Magnuson-Moss Warranty Act and Arbitration Agreements

Consumer products often include some form of written warranty. Depending on the type of product, that written warranty may be governed by the requirements of the Magnuson-Moss Warranty Act (“Magnuson-Moss Act” or “Act”).  The Magnuson-Moss Act was enacted to protect consumers and to prevent deception in certain types of written warranties by the entity providing the written warranty (warrantor).  15 U.S.C. § 2301, et seq.  The term “consumer products” under the Magnuson-Moss Act means any tangible personal property distributed in commerce and normally used for personal, family, or household purposes. Consumer products covered by the Magnuson-Moss Act are very broad, and include automobiles (both new and used) and appliances.

So, what happens if there is a dispute under the written warranty covered by the Magnuson-Moss Warranty Act?  Depending on the contractual provisions of that written warranty and the jurisdiction (state) you are in, the answer may be very different.

Dispute Resolution Provisions In A Written Warranty

Written warranties for consumer products often contain dispute resolution provisions, including binding arbitration to resolve claims.  Courts in the United States are divided on whether these binding arbitration provisions violate the Magnuson-Moss Act.  Therefore, businesses and consumers must understand the enforceability of such provisions when entering into such warranty agreements.

The Magnuson-Moss Warranty Act provides for a private cause of action for consumers who have been damaged by a warrantor.  To encourage settlement, § 2310(a) of the Magnuson-Moss Act allows a warrantor to include “informal dispute settlement procedures” within these warranties.  However, the Magnuson-Moss Act is silent on whether “informal dispute settlement procedures” includes binding arbitration.  Courts have looked to Congress’ intent and the Federal Trade Commission’s (“FTC”) interpretations to determine if the Magnuson-Moss Act prohibits binding arbitration provisions in these written warranties.  The cases of Kolev v. Euromotors West/The Auto Gallery and Davis v. Southern Energy Homes, Inc. illustrate the divide on this issue.

In Kolev, a pre-owned automobile developed mechanical problems during the warranty period, and the dealership refused to honor the consumer’s warranty claim.  The written warranty included a pre-suit binding arbitration provision.  The consumer brought a claim under the Magnuson-Moss Act, and the warrantor moved to compel arbitration (pursuant to the terms of the written warranty). The consumer argued the arbitration provision violated the Magnuson-Moss Warranty Act because “informal dispute settlement procedures” under the Act did not include binding arbitration.

Considerations Of Whether Binding Arbitration Agreements Violate The Magnuson-Moss Act

To determine whether the binding arbitration provision in the warranty violated the Act, the U.S. Court of Appeals for the Ninth Circuit used a two-prong test, looking first to see if Congress “directly spoke to the precise question at issue” and, second, whether the FTC’s interpretation of the Act is reasonable.  The Ninth Circuit noted the Act is silent on whether informal dispute settlement procedures include binding arbitration, but recognized that Congress expressly delegated rulemaking authority under the Act to the FTC.  15 U.S.C. § 2310(a)(2).  The FTC’s interpretation of these binding arbitration provisions was that “informal dispute settlement procedures” did not include binding arbitration.  The Koley court then found the FTC’s interpretation reasonable because it advanced the statute’s purpose of protecting consumers from being “forced into involuntary agreements that they cannot negotiate.”

Conversely, the U.S. Court of Appeals for the Eleventh Circuit in Davis used the same test and found that binding arbitration provisions in written warranties do not violate the Magnuson-Moss Act.  The Davis court agreed the Act’s text did not provide an answer to the arbitration question, but found the FTC’s stance against binding arbitration agreements was unreasonable because its motives contradicted the U.S. Supreme Court’s rationale of enforcing agreements to arbitrate.  Due to the Supreme Court’s “continual enforcement of the strong federal policy toward arbitration”, the court in Davis held that the Magnuson-Moss Act did not prohibit binding arbitration agreements in written warranties.

Conclusion On Whether To Include Arbitration Agreements Provision In A Written Warranty Covered By The Magnuson-Moss Warranty Act

Florida state courts have not squarely addressed the issue of binding arbitration in written warranties covered by the Act, but at least one Florida court has recognized and cited the Davis’ holding.  Stacy David, Inc. v. Consuegra, 845 So. 2d 303 (Fla. 2d DCA 2003).

Therefore, when deciding whether to include an arbitration provision within a written warranty covered by the Magnuson-Moss Act, warrantors and consumers should not assume that arbitration provision will be enforced.

Authors:
James O. Birr, III, Esq.
John Rutledge, J.D. Candidate