The Federal Trade Commission (FTC) recently announced its decision to retain a ban on mandatory arbitration provisions in warranty claims made under the Magnuson-Moss Warranty Act (MMWA). The FTC’s decision was announced in conjunction with the completion of its review of the FTC’s Magnuson-Moss interpretations and rules, including Rule 703 (16 C.F.R. § 703), which specifies standards required for any informal dispute settlement mechanism (ISDM) incorporated into a written consumer product warranty.

Based on Rule 703.5(j), which provides that an ISDM cannot be legally binding on any person, the FTC has taken the position since 1975 that binding arbitration provisions are prohibited in warranties. In explaining its decision to retain the arbitration ban, the FTC noted that it received three comments on Rule 703.5(j), including one comment from an industry trade group urging the FTC to delete this provision. According to the FTC, the ban is consistent with the language of the MMWA and finds support in the MMWA’s legislative history. The FTC specifically rejected the argument that an arbitration proceeding is not an ISDM because it is binding and therefore outside the MMWA, which permits warrantors to establish ISDMs for breach of warranty claims and require consumers to use such ISDMs before bringing a civil suit.

Nevertheless, among the federal appellate courts and state courts that have considered the question of whether the MMWA precludes binding pre-dispute arbitration, a consensus has emerged favoring arbitration. Indeed, in her dissenting statement, FTC Commissioner Maureen K. Ohlhausen commented that “[t]he courts have sent a clear signal that the Commission’s position that MMWA prohibits binding arbitration is no longer supportable.” She stated that in the face of such a signal, the FTC should not have reaffirmed the ban.

We find the dissent’s position to be the more persuasive one in light of recent U.S. Supreme Court decisions emphasizing the federal policy favoring arbitration under the Federal Arbitration Act (FAA), even when the claims at issue are federal statutory claims. According to the Supreme Court, if a federal statute does not expressly prohibit arbitration, the FAA controls and claims brought under that statute can be arbitrated. As several courts have found that the text, legislative history, and purpose of the MMWA demonstrate no congressional intent to bar binding arbitration, the MMWA should be construed as not prohibiting binding arbitration.

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.

 


 

 

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