Consumer Alert on Auto Warranties''), available
at http://www.consumer.ftc.gov/articles/0138-auto-warranties-routine-maintenance. A warrantor may condition the warranty on the
use of certain parts or service if it provides these parts and
services without charge to the consumer under the warranty, or
alternatively, if the warrantor receives a waiver from the
Commission. See 15 U.S.C. 2302(c).
\4\ See FTC, .com Disclosures: How to Make Effective Disclosures
in Digital Advertising (2013), available at http://ftc.gov/os/2013/03/130312dotcomdisclosures.pdf.
\5\ Press Release, FTC, As Holiday Shopping Season Gets
Underway, FTC Reminds Internet Retailers to Ensure Consumers Have
Access to Warranty Information (Dec. 2, 2013), http://www.ftc.gov/news-events/press-releases/2013/12/holiday-shopping-season-gets-underway-ftc-reminds-internet.
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A. Background
1. 16 CFR Part 700: Interpretations of the Magnuson-Moss Warranty Act
(``Interpretations'')
The MMWA, 15 U.S.C. 2301-2312, which governs written warranties on
consumer products, was signed into law on January 4, 1975. After the
Act was passed, the Commission received many questions concerning the
Act's requirements. In responding to these inquiries, the Commission
initially published, on June 18, 1975, a policy statement in the
Federal Register (40 FR 25721) providing 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 more comprehensive guidance was appropriate. Therefore,
on July 13, 1977, the Commission published in the Federal Register (42
FR 36112) its Interpretations of the MMWA to assist warrantors and
suppliers of consumer products in complying with the Act.
These Interpretations are intended to clarify the Act's
requirements for manufacturers, importers, distributors, and retailers.
The Interpretations cover a wide range of subjects, including: The
types of products considered ``consumer products'' under the Act; the
differences between a ``written warranty,'' ``service contract'' and
``insurance''; written warranty term requirements; the use of warranty
registration cards under full and limited warranties; and illegal tying
arrangements under Section 2302(c) of the Act. These Interpretations,
like industry guides, are administrative interpretations of the law.
Therefore, they do not have the force of law and are not independently
enforceable. The Commission can take action under the Federal Trade
Commission Act (``FTC Act'') and the MMWA, however, against claims that
are inconsistent with the Interpretations if the Commission has reason
to believe that such claims are unfair or deceptive practices under
Section 5 or violate the MMWA.
2. 16 CFR Part 701: Disclosure of Written Consumer Product Warranty
Terms and Conditions
Section 2302(a) of the MMWA authorizes the Commission to promulgate
rules regarding the disclosure of written warranty terms. Accordingly,
on December 31, 1975, the Commission published in the Federal Register
(40 FR 60188) its Rule Governing Disclosure of Written Consumer Product
Warranty Terms and Conditions. Rule 701 establishes disclosure
requirements for written warranties on consumer products that cost more
than $15.00. It also specifies the aspects of warranty coverage that
must be disclosed in the written document, as well as the exact
language that must be used for certain disclosures regarding state law
on the duration of implied warranties and the availability of
consequential or incidental damages.
Under Rule 701, warranty information must be disclosed in simple,
easily understandable, and concise language in a single document. In
promulgating Rule 701, the Commission determined that material facts
about product warranties, the nondisclosure of which would be deceptive
or misleading, must
[[Page 42712]]
be disclosed.\6\ In addition to specifying the information that must
appear in a written warranty, Rule 701 also requires that, if the
warrantor of a limited warranty 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.\7\
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\6\ See 40 FR 60168, 60169 (Dec. 31, 1975) (``The items required
for disclosure by this Rule are material facts about warranties, the
non-disclosure of which constitutes a deceptive practice.'').
\7\ Notably, section 2014(b)(1) of the MMWA prohibits warrantors
offering a full warranty from imposing duties other than the
notification of a defect as a condition of securing warranty
remedies. 15 U.S.C. 2304(b)(1).
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3. 16 CFR Part 702: Pre-Sale Availability of Written Warranty Terms
Section 2302(b)(1)(A) of the MMWA 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. Rule 702 establishes requirements for
sellers and warrantors to make the text of any warranty on a consumer
product available to the consumer prior to sale. Among other things,
Rule 702 requires sellers to make warranties readily available either
by: (1) Displaying the warranty document in close proximity to the
product or (2) furnishing the warranty document on request and posting
signs in prominent locations advising consumers that warranties are
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. As discussed further below, Rule 702 also applies to
online sales.
4. 16 CFR Part 703: Informal Dispute Settlement Procedures
Section 2310(a)(2) of the MMWA directs the Commission to prescribe
the minimum standards for any informal dispute settlement mechanism
(``IDSM'' or ``Mechanism'') that a warrantor, by including a ``prior
resort'' clause in its written warranty, requires consumers to use
before they may file suit under the Act to obtain a remedy for warranty
non-performance. Accordingly, on December 31, 1975, the Commission
published Rule 703. Rule 703 contains extensive procedural safeguards
for consumers that a warrantor must incorporate in any IDSM. These
standards include, but are not limited to, requirements concerning the
IDSM's structure (e.g., funding, staffing, and neutrality), the
qualifications of staff or decision makers, and the IDSM's procedures
for resolving disputes, recordkeeping, and annual audits.
5. 16 CFR Part 239: Guides for the Advertising of Warranties and
Guarantees
The Guides for the Disclosure of Warranties and Guarantees,
codified in part 239, provide guidance concerning warranty and
guarantee disclosures. Part 239 intends to help advertisers avoid
unfair and deceptive practices when advertising warranties and
guarantees. 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 guarantee,'' ``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. The Guides are advisory in nature.
B. Analysis of the Comments on the Interpretations, Rule 701, Rule 702,
Rule 703, and the Guides
Twenty-nine entities and individuals submitted public comments in
response to the August 23, 2011 Federal Register request for public
comment.\8\ Comments generally reflect a strong level of support for
the view that the Interpretations, 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. A
majority of the commenters, though endorsing retention of the present
regulatory scheme, suggested modifications to the Interpretations,
Rules, and Guides, which they believe would provide greater consumer
protections and minimize burdens on firms subject to the regulations.
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\8\ 76 FR 52596 (Aug. 23, 2011). Public comments in response to
the Commission's 2011 FRN are located at http://www.ftc.gov/policy/public-comments/initiative-392. Comments cited herein to the Federal
Register notice are designated as such, and are identified by
commenter name, and, where applicable, page number.
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1. 16 CFR Part 700: Interpretations
a. Amend Sec. 700.10 To Provide Further Guidance on Prohibited Tying
Generally, the MMWA prohibits warrantors from conditioning
warranties on the consumer's use of a replacement product or repair
service identified by brand or name, unless the article or service is
provided without charge to the consumer or the warrantor has received a
waiver.\9\ The Commission's Interpretations illustrate this concept by
stating that phrases such as this warranty is void if service is
performed by anyone other than an authorized ``ABC'' dealer and all
replacement parts must be genuine ``ABC'' parts and the like, are
prohibited unless the service or parts are provided free of charge.
Such provisions violate the MMWA's ban on tying arrangements and are
deceptive under Section 5 of the FTC Act, because a warrantor cannot
avoid liability under a warranty where the defect or damage is
unrelated to the consumer's use of ``unauthorized'' parts or service.
This does not, however, preclude the warrantor from denying warranty
coverage for repairs associated with defects or damage caused by the
use of the ``unauthorized'' parts or service.\10\
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\9\ See 15 U.S.C. 2302(c). The Commission may waive this
prohibition if the warrantor demonstrates to the Commission that the
warranted product will function properly only if the article or
service so identified is used in connection with the warranted
product, and the waiver is in the public interest. 15 U.S.C.
2302(c).
\10\ 16 CFR 700.10.
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Several commenters \11\ assert that the Commission's
Interpretations do not address the market realities of manufacturers'
statements about the use of branded products. These commenters state
that automotive and other consumer product manufacturers have employed
language in consumer materials ``to suggest that warranty coverage
directly or impliedly `requires' the use of a branded product or
service'' \12\ leading reasonable consumers to believe that coverage
under a written warranty will be void if
[[Page 42713]]
non-original parts or non-dealer services are utilized.\13\ Commenters
suggest that these statements lead consumers to doubt the viability of
non-original (or recycled) parts.\14\ ``Faced with such a choice a
consumer is likely to use the `required' product in order to avoid the
risk that they may later face potentially expensive repairs that may
not be covered under their warranty, resulting in a `tie' created via
warranty.'' \15\ Accordingly, these commenters request that the
Commission ``make clear that warranty language that creates the
impression that the use of a branded product or service is required in
order to maintain warranty coverage is . . . impermissible.'' \16\
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\11\ Ashland; Automotive Oil Change Association; Automotive
Recyclers Association; BP Lubricants; Certified Auto Parts
Association; Hunton & Williams; International Imaging Technology
Council; LKQ Corporation; Motor & Equipment Manufacturers
Association; Monro Muffler Brake; Property Casualty Insurers
Association of America; and the Uniform Standards in Automotive
Products Coalition (``USAP Coalition''). One commenter, the American
Insurance Association, urges the Commission not to change Sec.
700.10. The Coalition for Auto Repair Equality urges the Commission
to uphold MMWA's tying prohibitions. Grandpa's Garage comments that
GM's recommendation that consumers use its branded oil is helpful
because GM explains the right products to use for repair and the
prevention of premature failure. Consumer J. McKee generally
supports the tying prohibitions.
\12\ USAP Coalition at 6.
\13\ Hunton & Williams at 4.
\14\ Automotive Recyclers Association at 2.
\15\ Id.
\16\ USAP Coalition at 3.
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The MMWA incorporates principles under Section 5 of the FTC Act
that prohibit warrantors from disseminating deceptive statements
concerning warranty coverage. The MMWA gives the Commission the
authority to restrain a warrantor from making a deceptive warranty,
which is defined as a warranty that ``fails to contain information
which is necessary in light of all of the circumstances, to make the
warranty not misleading to a reasonable individual exercising due
care.'' \17\ Thus, a warrantor would violate the MMWA if its warranty
led a reasonable consumer exercising due care to believe that the
warranty conditioned coverage ``on the consumer's 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.'' \18\
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\17\ 15 U.S.C. 2310(c).
\18\ 16 CFR 700.10.
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Moreover, misstatements leading a consumer to believe that the
consumer's warranty is void because a consumer used ``unauthorized''
parts or service may also be deceptive under Section 5 of the FTC
Act.\19\ Specifically, claims by a warrantor that create a false
impression that a warranty would be void due to the use of
``unauthorized'' parts or service may constitute a deceptive practice
as outlined in the FTC Policy Statement on Deception: ``The deception
theory is based on the fact that most ads making objective claims
imply, and many expressly state, that an advertiser has certain
specific grounds for the claims. If the advertiser does not, the
consumer is acting under a false impression. The consumer might have
perceived the advertising differently had he or she known the
advertiser had no basis for the claim.'' \20\ A warrantor claiming or
suggesting that a warranty is void simply because a consumer used
``unauthorized'' parts or service would have no basis for such a claim
(absent a Commission waiver pursuant to Section 2302(c) of the Act).
This is consistent with staff's view, as expressed in recent opinion
letters, that misinformation and misleading statements in conjunction
with warranty coverage may be actionable.\21\
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\19\ 15 U.S.C. 45(a). See generally Letter from James C. Miller
III, Chairman, Fed. Trade Comm'n, et al., to Rep. John D. Dingell
(Oct. 14, 1983), reprinted in Cliffdale Assocs., Inc., 103 F.T.C.
110, 174 (1984), available at https://www.ftc.gov/public-statements/1983/10/ftc-policy-statement-deception (hereinafter ``FTC Policy
Statement on Deception'') at 2.
\20\ FTC Policy Statement on Deception, supra note 19 at n14;
see also 15 U.S.C. 2310(c)(2).
\21\ Consumer Alert on Auto Warranties, supra note 3.
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Therefore, to clarify the tying prohibition of the MMWA, Sec.
700.10(c) will be changed as described in amendatory instruction 11.
b. Require a Mandatory Disclosure Statement in Companies' Warranties
Several commenters \22\ ask the Commission to mandate that
warrantors providing a warranty to a consumer in connection with a
motor vehicle incorporate standard language in their warranties, akin
to the FTC's Consumer Alert on Auto Warranties.\23\ These commenters
state that, although the FTC's Consumer Alert on Auto Warranties
informs consumers of their rights under the MMWA, consumers should
receive information about these rights in an owner's manual or warranty
document pursuant to a Commission-mandated disclosure. These commenters
ask the Commission to amend its Interpretations so that these
warrantors would be required to provide in boldface type on the first
page of a written automobile warranty: ``Warranty coverage cannot be
denied unless the warrantor or service provide[r] [sic] can demonstrate
that the defect or damage was caused by the use of unauthorized
articles or services.'' \24\ Commenters base their recommendation, in
part, on the language mandated by the Clean Air Act for use in user
manuals, namely, that ``maintenance, replacement, or repair of the
emissions control devices and systems may be performed by any
automotive repair establishment or individual using any automotive
part.'' \25\
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\22\ Ashland at 3; Automotive Oil Change Association at 2;
Certified Automotive Parts Association at 2-3; International Imaging
Technology Council at 6-7; LKQ Corporation at 10; Monro Muffler
Brake at 1-2; USAP Coalition at 14-15.
\23\ The Consumer Alert on Auto Warranties informs consumers,
among other things, that unless they have been provided parts or
services without charge under the warranty, they do not have to use
the dealer for repairs and maintenance to keep their warranty in
effect, stating, ``An independent mechanic, a retail chain shop, or
even you yourself can do routine maintenance and repairs on your
vehicle. In fact, the Magnuson-Moss Warranty Act, which is enforced
by the FTC, makes it illegal for manufacturers or dealers to claim
that your warranty is void or to deny coverage under your warranty
simply because someone other than the dealer did the work.''
Consumer Alert on Auto Warranties, supra note 3.
\24\ USAP Coalition at 14. Elsewhere, however, the commenters
propose other specific language for the Commission to add to its
Interpretations that would not be limited to mandatory disclosures
in warranty documents but would extend to owner's manuals and other
communications with prospective consumers. USAP Coalition at 20,
Att. B; Automotive Oil Change Association at 6 (referring to
``warranty documents and related communications.'').
\25\ USAP Coalition at 14, citing 42 U.S.C. 7541(c)(3)(A).
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The Commission declines to make this change. As an initial matter,
the MMWA, unlike the Clean Air Act, does not require a mandatory
disclaimer on all warranties. Further, the current record lacks
sufficient evidence to justify the imposition of a mandatory warranty
disclosure requirement for a subset of warrantors.\26\
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\26\ The Specialty Equipment Market Association (``SEMA'') asks
the Commission to prepare a supplemental consumer alert to
specifically reference ``specialty parts.'' SEMA at 2. A
supplemental consumer alert is not necessary as the existing
consumer alert applies to all non-original (or recycled) parts.
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c. Clarify That Use of an Aftermarket or Recycled Component is Not a
Prima Facie Justification for Warranty Denial
One commenter \27\ asks the Commission to clarify that the use of
aftermarket components is not a prima facie justification for warranty
denial. The Interpretations and related educational materials already
make clear that the mere use of an aftermarket (or recycled) component
alone is not a sufficient justification for warranty denial. As
discussed above, a warrantor cannot disclaim warranty coverage if a
defect or damage is unrelated to the consumer's use of ``unauthorized''
products or service, unless the warrantor provides the service or part
without charge under the warranty or receives a Commission waiver.\28\
A warrantor can refuse coverage where the warrantor can demonstrate
that the defect or damage was caused by the use of the ``unauthorized''
part or service.\29\
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\27\ Ashland at 2.
\28\ 16 CFR 700.10(c).
\29\ Id.
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Several commenters ask the Commission to better educate consumers
on how to identify and report warranty tying in the marketplace. In
July 2011, the staff
[[Page 42714]]
issued a consumer alert highlighting MMWA's tying prohibitions. The
alert explained: ``Simply using an aftermarket or recycled part does
not void your warranty. The Magnuson-Moss Warranty Act makes it illegal
for companies to void your warranty or deny coverage under the warranty
simply because you used an aftermarket or recycled part.'' \30\
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\30\ See Consumer Alert on Auto Warranties, supra note 3. As
stated in the updated consumer alert, the manufacturer or dealer
can, however, require consumers to use select parts if those parts
are provided to consumers free of charge under the warranty.
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d. Require That Warrantors Have Substantiation for Their Performance
Claims Regarding Non-Original Parts
Several commenters \31\ ask the Commission to require that
warrantors have substantiation for their claims that original equipment
manufacturer (``OEM'') parts work better than non-original or recycled
parts. This specific request is outside the purview of the Act and
relates generally to the requirement under Section 5 of the FTC Act
that companies have sufficient basis for their claims. Section 5
requires warrantors making performance claims regarding non-original or
recycled parts to have a reasonable basis for those claims, thereby
ensuring that such claims are not unfair, deceptive, false, or
misleading. Similarly, advertisers must have adequate substantiation--
or a reasonable basis--for any advertising claims they make before the
claims are disseminated. Under the substantiation doctrine, ``firms
lacking a reasonable basis before an ad is disseminated violate Section
5 of the FTC Act.'' \32\
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\31\ Ashland at 6-7; LKQ Corporation at 8; USAP Coalition at 15-
16.
\32\ FTC Policy Statement Regarding Advertising Substantiation,
appended to Thompson Med. Co., 104 F.T.C. 648, 839 (1984), aff'd,
791 F.2d 189 (D.C. Cir. 1986).
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e. Require Warranty Denial To Be in Writing
The Commission's Interpretations state that a warrantor is not
precluded from denying warranty coverage for defects or damage caused
by the use of ``unauthorized'' parts or service if the warrantor
``demonstrates'' that the ``unauthorized'' parts or service caused a
defect or damage to the vehicle.\33\ Commenters \34\ state that, in
some instances, warrantors have denied warranty coverage without
sufficiently demonstrating to consumers that the use of
``unauthorized'' parts or service caused defects or damage to the
consumer's vehicle by, for example, giving consumers a copy of a
service bulletin or just ``say[ing] so.'' \35\ Commenters therefore ask
the Commission to require, in its Interpretations, that warrantors
provide consumers with a written statement to support any warranty
denial claim.
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\33\ 16 CFR 700.10(c).
\34\ Ashland at 3; Automotive Oil Change Association at 6-7; BP
Lubricants at 3, Certified Auto Parts Association at 4-5; SEMA at 3;
USAP Coalition at 15-16.
\35\ Certified Auto Parts Association at 5.
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The Commission does not believe a change is warranted because the
current record lacks sufficient evidence showing that warrantors
routinely deny warranty coverage orally without demonstrating to the
consumer that the ``unauthorized'' part or service caused damage to the
vehicle. At this time, the Commission believes the existing
Interpretations adequately address this issue.
Simply providing a consumer with a copy of a service bulletin or
denying coverage with a bald, unsupported statement that the
``unauthorized'' parts or service caused the vehicle damage would be
insufficient under the Commission's existing Interpretations.
Warrantors must have a basis for warranty denials by demonstrating to
consumers that the use of ``unauthorized'' parts or service caused the
defect or damage to the vehicle. Further, denying warranty coverage by
simply pointing to a service bulletin that informs consumers that only
``authorized'' parts or service should be used to maintain warranty
coverage may also violate the MMWA's proscriptions against tying.\36\
Therefore, whether the demonstration is in writing or oral, a warrantor
denying warranty coverage due to the use of ``unauthorized'' parts or
service must show that such use caused the defect or damage to the
vehicle.
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\36\ 16 CFR 700.10(c).
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f. The Scope of Auto Dealers' Responsibilities Under the MMWA and
Interpretations
Two commenters \37\ address the scope of auto dealers' (which fall
under MMWA's definition of ``supplier'' \38\) responsibilities under
the MMWA and Interpretations.\39\ First, the National Consumer Law
Center (``NCLC'') asks the Commission to add an interpretation stating
that a supplier enters into a service contract with a consumer whenever
the supplier offers a service contract to the consumer, irrespective of
whether the supplier is obligated to perform under the service
contract.\40\ The Commission declines to add the requested
interpretation.
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\37\ Center for Auto Safety at 2; NCLC at 10.
\38\ The MMWA defines ``supplier'' as ``any person engaged in
the business of making a consumer product directly or indirectly
available to consumers.'' 15 U.S.C. 2301(4).
\39\ Center for Auto Safety at 2.
\40\ NCLC at 10.
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Existing staff guidance provides that ``sellers of consumer
products that merely sell service contracts as agents of service
contract companies and do not themselves extend written warranties'' do
not ``enter into'' service contracts.\41\ This guidance parallels the
MMWA's provisions concerning a seller's liability under the MMWA for
merely selling a third party's warranty: ``only the warrantor actually
making a written affirmation of fact, promise, or undertaking shall be
deemed to have created a written warranty, and any rights arising
thereunder may be enforced under this section only against such
warrantor and no other person.'' \42\
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\41\ See FTC, The Businessperson's Guide to Federal Warranty
Law, available at http://www.business.ftc.gov/documents/bus01-businesspersons-guide-federal-warranty-law; 15 U.S.C. 2308(a)(2).
\42\ 15 U.S.C. 2310(f).
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In keeping with the MMWA, the Commission's Interpretations
concerning parties ``actually making'' a written warranty provide that
a supplier who simply distributes or sells a consumer product warranted
by another person or business is not liable for failure of the written
warranty to comply with the Act.\43\ Accordingly, the Commission will
not add the requested interpretation concerning service contracts.
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\43\ 16 CFR 700.4. Section 700.4 further provides, however, that
other actions and written and oral representations of such a
supplier in connection with the offer or sale of a warranted product
may obligate that supplier under the Act. If under State law the
supplier is deemed to have ``adopted'' the written affirmation of
fact, promise, or undertaking, the supplier is also obligated under
the Act.
---------------------------------------------------------------------------
The second commenter, the Center for Auto Safety, seeks clarity to
address the discrepancy it perceives between the MMWA and the staff's
guidance concerning the circumstances under which an auto dealer (i.e.,
supplier) can disclaim implied warranties when offering service
contracts. It argues that, on one hand, Section 2308(a)(2) of the MMWA
states: ``no supplier may disclaim or modify . . . any implied warranty
to a consumer with respect to such consumer product if . . . at the
time of sale, or within 90 days thereafter, such supplier enters into a
service contract with the consumer which applies to such consumer
product.'' \44\ On the other hand, the FTC's Businessperson's Guide to
Federal Warranty Law states: ``[s]ellers of consumer products who make
service contracts on their products are
[[Page 42715]]
prohibited under the Act from disclaiming or limiting implied
warranties. . . . However, sellers of consumer products that merely
sell service contracts as agents of service contract companies and do
not themselves extend written warranties can disclaim implied
warranties on the products they sell.'' \45\
---------------------------------------------------------------------------
\44\ 15 U.S.C. 2308(a)(2).
\45\ The Businessperson's Guide to Federal Warranty Law, supra
note 41.
---------------------------------------------------------------------------
The Commission does not believe any discrepancy exists. The
confusion may stem from the usage of the word ``supplier,'' defined in
the MMWA as: ``any person engaged in the business of making a consumer
product directly or indirectly available to consumers.'' \46\ Thus,
``supplier'' can mean either the entity that ``enters into a service
contract with the consumer'' or the entity that ``merely sells'' a
third-party's service contract, without more. The latter, as explained
previously,\47\ has not entered into a service contract with the
consumer, and therefore Section 2308(a)(2) would not apply.\48\
---------------------------------------------------------------------------
\46\ 15 U.S.C. 2301(4).
\47\ The Businessperson's Guide to Federal Warranty Law, supra
note 41.
\48\ 15 U.S.C. 2308(a)(2).
---------------------------------------------------------------------------
Suppliers, however, are not immune from liability. If a supplier
sells a service contract that obligates it to perform under the
contract, it will be deemed to have entered into the service contract
within the meaning of the statute. In addition, suppliers who extend
service contracts utilizing misrepresentations or material omissions
may be subject to liability under the MMWA and Section 5 of the FTC
Act.\49\
---------------------------------------------------------------------------
\49\ 15 U.S.C. 2306(b) (requiring warrantors and suppliers to
clearly and conspicuously disclose service contract terms and
conditions); 15 U.S.C. 45.
---------------------------------------------------------------------------
Enforce the Act
Commenters \50\ encourage the Commission to enforce the MMWA. The
Commission enforces the Act by monitoring consumer complaints,
reviewing audit reports, advising warrantors of their obligations,
educating consumers and businesses, and taking enforcement action where
appropriate.\51\
---------------------------------------------------------------------------
\50\ LKQ Corp. at 1 and 5; Motor & Equipment Manufacturers
Association at 2-3.
\51\ See, e.g., Compl., BMW of N. Am., LLC, File No. 132 3150,
available at https://www.ftc.gov/system/files/documents/cases/150319bmwcmpt.pdf (Fed. Trade Comm'n March 19, 2015); Consumer Alert
on Auto Warranties, supra note 3. Consumers or businesses may file
complaints with the Commission online through https://www.ftccomplaintassistant.gov or by calling the Commission's toll-
free number, 1-877-FTC-HELP (1-877-382-4357).
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g. Apply Rules to Leases And Define ``Lease''
NCLC urges the Commission to amend Sec. 700.10 to clarify that the
MMWA covers consumer leases.\52\ The majority of courts have found that
a lessee meets the definition of ``consumer'' in the MMWA because
warranty rights are transferred to lessees or the lessees are permitted
to enforce the contract under state law, among other reasons.\53\ As
NCLC notes, however, some courts have held that a lessee does not meet
the definition of ``consumer.'' These courts have generally found that
the definition of ``consumer'' presupposes a transaction that qualifies
as a sale under the Act, and that the lease transaction at issue was
not a qualifying sale.\54\ NCLC therefore asks the Commission to add a
new Interpretation, as Sec. 700.13, titled, ``consumer leases,'' to
provide explicitly that the Act applies to consumer leases.\55\
---------------------------------------------------------------------------
\52\ NCLC at 3.
\53\ See, e.g., Voelker v. Porsche Cars N. Am., Inc., 353 F.3d
516 (7th Cir. 2003); Mago v. Mercedes-Benz, U.S.A., Inc., 142 P.3d
712 (Ariz. Ct. App. 2006); Am. Honda Motor Co. v. Cerasani, 955
So.2d 543 (Fla. 2007).
\54\ See, e.g., Stark v. Maserati N. Am., Inc., 2010 WL 4916981
(E.D.N.Y. Oct. 13, 2010); DiCintio v. DaimlerChrysler Corp., 768
NE.2d 1121 (N.Y. 2002).
\55\ NCLC at 5.
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The Commission does not agree with the view held by a minority
number of courts that lessees cannot be a ``consumer'' under the MMWA
because each prong of the ``consumer'' definition \56\ presupposes a
sale to the end-consumer (which in this case is a lessee). Rather, as
the majority of courts have held, lessees meet the definition of a
``consumer'' because warranty rights are either transferred to lessees
or the lessees are permitted to enforce the contract under state
law.\57\ Given that a majority of courts hold that the MMWA applies to
certain leases, consistent with past agency guidance,\58\ a new
Interpretation is not necessary.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 2301(3) (``The term `consumer' means a buyer
(other than for purposes of resale) of any consumer product, any
person to whom such product is transferred during the duration of an
implied or written warranty (or service contract) applicable to the
product, and any other person who is entitled by the terms of such
warranty (or service contract) or under applicable State law to
enforce against the warrantor (or service contractor) the
obligations of the warranty (or service contract).'').
\57\ See, e.g., supra note 53.
\58\ The agency has provided similar guidance. See Advisory
Opinion from Rachel Dawson to Raymond Asher (June 10, 1976) (``A
leased product would be covered if the lease is essentially
equivalent to a sale. For example, a product would be covered if the
total compensation to be paid by the lessee is substantially
equivalent to or in excess of the value of the product, and the
lessee will own the product, or has an option to buy it for a
nominal consideration, upon full compliance with his obligations
under the lease.'').
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h. Certain 50/50 Warranties Should Be Interpreted To Violate the Act's
Anti-Tying Prohibition
NCLC urges the Commission to reconsider its 2002 opinion letter
\59\ finding ``50/50 warranties'' permissible under the Act. Fifty/
fifty warranties are those where the dealer promises to pay 50% of the
labor costs and 50% of the parts cost, and the consumer pays the
remainder. NCLC argues that allowing the warrantor to choose the
repairs or parts is contrary to the goals of the MMWA, and leads to
monopolistic pricing practices and a decrease in competition.\60\
---------------------------------------------------------------------------
\59\ NCLC at 6-7, citing Letter from Donald S. Clark to Keith E.
Whann (Dec. 2, 2002), available at http://www.ftc.gov/system/files/documents/advisory_opinions/national-independent-automobile-dealer-association/clark_to_whann_letter.pdf.
\60\ NCLC at 6.
---------------------------------------------------------------------------
Although the Commission found that 50/50 warranties may violate the
Act in certain circumstances in its 1999 rule review, in 2002, the
Commission clarified its position on 50/50 warranties. The Commission
stated that the Act prohibits warrantors from conditioning their
warranties on the use of branded parts or service where the warranted
articles or services are ``severable from the dealer's responsibilities
under the warranty.'' \61\ Therefore, when a warranty covers only
replacement parts, and the consumer pays the labor charges, the
warrantor cannot mandate specific service or labor to install those
parts. Conversely, when a warranty covers only labor charges, and the
consumer pays for parts, the warrantor cannot mandate the use of
specific parts. With 50/50 warranties, however, ``the warranting dealer
has a direct interest in providing the warranty service for which it is
partly financially responsible. . . . Rather than conditioning the
warranty on the purchase of a separate product or service not covered
by the warranty, a 50/50 warranty shares the cost of a single product
or service.'' \62\ For that reason, the warrantor needs some control
over the repair needed and quality of repair.\63\ The Commission has
decided to retain its 2002 position on 50/50 warranties. The Commission
has reviewed the issue and believes that its 2002 interpretation
continues to be correct.
---------------------------------------------------------------------------
\61\ Letter from Donald S. Clark to Keith E. Whann (Dec. 2,
2002), supra note 59.
\62\ Id. at 2.
\63\ Id.
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[[Page 42716]]
i. The Commission's Interpretation Under Sec. 700.11(a) Conflicts With
the McCarran-Ferguson Act and Supreme Court Precedent
NCLC asserts that the Commission has incorrectly interpreted the
meaning of the McCarran-Ferguson Act in Sec. 700.11(a).\64\ The
McCarran-Ferguson Act provides that ``[n]o Act of Congress shall be
construed to invalidate, impair, or supersede any law enacted by any
State for the purpose of regulating the business of insurance, or which
imposes a fee or tax upon such business, unless such Act specifically
relates to the business of insurance: Provided, That . . . the Sherman
Act, . . . the Clayton Act, and . . . the Federal Trade Commission Act
. . . shall be applicable to the business of insurance to the extent
that such business is not regulated by State Law.'' \65\ Section 700.11
states that agreements regulated by state law as insurance are subject
to the MMWA ``only to the extent they are not regulated in a particular
state as the business of insurance.'' \66\
---------------------------------------------------------------------------
\64\ NCLC at 9.
\65\ 15 U.S.C. 1012(b).
\66\ 16 CFR 700.11(a).
---------------------------------------------------------------------------
NCLC states that the Interpretation is inconsistent with both the
McCarran-Ferguson Act and Supreme Court precedent.\67\ First, NCLC
argues that because the MMWA is not one of the three enumerated
statutes (the Sherman Act, Clayton Act or the FTC Act), the correct
standard is the standard applicable to all other federal statutes. In
other words, the MMWA can regulate the business of insurance so long as
it does not ``invalidate, impair, or supersede'' state law. Therefore,
even if a state regulates a service agreement as the business of
insurance, the MMWA may still apply.\68\ Second, NCLC asserts the
Commission's Interpretation is contrary to Supreme Court precedent,
Humana v. Forsyth, 525 U.S. 299 (1999). There, the Supreme Court held
that states' regulation of insurance fraud would not displace remedies
under federal law for the same misconduct because they do not ``impair
the insurance regulatory scheme.'' \69\ Consequently, NCLC states,
``even though state insurance law provides a remedial scheme for breach
of a service contract regulated as insurance, the additional
availability of Magnuson-Moss remedies for the same misconduct does not
`impair' the insurance regulatory scheme.'' \70\
---------------------------------------------------------------------------
\67\ NCLC at 8-9.
\68\ Id. at 8.
\69\ Id. at 9.
\70\ Id.
---------------------------------------------------------------------------
The Commission agrees that the McCarran-Ferguson Act's
``invalidate, impair, or supersede'' standard is applicable to the
MMWA. The Commission will revise the Interpretation as described in
amendatory instruction 12.
j. Amend Definition of ``Consumer Product''
SEMA asks the Commission to amend the definition of ``consumer
product'' to include specialty equipment.\71\ The Commission has
determined that no definitional change is warranted because specialty
equipment is already covered by the definition of ``consumer product.''
``Consumer product'' is defined as ``any tangible personal property
which is distributed in commerce and which is normally used for
personal, family, or household purposes.'' \72\
---------------------------------------------------------------------------
\71\ SEMA at 2. Specialty equipment includes performance,
functional, restoration and styling-enhancement products for use on
passenger cars and light-duty trucks. Id. at 1.
\72\ 16 CFR 701.1(b).
---------------------------------------------------------------------------
2. 16 CFR Part 701: Disclosure of Terms and Conditions (Rule 701)
a. Regulate Service Contract Disclosures
The request for public comment specifically asked whether the
Commission should amend the Rules to cover service-contract
disclosures.\73\ The Commission received six comments on this issue:
four commenters urge the Commission not to add specific service-
contract disclosure requirements, while two commenters take the
opposite view.\74\ The four opponents of disclosure rules for service
contracts state that service contracts are different from warranties in
that they do not form the basis of the bargain. They argue that no
federal regulation is needed because states already regulate service
contracts and adding federal regulation to the mix would create
unnecessary burdens to both the industry and to federal and state
governments.\75\
---------------------------------------------------------------------------
\73\ The Association of Home Appliance Manufacturers (``AHAM'')
asks for additional changes to Rule 701. First, AHAM asks the
Commission to amend Rule 701.3 by adding that any warrantor
complying with the Rule is entitled to a presumption in any breach
of warranty litigation that the warranty is not unconscionable,
deceptive, or misleading. AHAM at 2. It argues that consumers file
hundreds of class actions each year asking courts to invalidate or
modify the terms of a written warranty. Id. Although Rule 701.3 sets
out minimum federal disclosure requirements for consumer product
warranties, warrantors must also follow the proscriptions of Section
5 of the FTC Act, prohibiting unfair and deceptive practices, and
various applicable state laws. Because there are other laws
governing unfairness or deception in warranties, the Commission does
not believe it would be appropriate to create a new provision in the
Warranty Rules specifying that warrantors complying with Rule 701.3
are entitled to a presumption that their warranties are not
unconscionable, deceptive, or misleading. Second, AHAM asks the
Commission to amend Rule 701.3 by adding that a warrantor can
exclude any latent defects that may manifest after the written
warranty period expires. Id. at 3. AHAM asserts that many lawsuits
seek to expand or modify the express warranty's terms after sale,
and beyond the contractually-limited time period, to cover an
alleged latent defect that manifests itself post-warranty period.
However, Rule 701.3 focuses on disclosure requirements for consumer
product warranties. It requires the disclosure of several items of
material information in a clear and conspicuous manner. Rule 701.3
does not mandate specific warranty coverage. Nor does the Rule
itself cover post-warranty conduct. Therefore, no change is
warranted. Mr. Steinborn asks the Commission to modify Rule 701 so
that third-party manufacturers or re-fillers of consumables, such as
ink and toner, must include a marking prominently displayed on the
consumable that clearly directs the end user to contact the party
that remanufactured the consumable (or its designee) for all
warranty claims and information. Steinborn at 2. However, Rule 701
already requires that warranty terms include a step-by-step
explanation of the procedure which the consumer should follow in
order to obtain performance of any warranty obligation. 16 CFR
701.3(a)(5). For this reason, the Commission has chosen not to
incorporate the specific change advocated by Mr. Steinborn.
\74\ Opponents of federal service-contract disclosure
regulations are the AHAM, Florida Service Agreement Association,
Service Contract Industry Council, and Property Casualty Insurers
Association of America. Mr. Johnson and NCLC support the
Commission's promulgation of service-contract disclosure
regulations.
\75\ See Florida Service Agreement Association at 2-3; Service
Contract Industry Council at 2-3. For example, the Service Contract
Industry Council states that thirty-five states specifically
regulate service contracts on consumer goods, thirty-five states
regulate service contracts on homes, and thirty-eight states
regulate service contracts on motor vehicles. Commenters assert that
many of these state laws provide greater protection to consumers
than the MMWA by, for example, ``ensuring that service contract
obligors are financially sound and that their obligations to
consumers are secure.'' Because the MMWA preempts state warranty law
unless the state law ``affords protection to consumers greater than
the requirement of Magnuson-Moss,'' these commenters argue that
additional federal regulations may have little practical effect.
---------------------------------------------------------------------------
On the other hand, two commenters, Mr. Evan Johnson and NCLC, argue
that the Commission should amend the Rules to prescribe the manner and
form in which service-contract terms are disclosed. Mr. Johnson argues
that service contracts have been a ``huge source'' of consumer
complaints. ``Many of these complaints concern marketing but many also
arise from the unclear wording and structure of the contracts.'' \76\
NCLC provides two reasons why the Commission should specifically
regulate service contracts. First, the reasons for mandatory disclosure
requirements for warranties apply equally to service contracts;
regulating one and not the other makes little sense.\77\ Second,
service contracts
[[Page 42717]]
are widely sold and expensive, and consumers have little information
concerning costs, coverage, and claims process.\78\
---------------------------------------------------------------------------
\76\ Johnson at 4.
\77\ NCLC at 12.
\78\ Id.
---------------------------------------------------------------------------
The Commission does not believe such a rule amendment is needed
because the MMWA and Section 5 already require that warrantors,
suppliers, and service contract providers clearly and conspicuously
disclose service contract terms and conditions. Section 2306(b) of the
Act provides: ``[n]othing in this chapter shall be construed to prevent
a supplier or warrantor from entering into a service contract with the
consumer in addition to or in lieu of a written warranty if such
contract fully, clearly, and conspicuously discloses its terms and
conditions in simple and readily understood language.'' \79\ In
addition, Section 5 prohibits service contract providers from failing
to clearly and conspicuously disclose material terms and conditions or
otherwise deceiving consumers with respect to the scope and nature of
service contracts. This is in accord with the Businessperson's Guidance
to the MMWA: ``If you offer a service contract, the Act requires you to
list conspicuously all terms and conditions in simple and readily
understood language.'' \80\ The Commission has issued a number of
consumer education pieces on service contracts and extended warranties
and will take action where warranted.\81\
---------------------------------------------------------------------------
\79\ 15 U.S.C. 2306(b).
\80\ The Businessperson's Guide to Federal Warranty Law, supra
note 41.
\81\ See, e.g., FTC, Auto Service Contracts and Warranties,
http://www.consumer.ftc.gov/articles/0054-auto-service-contracts-and-warranties; see also FTC v. Voicetouch, Civ. No. 09CV2929 (N.D.
Ill., filed May 13, 2009) (action involving deceptive telemarketing
of extended auto warranties); FTC v. Transcontinental Warranty,
Inc., Civ. No. 09CV2927 (N.D. Ill., filed May 13, 2009) (same). The
Commission will continue to examine service contract disclosures.
---------------------------------------------------------------------------
3. 16 CFR Part 702: Pre-Sale Availability Rule (Rule 702)
Generally, under Rule 702, sellers who offer written warranties on
consumer products must include certain information in their warranties
and make them available for review at the point of purchase. The
Commission's request for public comment asked whether the Commission
should amend Rule 702 to specifically address making warranty documents
accessible online.
The Commission received seven comments on this specific
question.\82\ One commenter noted at the outset that Rule 702
``continues to be very important to consumers. Consumers are very aware
of warranties and use warranty differences as a basis for choosing a
product. The current rule is a reasonable and cost-effective approach
to providing the information.'' \83\
---------------------------------------------------------------------------
\82\ AHAM at 3; Center for Auto Safety at 2; Eisenberg at 1;
Johnson at 2-3; National Automobile Dealers Association at 2;
National Independent Automobile Dealers Association at 2; Steinborn
at 2-3. Ms. Eisenberg asks the Commission to amend the Rule to
permit private actions for violations of Rule 702. However, the MMWA
already provides a private cause of action to any consumer ``who is
damaged by the failure of a supplier, warrantor, or service
contractor to comply with any obligation'' under the MMWA. 15 U.S.C.
2310(d)(1).
\83\ Johnson at 2.
---------------------------------------------------------------------------
Three commenters ask the Commission to specifically reference
Internet sales in Rule 702 and provide additional guidance on how
retailers can comply with the Rule by referring consumers to
warrantors' Web sites.\84\ Although Rule 702 does not explicitly
mention online commerce, it applies to the sale of warranted consumer
products online. Staff recently updated the .Com Disclosures to provide
additional guidance on disclosure obligations in the online context. As
stated in the updated .Com Disclosures, warranties communicated through
visual text online are no different than paper versions and the same
rules apply.\85\ Online sellers of consumer products can easily comply
with the pre-sale availability rule in a number of ways. Online sellers
can, for example, use ``a clearly-labeled hyperlink, in close
conjunction to the description of the warranted product, such as `get
warranty information here' to lead to the full text of the warranty.''
\86\
---------------------------------------------------------------------------
\84\ AHAM at 3; National Independent Automobile Dealers
Association at 2; Steinborn at 2-3. The Center for Auto Safety
recommends that Rule 702.3 point of sale requirements be maintained
and enforced, requiring hard copy warranty materials to be available
at physical retail locations, not on CD or DVD. Staff's guidance
allows warranties to be available on CDs and DVDs, but does not
allow sellers to meet their pre-sale obligations by referring
consumers to CDs or DVDs that are not readily accessible at the
point of sale. See Letter from Allyson Himelfarb to Thomas M. Hughes
(Feb. 17, 2009), available at http://www.ftc.gov/bcp/warranties/opinion0901.pdf.
\85\ See .com Disclosures, supra note 4, at 3, n7.
\86\ Id.
---------------------------------------------------------------------------
As with other online disclosures, warranty information should be
displayed clearly and conspicuously. Therefore, for example, warranty
terms buried within voluminous ``terms and conditions'' do not satisfy
the Rule's requirement that warranty terms be in close proximity to the
warranted product. Further, general references to warranty coverage,
such as ``one year warranty applies,'' are also not sufficient.\87\
---------------------------------------------------------------------------
\87\ FTC Staff has found several instances in which online
sellers have not fully complied with the pre-sale availability rule
and has contacted these sellers to inform them of their obligations.
http://www.ftc.gov/opa/2013/12/warningletters.shtm
---------------------------------------------------------------------------
The Commission however, does not agree with the view endorsed by
commenters \88\ that offline sellers can comply with the pre-sale
availability rule by advising buyers of the availability of warranties
on the warrantor's Web site. The intent of the Rule is to make warranty
information available at the point of sale. For brick and mortar
transactions, the point of sale is in the store; for online
transactions, the point of sale is where consumers purchase the product
online.
---------------------------------------------------------------------------
\88\ AHAM at 4-5; see also Steinborn at 2 (``Where manufacturers
and resellers have Internet presences, click-through access to and/
or a conspicuous reference to the manufacturers' Web site containing
the applicable warranty should be recognized as sufficient means for
sellers to meet the requirements of 702.'').
---------------------------------------------------------------------------
The Commission agrees with the commenter who notes: ``Internet
availability, however, is not a substitute for availability as
specified in Rule 702 because many consumers make little or no use of
the internet, while those who do still need the information at the
point of sale as a fallback for when they haven't obtained the
information online or when they want to verify that their online
information is accurate.'' \89\
---------------------------------------------------------------------------
\89\ Johnson at 2.
---------------------------------------------------------------------------
In sum, because Rule 702 already covers the sale of consumer
products online, and because staff has updated its .Com Guidance
concerning compliance with pre-sale obligations online, the Commission
has chosen not to engage in additional rulemaking as to Rule 702 at
this time.
4. Rule 703--Informal Dispute Settlement Procedures
The Commission's request for public comment specifically asked
whether it should change Rule 703, and if so, how. Six commenters
submitted responses to this question.\90\ At the outset, commenters
highlighted the importance of the Rule in serving as a standard for
IDSMs in general, and more specifically, in providing a benchmark for
state lemon law IDSMs and certification programs for IDSMs. Many
states' criteria focus on the IDSM's compliance with Rule 703's
provisions. Therefore, commenters stressed that any repeal or change to
Rule 703 will also affect state lemon law and certification
programs.\91\ Notwithstanding this fact, some commenters ask the
Commission to change certain elements of the Rule,
[[Page 42718]]
including the Mechanism's procedure, record-keeping, and audit
requirements, and also reassess the Commission's position on binding
arbitration clauses in warranty contracts. These comments are discussed
below. Overall, the Commission leaves Rule 703 unchanged.
---------------------------------------------------------------------------
\90\ AHAM at 6; Center for Auto Safety at 1; Johnson at 3;
International Association of Lemon Law Administrators at 1; NCLC at
14-15; Nowicki at 1-2.
\91\ See International Association of Lemon Law Administrators
at 1.
---------------------------------------------------------------------------
a. Modify the IDSM Procedures
AHAM claims that the procedures prescribed in Rule 703 are
difficult to follow and implement.\92\ It urges the Commission to
simplify the procedures so they would be ``more easily and widely
implemented by warrantors.'' \93\ It further asserts that ``a change
would benefit consumers, businesses, and courts by streamlining the
dispute resolution procedure and, thereby, reducing the burden on state
and federal courts of adjudicating some warranty disputes, as many more
could be handled through informal, but structured proceedings.'' \94\
AHAM does not proffer any specific changes that should be made, or
provide examples of why the procedures described in Rule 703 are
difficult to follow. As the Commission stated in 1975 when adopting the
Rule, ``[t]he intent is to avoid creating artificial or unnecessary
procedural burdens so long as the basic goals of speed, fairness, and
independent participation are met.'' \95\ Further, staff's review of
IDSM audits have not indicated any significant concern with IDSM
procedures. The Commission therefore retains the Rule 703 procedures.
---------------------------------------------------------------------------
\92\ AHAM at 6.
\93\ Id.
\94\ Id.
\95\ 40 FR 60168, 60193 (Dec. 31, 1975).
---------------------------------------------------------------------------
b. Change Rules on Mechanism and Auditor Impartiality
Two commenters \96\ state that Rule 703.4 should be amended because
neither the Mechanism nor the auditor, who is selected by the
Mechanism, is impartial. Mr. Nowicki asks the Commission to require the
Mechanism to be completely independent of any warrantor or trade
association. Further, both the Center for Auto Safety and Mr. Nowicki
assert that a Mechanism should not select an auditor because doing so
creates a conflict of interest. The Center for Auto Safety recommends
that the Commission select an auditor for a fee, and determine whether
the Mechanisms are fair and expeditious.
---------------------------------------------------------------------------
\96\ Center for Auto Safety at 1; Nowicki at 1.
---------------------------------------------------------------------------
No changes are warranted because Rule 703 already imposes specific
requirements concerning the impartiality of both the Mechanism and the
auditor that the Mechanism selects. For example, Rule 703.3(b) requires
the warrantors and sponsors of IDSMs to take all necessary steps to
ensure that the Mechanism, and its members and staff, are sufficiently
insulated from the warrantor and the sponsor, so that the members' and
staff's decisions and performance are not influenced by either the
warrantor or the sponsor.\97\ The Rule imposes minimum criteria in this
regard: (1) Committing funds in advance; (2) basing personnel decisions
solely on merit; and (3) not assigning conflicting warrantor or sponsor
duties to the Mechanism.\98\ Additional safeguards for impartiality are
set forth in Rule 703.4 governing qualification of members.
---------------------------------------------------------------------------
\97\ 16 CFR 703.3(b).
\98\ Id.
---------------------------------------------------------------------------
As to auditors' impartiality, although the Mechanism may select its
own auditor, Rule 703.7(d) provides that ``[n]o auditor may be involved
with the Mechanism as a warrantor, sponsor or member, or employee or
agent thereof, other than for purposes of the audit.'' \99\ Further,
IDSM audits have found ``no situation of conflict or circumstance which
might give rise to an impression that [a conflict of interest]
exists.'' \100\ Therefore, the Rule contains sufficient safeguards
against partiality.
---------------------------------------------------------------------------
\99\ 16 CFR 703.7(d).
\100\ See, e.g., Morrison and Company, 2013 Audit of BBB Auto
Line, available at http://www.ftc.gov/sites/default/files/documents/reports_annual/2013-audit-better-business-bureau-auto-line-including-state-florida-and-state-ohio/2013bbbautoline.pdf, at 6.
The audit further found that ``consumers are pleased with the
impartiality and the quality of dispute resolution services . . .
.'' Id.
---------------------------------------------------------------------------
c. Modify the Information To Be Submitted to the Mechanism
Rule 703.5(d) requires the Mechanism to render a decision ``at
least within 40 days of notification of the dispute.'' \101\ The Center
for Auto Safety asks the Commission to amend Section 703.5 to provide
that the ``40 day deadline begins upon the consumer filing a
substantially complete application regardless of whether the VIN is
provided or not.'' \102\ The Center for Auto Safety claims that the
Better Business Bureau is evading the 40-day deadline, because the BBB
does not request Vehicle Identification Number (``VIN'') information on
its consumer intake form but the BBB will only begin to consider the
dispute after it receives the VIN number.
---------------------------------------------------------------------------
\101\ 16 CFR 703.5(d).
\102\ Center for Auto Safety at 1.
---------------------------------------------------------------------------
Section 703.5 requires the Mechanism to ``investigate, gather and
organize all information necessary for a fair and expeditious decision
in each dispute.'' \103\ This provision ``implicitly permits Mechanisms
to require consumers to provide the Mechanism with information
`reasonably necessary' to decide the dispute.'' \104\ When adopting the
final Rule in 1975, the Commission noted the Rule's ``intent is to
avoid creating artificial or unnecessary procedural burdens so long as
the basic goals of speed, fairness and independent participation are
met.'' \105\ Therefore, because the Mechanism must have some
flexibility in deciding the information necessary for it to make a
determination, the Commission will retain Rule 703.5 unchanged. The
Commission encourages, however, open dialogue between industry groups
and the BBB to address any remaining concerns.\106\
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\103\ 16 CFR 703.5(c).
\104\ See Staff Advisory Opinion to Mr. Dean Determan, at 6, n6
(Aug. 28, 1985).
\105\ 40 FR 60168, 60193 (Dec. 31, 1975).
\106\ According to the BBB Autoline program, a claim is
initiated only after a consumer provides the VIN and signs the
application. A claim cannot be initiated online without this
information.
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d. Mechanism's Decisions as Non-Binding
The Commission received three comments concerning Rule 703.5(j)'s
provision prohibiting binding arbitration provisions in warranty
contracts.\107\ AHAM urges the Commission to delete this provision
because ``it creates disincentives for manufacturers or sellers to
create a Mechanism in the first instance and leads to wasted and
duplicative efforts in cases between the consumers and manufacturers or
sellers.'' \108\ NCLC and Mr. Johnson ask the Commission to retain Rule
703.5(j).\109\
---------------------------------------------------------------------------
\107\ See NCLC at 13-14; Johnson at 3; AHAM at 6.
\108\ AHAM at 6-7.
\109\ NCLC at 13-18; Johnson at 3.
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When the Commission first promulgated Rule 703.5(j) in 1975, it did
so based on the MMWA's language, legislative history, and purpose: to
ensure that consumer protections were in place in warranty
disputes.\110\ The Commission explained that ``reference within the
written warranty to any binding, non-judicial remedy is prohibited by
the Rule and the Act.'' \111\ The Commission's underlying premise was
that its authority over Mechanisms encompassed all nonjudicial dispute
resolution procedures referenced within a written warranty, including
arbitration.
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\110\ 40 FR 60168, 60210 (Dec. 31, 1975).
\111\ 40 FR 60168, 60211 (Dec. 31, 1975).
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During the 1996-97 rule review, some commenters asked the
Commission to deviate from its position that Rule 703
[[Page 42719]]
bans mandatory binding arbitration in warranties. The Commission,
however, relying on its previous analysis and the MMWA's statutory
language, reaffirmed its view that the MMWA and Rule 703 prohibit
mandatory binding arbitration.\112\ As the Commission noted, Section
2310(a)(3) of the MMWA states that, if a warrantor incorporates an IDSM
provision in its warranty, ``the consumer may not commence a civil
action (other than a class action) . . . unless he initially resorts to
such procedure.'' \113\ The Commission concluded ``Rule 703 will
continue to prohibit warrantors from including binding arbitration
clauses in their contracts with consumers that would require consumers
to submit warranty disputes to binding arbitration.'' \114\
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\112\ 64 FR 19700, 19708 (Apr. 22, 1999).
\113\ Id. (quoting 15 U.S.C. 2310(a)(3)(C)(i)).
\114\ 64 FR 19700, 19708 (Apr. 22, 1999).
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Since the issuance of the 1999 FRN, courts have reached different
conclusions as to whether the MMWA gives the Commission authority to
ban mandatory binding arbitration in warranties.\115\ In particular,
two appellate courts have questioned whether Congress intended binding
arbitration to be considered a type of IDSM, which would potentially
place binding arbitration outside the scope of the MMWA.\116\
Nonetheless, the Commission reaffirms its long-held view that the MMWA
disfavors, and authorizes the Commission to prohibit, mandatory binding
arbitration in warranties.\117\
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\115\ See, e.g., Kolev v. Euromotors West/The Auto Gallery, 658
F.3d 1024 (9th Cir. 2011), withdrawn, 676 F.3d 867 (9th Cir. 2012)
(withdrawn pending the issuance of a decision on a separate issue by
the California Supreme Court in Sanchez v. Valencia Holding Co.,
S199119); Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th
Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir.
2002); see also Seney v. Rent-A-Center, Inc., 738 F.3d 631 (4th Cir.
2013).
\116\ Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th
Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir.
2002).
\117\ See 40 FR 60168, 60210 (Dec. 31, 1975) and 64 FR 19700,
19708 (Apr. 22, 1999).
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First, as the Commission observed during the 1999 rule review, the
text of section 2310(a)(3)(C)(i) contemplates that consumers will
``initially resort'' to IDSMs before commencing a civil action. That
language clearly presupposes that ``a mechanism's decision cannot be
binding, because if it were, it would bar later court action.'' \118\
Similarly, section 2310(a)(3)(C) specifies that ``decisions'' in IDSMs
shall be admissible in any subsequent ``civil action.'' \119\ As that
language confirms, Congress intended that IDSMs resulting in a
``decision''--i.e., arbitration decisions rather than conciliation or
mediation mechanisms--would precede and influence, but not foreclose, a
subsequent judicial decision.
---------------------------------------------------------------------------
\118\ 64 FR 19700, 19708 (Apr. 22, 1999).
\119\ 15 U.S.C. 2310(a)(3).
---------------------------------------------------------------------------
As the Commission has previously noted, the legislative history
provides additional evidence that Congress intended all IDSMs,
including arbitration proceedings, to be nonbinding.\120\ The House
committee report stated 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. . . .'' \121\ That language
confirms what Congress strongly implies in the statutory text:
arbitration should precede but not preclude a subsequent court action.
---------------------------------------------------------------------------
\120\ 64 FR 19700, 19708 (Apr. 22, 1999).
\121\ Report to Accompany H.R. 7917, H.R. Rep. No. 93-1107, at
41 (1974) (report of the House Committee on Interstate and Foreign
Commerce); see also S. Rep. No. 93-151, at 3 (1973) (report of the
Senate Committee on Commerce) (``[I]f the consumer is not satisfied
with the results obtained in any informal dispute settlement
proceeding, the consumer can pursue his legal remedies in a court of
competent jurisdiction. . . .'').
---------------------------------------------------------------------------
The statutory scheme forecloses any argument that warranty-related
arbitration proceedings fall outside the statutory category of
``informal dispute resolution mechanisms'' and thus outside the FTC's
rulemaking authority. As many legislators, policymakers, and courts
understood at the time of the MMWA's enactment, any arbitration
proceeding is, by comparison to judicial proceedings, an ``informal''
``mechanism'' for ``dispute settlement,'' and it thus falls squarely
within the plain meaning of the term ``informal dispute settlement
mechanism.'' \122\ Similarly, the MMWA's conference report indicates
that ``arbiters''--i.e., the decisionmakers in any arbitration
proceeding--are responsible for making determinations in IDSMs, and
thus further confirms that arbitration is a form of IDSM.\123\
---------------------------------------------------------------------------
\122\ See, e.g., 119 Cong. Rec. 33,498 (1973) (statement of Sen.
Magnuson); Consumer Protection: Hearings Before the Consumer
Subcomm. of the S. Comm. on Commerce, S. Doc. No. 91-48, at 69
(1969) (statement of FTC Commissioner Elman); Alexander v. Gardner-
Denver Co., 415 U.S. 36, 58 (1974). The Supreme Court has repeatedly
confirmed that arbitration is a method of informal dispute
resolution. See, e.g., AT&T Mobility LLC v. Concepcion, 131 S. Ct.
1740, 1749 (2011) (``[T]he informality of arbitral proceedings is
itself desirable, reducing the cost and increasing the speed of
dispute resolution.''); Mitsubishi Motors v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 628 (1985) (``By agreeing to arbitrate
. . ., [a party] trades the procedures and opportunity for review of
the courtroom for the simplicity, informality, and expedition of
arbitration.'').
\123\ Section 2304(b)(1) prohibits warrantors from imposing any
additional duty on consumers unless the duty has been found
reasonable in ``an administrative or judicial enforcement
proceeding'' or ``an informal dispute settlement proceeding.'' 15
U.S.C. 2304(b)(1). The conference report indicates that the
reasonableness of the additional duty is to be determined by ``the
Commission, an arbiter, or a court.'' S. Rep. No. 93-1408, at 25,
H.R. Rep. No. 93-1606, at 25 (1974) (Conf. Rep.) (emphasis added).
---------------------------------------------------------------------------
Just as important, any argument that an ``arbitration'' can somehow
elude classification as an IDSM would subvert the purposes of the
MMWA's IDSM provisions. To effectuate its declared policy of
encouraging IDSMs that ``fairly and expeditiously'' settle consumer
disputes, Congress: (1) Created incentives for warrantors to develop
IDSMs and (2) directed the Commission to issue and enforce baseline
rules for IDSMs.\124\ Congress would not have created this elaborate
structure for warrantor incentives and agency supervision of warrantors
who want to mandate use of certain contractual procedures in their
warranties, while simultaneously permitting warrantors to evade that
structure simply by using another contractual procedure and calling it
something else (e.g., ``binding arbitration'') and thereby immunizing
it from all agency oversight.\125\ Other courts have upheld binding
arbitration in this context on the ground that the rationale of Rule
703 demonstrates an impermissible hostility toward arbitration in
general and binding arbitration in particular.\126\ The Commission does
not believe this is correct. Like the statutory text, the Commission's
rules encourage arbitration proceedings when they comply with IDSM
procedural safeguards and are not both mandatory and binding. Moreover,
the Commission's rules permit ``post-dispute'' binding arbitration,
where the parties agree--after a warranty dispute has arisen--to
resolve their disagreement through arbitration.\127\ The Commission has
also recognized that post-Mechanism binding arbitration is
allowed.\128\ The Commission's prohibition is limited only to instances
where binding arbitration is incorporated into the terms of a written
warranty governed by the MMWA.\129\
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\124\ 15 U.S.C. 2310(a)(1)-(4).
\125\ 9 U.S.C. 1-16.
\126\ See, e.g., Davis v. S. Energy Homes, Inc., 305 F.3d 1268
(11th Cir. 2002).
\127\ See 40 FR 60168, 60211 (Dec. 31, 1975).
\128\ Id.
\129\ Id.
---------------------------------------------------------------------------
AHAM also argues that eliminating the prohibition on binding
arbitration would remove disincentives for warrantors to create a
Mechanism and reduce judicial costs spent dealing with duplicative
warranty cases. However,
[[Page 42720]]
Congress already considered the issues of warrantor incentives and
availability of judicial remedies. To encourage warrantors to create
Mechanisms, Section 2310(a)(3) allows warrantors to specify that use of
a Mechanism is a prerequisite to filing a MMWA suit.\130\ The
Commission believes that the current Rule appropriately implements the
incentive structure that Congress established in the MMWA.
---------------------------------------------------------------------------
\130\ 15 U.S.C. 2310(a)(3).
---------------------------------------------------------------------------
e. Change the Statistical Requirements
Rule 703.6 requires the Mechanism to prepare indices and
statistical compilations on a variety of issues, including warrantor
performance, brands at issue, all disputes delayed beyond 40 days, and
the number and percentage of disputes that were resolved, decided, or
pending.\131\ The Commission requires the compilation of indices and
statistics in part so any person can review a Mechanism's files. ``On
the basis of the statistically reported performance, an interested
person could determine to file a complaint with the Federal Trade
Commission . . . and thereby cause the Commission to review the bona
fide operation of the dispute resolution mechanism.'' \132\
---------------------------------------------------------------------------
\131\ See generally 16 CFR 703.6(b)-(e).
\132\ 40 FR 60168, 60213 (Dec. 31, 1975).
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Two commenters, the Center for Auto Safety and Mr. Nowicki, ask the
Commission to repeal the Mechanism's record-keeping requirements
contained in Rule 703.6.\133\ The Center for Auto Safety claims that
most of the categories for statistical analysis ``are ambiguous,
misleading or deceptive. Unfavorable consumer outcomes can be reported
as favorable; untimely resolutions can be reported as timely.'' \134\
---------------------------------------------------------------------------
\133\ Center for Auto Safety at 1; Nowicki at 2.
\134\ Center for Auto Safety at 1. Nowicki claims that empirical
evidence suggests that the ``compliance self-proclamations'' may be
false and warranties may be deceptive.
---------------------------------------------------------------------------
Similar comments were received during the previous rule review.
Then, commenters urged the Commission to abolish Rule 703.6 because the
categories of statistical compilation were ``either moot, nebulous, or
even worse, misleading or deceptive.'' \135\ The Commission then stated
that it appreciated that Rule 703.6(e)'s statistical compilations
cannot provide an in-depth picture of the workings of the Mechanism.
``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.'' \136\ In addition, the
Commission was mindful of the costs associated with substantial record-
keeping requirements, so as not to discourage 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.''
\137\ The Commission has reviewed the issue and believes that its
previous position continues to be correct.
---------------------------------------------------------------------------
\135\ See 64 FR 19700, 19710 (Apr. 22, 1999) (discussing Mr.
Nowicki's comment).
\136\ Id.
\137\ Id.
---------------------------------------------------------------------------
f. Audits and Recordkeeping Availability
Rule 703.7 contains the audit requirements for the Mechanism. The
Rule requires that an audit be performed annually evaluating: (1)
Warrantors' efforts to make consumers aware of the Mechanism and (2) a
random sample of disputes to determine the adequacy of the Mechanism's
complaint intake-process and investigation and accuracy of the
Mechanism's statistical compilations.\138\ Each audit should be
submitted to the Commission and made available to the public at a
reasonable cost. For the last several years, the Commission has
published the audits on its Web site, making them available to the
public free of charge.
---------------------------------------------------------------------------
\138\ 16 CFR 703.7.
---------------------------------------------------------------------------
One commenter asks the Commission to change Rule 703.8 to ``mak[e]
all IDSM documents available online, and requir[e] the Commission to
review samples of disputes to determine whether the mechanism fairly
and expeditiously resolves disputes.'' \139\ Another commenter
recommends that the Commission repeal the audit requirements for the
same reasons as the statistical compilation requirements.\140\ Similar
to the Commission's reasoning in upholding the statistical compilation
requirements, the Commission has decided to retain the audit
requirements without change for two reasons. First, like the
statistical compilation requirements, the audit function attempts to
provide a general basis for interested parties to determine whether the
IDSM program is working fairly and expeditiously. Second, the IDSM must
make available the statistical summaries to interested parties upon
request, and hold open meetings to hear and decide disputes.\141\ Given
that Rule 703 already contemplates public access to Mechanism
information, and that the Commission was mindful that substantial
recordkeeping costs may discourage the establishment of IDSMs, the
Commission will not impose at this time a mandatory electronic access
requirement. Further, the Commission staff reviews the audits annually
and confirms they are Rule 703 compliant. For these reasons, the
Commission retains Rule 703.8 unchanged.
---------------------------------------------------------------------------
\139\ Nowicki at 2.
\140\ Center for Auto Safety at 1.
\141\ 16 CFR 703.8.
---------------------------------------------------------------------------
5. 16 CFR Part 239: Warranty Guides
Several commenters ask the Commission to revise its Warranty
Guides. First, three commenters \142\ ask the Commission to modify
Sec. 239.2 to allow for the advertising of warranties online. The
Commission's Guides are not specific to any medium, and already are
applicable to all media. Second, commenters recommend that the Guides
provide explicit, detailed guidance explaining how retailers and
warrantors can comply with the MMWA. As stated previously, the .Com
Disclosures and the Businessperson's Guide to Federal Warranty Law both
provide additional guidance concerning online disclosure obligations.
Therefore, part 239 will remain unchanged.\143\
---------------------------------------------------------------------------
\142\ AHAM at 3; National Automobile Dealers Association at 2;
Steinborn at 3.
\143\ AHAM and Steinborn ask the Commission to amend part 239 to
recognize that ``referral of consumers to manufacturer Internet
sites which make available warranty information satisfies the
requirement to disclose the actual product warranty information
prior to purchase by consumer.'' AHAM at 3; Steinborn at 3-4. Such
reference is already contemplated for online retailers. Such
reference, however, would be contrary to the requirements imposed
for offline retailers, as discussed above. Second, AHAM recommends
that the Guides be amended to require advertisers ``to clearly and
conspicuously disclose what component/system is warranted and for
what duration and if the balance of the product is not covered or
covered for a different duration disclose that as well to prevent
the consumer from believing that the terms of the warranty apply to
the entire product.'' AHAM at 3-4. These requirements, however, are
already encompassed in Rule 701.3(a)(2) and therefore not needed in
the Guides.
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List of Subjects
16 CFR Part 700
Trade practices, Warranties.
16 CFR Part 701
Trade practices, Warranties.
16 CFR Part 703
Trade practices, Warranties.
For the reasons set forth above, the Federal Trade Commission
amends 16 CFR parts 700, 701, and 703 as follows:
[[Page 42721]]
PART 700--INTERPRETATIONS OF MAGNUSON-MOSS WARRANTY ACT
0
1. The authority citation for part 700 continues to read as follows:
Authority: Magnuson-Moss Warranty Act, Pub. L. 93-637, 15
U.S.C. 2301.
0
2. Amend Sec. 700.1 by revising the second and fifth sentences of
paragraph (g) and the first sentence of paragraph (i) to read as
follows:
Sec. 700.1 Products covered.
* * * * *
(g) * * * Section 103, 15 U.S.C. 2303, applies to consumer products
actually costing the consumer more than $10, excluding tax.* * * This
interpretation applies in the same manner to the minimum dollar limits
in section 102, 15 U.S.C. 2302, and rules promulgated under that
section.
* * * * *
(i) The Act covers written warranties on consumer products
``distributed in commerce'' as that term is defined in section 101(13),
15 U.S.C. 2301(13). * * *
0
3. Amend Sec. 700.2 by revising the first sentence to read as follows:
Sec. 700.2 Date of manufacture.
Section 112 of the Act, 15 U.S.C. 2312, provides that the Act shall
apply only to those consumer products manufactured after July 4, 1975.*
* *
0
4. Amend Sec. 700.3 by revising the fourth and sixth sentences and
footnote 1 of paragraph (a), the first sentence of paragraph (b), and
the sixth sentence of paragraph (c) to read as follows:
Sec. 700.3 Written warranty.
(a) * * * Section 101(6), 15 U.S.C. 2301(6), provides that a
written affirmation of fact or a written promise of a specified level
of performance must relate to a specified period of time in order to be
considered a ``written warranty.'' \1\ * * * In addition, section
111(d), 15 U.S.C. 2311(d), exempts from the Act (except section 102(c),
15 U.S.C. 2302(c)) any written warranty the making or content of which
is required by federal law.* * *
---------------------------------------------------------------------------
\1\ A ``written warranty'' is also created by a written
affirmation of fact or a written promise that the product is defect
free, or by a written undertaking of remedial action within the
meaning of section 101(6)(B), 15 U.S.C. 2301(6)(B).
---------------------------------------------------------------------------
(b) Certain terms, or conditions, of sale of a consumer product may
not be ``written warranties'' as that term is defined in section
101(6), 15 U.S.C. 2301(6), and should not be offered or described in a
manner that may deceive consumers as to their enforceability under the
Act.* * *
(c) * * * Such warranties are not subject to the Act, since a
written warranty under section 101(6) of the Act, 15 U.S.C. 2301(6),
must become ``part of the basis of the bargain between a supplier and a
buyer for purposes other than resale.'' * * *
0
5. Amend Sec. 700.4 by revising the first sentence to read as follows:
Sec. 700.4 Parties ``actually making'' a written warranty.
Section 110(f) of the Act, 15 U.S.C. 2310(f), provides that only
the supplier ``actually making'' a written warranty is liable for
purposes of FTC and private enforcement of the Act.* * *
0
6. Amend Sec. 700.5 by revising paragraph (a) and the first and second
sentences of paragraph (b) to read as follows:
Sec. 700.5 Expressions of general policy.
(a) Under section 103(b), 15 U.S.C. 2303(b), statements or
representations of general policy concerning customer satisfaction
which are not subject to any specific limitation need not be designated
as full or limited warranties, and are exempt from the requirements of
sections 102, 103, and 104 of the Act, 15 U.S.C. 2302-2304, and rules
thereunder. However, such statements remain subject to the enforcement
provisions of section 110 of the Act, 15 U.S.C. 2310, and to section 5
of the Federal Trade Commission Act, 15 U.S.C. 45.
(b) The section 103(b), 15 U.S.C. 2303(b), exemption applies only
to general policies, not to those which are limited to specific
consumer products manufactured or sold by the supplier offering such a
policy. In addition, to qualify for an exemption under section 103(b),
15 U.S.C. 2303(b), such policies may not be subject to any specific
limitations.* * *
0
7. Amend Sec. 700.6 by revising the first sentence of paragraph (a)
and the first, second, and fourth sentences of paragraph (b) to read as
follows:
Sec. 700.6 Designation of warranties.
(a) Section 103 of the Act, 15 U.S.C. 2303, provides that written
warranties on consumer products manufactured after July 4, 1975, and
actually costing the consumer more than $10, excluding tax, must be
designated either ``Full (statement of duration) Warranty'' or
``Limited Warranty''.* * *
(b) Based on section 104(b)(4), 15 U.S.C. 2304(b)(4), the duties
under subsection (a) of section 104, 15 U.S.C. 2304, extend from the
warrantor to each person who is a consumer with respect to the consumer
product. Section 101(3), 15 U.S.C. 2301(3), defines a consumer as a
buyer (other than for purposes of resale) of any consumer product, any
person to whom such product is transferred during the duration of an
implied or written warranty (or service contract) applicable to the
product.* * * However, where the duration of a full warranty is defined
solely in terms of first purchaser ownership there can be no violation
of section 104(b)(4), 15 U.S.C. 2304(b)(4), since the duration of the
warranty expires, by definition, at the time of transfer.* * *
0
8. Amend Sec. 700.7 by revising the first sentence of paragraph (a) to
read as follows:
Sec. 700.7 Use of warranty registration cards.
(a) Under section 104(b)(1) of the Act, 15 U.S.C. 2304(b)(1), a
warrantor offering a full warranty may not impose on consumers any duty
other than notification of a defect as a condition of securing remedy
of the defect or malfunction, unless such additional duty can be
demonstrated by the warrantor to be reasonable.* * *
0
9. Amend Sec. 700.8 by revising the third sentence to read as follows:
Sec. 700.8 Warrantor's decision as final.
* * * Such statements are deceptive since section 110(d) of the
Act, 15 U.S.C. 2310(d), gives state and federal courts jurisdiction
over suits for breach of warranty and service contract.
0
10. Amend Sec. 700.9 by revising the first and third sentences to read
as follows:
Sec. 700.9 Duty to install under a full warranty.
Under section 104(a)(1) of the Act, 15 U.S.C. 2304(a)(1), the
remedy under a full warranty must be provided to the consumer without
charge.* * * However, this does not preclude the warrantor from
imposing on the consumer a duty to remove, return, or reinstall where
such duty can be demonstrated by the warrantor to meet the standard of
reasonableness under section 104(b)(1), 15 U.S.C. 2304(b)(1).
0
11. Amend Sec. 700.10 by revising the section heading, paragraph (a),
the first sentence in paragraph (b), and paragraph (c) to read as
follows:
Sec. 700.10 Prohibited tying.
(a) Section 102(c), 15 U.S.C. 2302(c), prohibits tying arrangements
that condition coverage under a written warranty on the consumer's 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.
(b) Under a limited warranty that provides only for replacement of
[[Page 42722]]
defective parts and no portion of labor charges, section 102(c), 15
U.S.C. 2302(c), prohibits a condition that the consumer use only
service (labor) identified by the warrantor to install the replacement
parts.* * *
(c) No warrantor may condition the continued validity of a warranty
on the use of only authorized repair service and/or authorized
replacement parts for non-warranty service and maintenance (other than
an article of service provided without charge under the warranty or
unless the warrantor has obtained a waiver pursuant to section 102(c)
of the Act, 15 U.S.C. 2302(c)). For example, provisions such as, ``This
warranty is void if service is performed by anyone other than an
authorized `ABC' dealer and all replacement parts must be genuine `ABC'
parts,'' and the like, are prohibited where the service or parts are
not covered by the warranty. These provisions violate the Act in two
ways. First, they violate the section 102(c), 15 U.S.C. 2302(c), ban
against tying arrangements. Second, such provisions are deceptive under
section 110 of the Act, 15 U.S.C. 2310, because a warrantor cannot, as
a matter of law, avoid liability under a written warranty where a
defect is unrelated to the use by a consumer of ``unauthorized''
articles or service. In addition, warranty language that implies to a
consumer acting reasonably in the circumstances that warranty coverage
requires the consumer's purchase of an article or service identified by
brand, trade or corporate name is similarly deceptive. For example, a
provision in the warranty such as, ``use only an authorized `ABC'
dealer'' or ``use only `ABC' replacement parts,'' is prohibited where
the service or parts are not provided free of charge pursuant to the
warranty. This does not preclude a warrantor from expressly excluding
liability for defects or damage caused by ``unauthorized'' articles or
service; nor does it preclude the warrantor from denying liability
where the warrantor can demonstrate that the defect or damage was so
caused.
0
12. Amend Sec. 700.11 by:
0
a. Revising the fourth and fifth sentences and adding a sixth sentence
in paragraph (a); and
0
b. Revising the first sentence of paragraph (b) and the first and
second sentences of paragraph (c).
The revisions and addition read as follows:
Sec. 700.11 Written warranty, service contract, and insurance
distinguished for purposes of compliance under the Act.
(a) * * * The McCarran-Ferguson Act, 15 U.S.C. 1011 et seq.,
provides that most federal laws (including the Magnuson-Moss Warranty
Act) shall not be construed to invalidate, impair, or supersede any law
enacted by any State for the purpose of regulating the business of
insurance. While three specific laws are subject to a separate proviso,
the Magnuson-Moss Warranty Act is not one of them. Thus, to the extent
the Magnuson-Moss Warranty Act's service contract provisions apply to
the business of insurance, they are effective so long as they do not
invalidate, impair, or supersede a State law enacted for the purpose of
regulating the business of insurance.
(b) ``Written warranty'' and ``service contract'' are defined in
sections 101(6) and 101(8) of the Act, 15 U.S.C. 2301(6) and 15 U.S.C.
2301(8), respectively.* * *
(c) A service contract under the Act must meet the definitions of
section 101(8), 15 U.S.C. 2301(8). An agreement which would meet the
definition of written warranty in section 101(6)(A) or (B), 15 U.S.C.
2301(6)(A) or (B), but for its failure to satisfy the basis of the
bargain test is a service contract.* * *
PART 701--DISCLOSURE OF WRITTEN CONSUMER PRODUCT WARRANTY TERMS AND
CONDITIONS
0
13. The authority citation for part 701 continues to read as follows:
Authority: 15 U.S.C. 2302 and 2309.
0
14. Amend Sec. 701.1 by revising paragraph (d) to read as follows:
Sec. 701.1 Definitions.
* * * * *
(d) Implied warranty means an implied warranty arising under State
law (as modified by sections 104(a) and 108 of the Act, 15 U.S.C.
2304(a) and 2308), in connection with the sale by a supplier of a
consumer product.
* * * * *
0
15. Amend Sec. 701.3 by revising paragraph (a)(7) to read as follows:
Sec. 701.3 Written warranty terms.
(a) * * *
(7) Any limitations on the duration of implied warranties,
disclosed on the face of the warranty as provided in section 108 of the
Act, 15 U.S.C. 2308, accompanied by the following statement:
Some States do not allow limitations on how long an implied
warranty lasts, so the above limitation may not apply to you.
* * * * *
PART 703--INFORMAL DISPUTE SETTLEMENT PROCEDURES
0
16. The authority citation for part 703 continues to read as follows:
Authority: 15 U.S.C. 2309 and 2310.
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17. Amend Sec. 703.1 by revising paragraph (e) to read as follows:
Sec. 703.1 Definitions.
* * * * *
(e) Mechanism means an informal dispute settlement procedure which
is incorporated into the terms of a written warranty to which any
provision of Title I of the Act applies, as provided in section 110 of
the Act, 15 U.S.C. 2310.
* * * * *
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18. Amend Sec. 703.2 by revising the second sentence of paragraph (a)
to read as follows:
Sec. 703.2 Duties of warrantor.
(a) * * * This paragraph (a) shall not prohibit a warrantor from
incorporating into the terms of a written warranty the step-by-step
procedure which the consumer should take in order to obtain performance
of any obligation under the warranty as described in section 102(a)(7)
of the Act, 15 U.S.C. 2302(a)(7), and required by part 701 of this
subchapter.
* * * * *
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19. Amend Sec. 703.5 by revising paragraph (g)(2), the first sentence
in paragraph (i), and the third sentence in paragraph (j) to read as
follows:
Sec. 703.5 Operation of the Mechanism.
* * * * *
(g) * * *
(2) The Mechanism's decision is admissible in evidence as provided
in section 110(a)(3) of the Act, 15 U.S.C. 2310(a)(3); and
* * * * *
(i) A requirement that a consumer resort to the Mechanism prior to
commencement of an action under section 110(d) of the Act, 15 U.S.C.
2310(d), shall be satisfied 40 days after notification to the Mechanism
of the dispute or when the Mechanism completes all of its duties under
paragraph (d) of this section, whichever occurs sooner. * * *
(j) * * * In any civil action arising out of a warranty obligation
and relating to a matter considered by the Mechanism, any decision of
the Mechanism shall be admissible in evidence, as provided in section
110(a)(3) of the Act, 15 U.S.C. 2310(a)(3).
[[Page 42723]]
By direction of the Commission, Commissioner Ohlhausen
dissenting.
Donald S. Clark,
Secretary.
Note: The following dissent will not appear in the Code of
Federal Regulations.
Dissenting Statement of Commissioner Maureen K. Ohlhausen
I voted against the Commission's Final Revised Interpretations of
the Magnuson-Moss Warranty Act (MMWA) Rule because it retains Rule
703.5(j)'s prohibition on pre-dispute mandatory binding arbitration.\1\
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\1\ I do not object to the other final actions taken in this
review.
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Since the last Rule review in 1997, two federal appellate courts
have held that the MMWA does not prohibit binding arbitration.\2\
Noting the federal policy favoring arbitration expressed in the Federal
Arbitration Act (FAA),\3\ these courts concluded that the MMWA's
statutory language and legislative history did not overcome the
presumption in favor of arbitration and that the purposes of the MMWA
and the FAA were not in inherent conflict. The courts also declined to
give the Commission's contrary interpretation Chevron deference.\4\
Although some lower courts have reached a different conclusion, there
is no circuit court precedent upholding the Commission's interpretation
of the MMWA in Rule 703.5(j). Additionally, in several recent cases,
the Supreme Court has indicated a strong preference for arbitration.\5\
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\2\ See Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir.
2002); Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th
Cir. 2002).
\3\ 9 U.S.C. 1. See Shearson/Am. Express Inc. v. McMahon, 482
U.S. 220 (1987) (noting that the presumption of the FAA is that
arbitration is preferable and Congress must clearly override that
presumption if it is to be disregarded).
\4\ Chevron U.S.A., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984) (holding that courts defer to an agency's
interpretation of a statute if ``(1) Congress has not spoken
directly to the issue; and (2) the agency's interpretation `is based
on a permissible construction of the statute' '').
\5\ See, e.g,. Am. Express Co. v. Italian Colors Rest., 133 S.
Ct. 2304 (2013), AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740
(2011).
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The courts have sent a clear signal that the Commission's position
that MMWA prohibits binding arbitration is no longer supportable.\6\
When faced with such a signal, the Commission should not reaffirm the
rule in question. I therefore respectfully dissent.
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\6\ See Davis, 305 F.3d at 1280 (``[T]he FTC's interpretation of
the MMWA is unreasonable, and we decline to defer to the FTC
regulations of the MMWA regarding binding arbitration in written
warranties.'').
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[FR Doc. 2015-14065 Filed 7-17-15; 8:45 am]
BILLING CODE 6750-01-P