After several years of uncertain judicial interpretation, courts have now concluded that consumers may enter into arbitration agreements enforceable under the Federal Arbitration Act (FAA) in written consumer product warranties.
In passing the Magnuson-Moss Warranty Act (MMWA), 15 U.S.C. § 2302 (1994), Congress encouraged companies to resolve disputes with a minimum of delay and expense to consumers. MMWA therefore encourages companies to adopt procedures for resolving disputes without litigation. The MMWA expressly encourages the use of "informal" procedures, one example of which is the Better Business Bureau "Auto Line" for automobile warranty disputes.
Courts have held that agreements to submit disputes to this type of informal procedure are not "agreements to arbitrate" and therefore are not governed by the FAA. Unfortunately, where one party is determined to bring a lawsuit, the informal process will not produce the result that Congress intended, without the authority of the FAA behind the dispute resolution agreement. Recent court decisions, however, affirm that parties to consumer product warranties can agree to arbitrate under the FAA and thereby avoid litigation. Arbitration agreements in consumer product warranties are enforceable and serve Congress' goal for these disputes to be resolved without litigation.
Benefits Of Arbitration
Independent studies have shown that:
• Seventy-eight percent (78%) of business attorneys and litigation attorneys find arbitration to be faster than a lawsuit.
• In fact, arbitration is approximately thirty-six percent (36%) faster than a lawsuit.
• Ninety-three percent (93%) of consumers using arbitration found it to be fair.
• Individuals prevail at least as often in arbitration as in lawsuits.
Congress enacted MMWA for the purpose of improving the adequacy of information available to consumers, preventing deception, and improving competition in the marketing of consumer products. MMWA establishes guidelines regarding the content of consumer product warranties and service contracts. Finding that the text, legislative history, and purpose of MMWA do not prohibit arbitration, under certain conditions courts now uphold arbitration agreements in written consumer product warranties.
Court Decisions Upholding Arbitration Provisions Within Warranties Governed By The Magnuson-Moss Warranty Act
In April 2004, the Supreme Courts of Illinois and Michigan upheld arbitration provisions contained in warranties. See Borowiec v. Gateway 2000, 808 N.E.2d 957 (Ill. 2004); Abela v. General Motors Corp., 677 N.W.2d 325 (Mich. 2004). In reaching their independent conclusions, the courts reviewed and found persuasive the most recent decisions from the Fifth and Eleventh U.S. Circuit Courts of Appeals. They join the Texas Supreme Court and other courts that have also held that MMWA does not preclude arbitration.
Borowiec And Abela
Borowiec involved customers who purchased personal computers with a written limited warranty containing an agreement to arbitrate any disputes. When the purchasers attempted to bypass arbitration by bringing their warranty claims in court, the seller moved to compel arbitration. In ruling that the lawsuits should be dismissed and arbitration compelled, the Illinois Supreme Court rejected the purchasers' arguments that MMWA supercedes the rights of parties to contract for arbitration governed by the FAA.
The plaintiffs offered the Federal Trade Commission's adverse interpretation of the MMWA that any dispute settlement procedures adopted by sellers and purchasers should be "informal" and that decisions from those procedures "shall not be legally binding on any person." The court analyzed the FTC's interpretation of MMWA in light of U.S. Circuit Court decisions. The court looked first to the Fifth Circuit decision in Walton v. Rose Mobile Homes LLC, which concluded, "the text, legislative history, and purposes of the MMWA do not evince a congressional intent to bar arbitration of written warranty claims." The Walton court held that the plaintiffs signed a valid arbitration agreement and that MMWA did not preclude arbitration of the claims. Walton v. Rose Mobile Homes LLC, 298 F.3d 470 (5th Cir. 2002).
Recognizing United States Supreme Court precedent, the court analyzed the interplay between the FAA and statutory remedies contained in other federal laws. The Illinois Supreme Court relied on the rule articulated by the Supreme Court that "by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." Borowiec, 808 N.E.2d at 963 (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)). In addition, the court stated that "unless Congress itself has evinced an intention to preclude a waiver of a judicial remedies for the statutory rights at issue," the party should be held to a contractual agreement to arbitrate.
Borowiec also discussed Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th Cir. 2002) where the Eleventh Circuit Court of Appeals applied analysis similar to that used by the Walton court. In Davis, the Eleventh Circuit also found that the text, legislative history, and purposes of the MMWA do not prohibit parties from agreeing to arbitrate disputes.
But the Davis court went further and "examined the reasonableness of the FTC's construction of the statute." Analyzing the statute, the court found that "a statute's provision for a judicial forum does not preclude enforcement of a arbitration agreement under the [FAA]." The Davis court concluded by emphasizing the strong federal policy supporting arbitration. See Davis, 305 F.3d 1279 (quoting Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995) (noting the advantages of arbitration)).
In conclusion, the Borowiec court emphasized the uniformity of Circuit Court authority on the issue regarding arbitration and MMWA. After commenting on the Circuit Court uniformity of authority, the Borowiec court held that MMWA does not preclude arbitration of consumer warranty claims.
This spring, the Supreme Court of Michigan also held that the MMWA does not bar enforcement of an arbitration agreement. Abela v. General Motors Corp., 677 NW.2d 325 (Mich. 2004). The Abela court also relied on reasoning from the Fifth and Eleventh Circuits. Emphasizing that its reliance on the Walton and Davis decisions was due to their persuasive quality, the Abela court noted that the decisions were not binding on its authority as a state Supreme Court. Nevertheless, the Abela court agreed with Walton and Davis in that "the text, legislative history, and context of the MMWA do not evince an intent under the FAA to bar agreements for arbitration."
Borowiec and Abela complement already existing federal Court of Appeals decisions that arbitration is a valid and viable forum for claims under warranties governed by the MMWA. All Circuit Courts considering the issue have reached the same conclusion: that these agreements to arbitrate are valid under MMWA. All of these decisions comport with the United States Supreme Court reasoning favoring arbitration. See Gilmer, 500 U.S. at 26 (stating "questions regarding arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration").
The FAA trumps other federal statutes unless there is a clear Congressional intent to the contrary. Like other appellate courts, in In re Am. Homestar of Lancaster, Inc., the Texas Supreme Court failed to find such a mandate, and held that MMWA does not stand in the way of the enforcement of an agreement to submit warranty claims to arbitration. In re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480 (Tex. 2001).
What emerges is clearer understanding that MMWA's encouragement of informal dispute resolution mechanisms, far from precluding arbitration, expresses Congress' intent that resolution of consumer product warranty disputes need not utilize the myriad technical rules of evidence, procedure, and precedents that a court of law must use, and is consistent with the use of enforceable arbitration under the FAA.
Guidelines To Ensure Enforceability Of An Arbitration Provision Contained In A Warranty
When drafting an arbitration agreement, parties must be careful in terms of arbitration clause placement. Parties that wish to arbitrate warranty claims, should the need arise, should place the arbitration provision in the text of the written warranty.
In Wilson v. Waverlee Homes, Inc. the Eleventh Circuit held that the manufacturer had no standing to compel arbitration of a warranty claim under an arbitration agreement in the purchase agreement between the buyer and the seller, since the manufacturer was not the seller. The court noted that the warranty claims in that case were not intertwined with or based upon the sales agreement between the plaintiff and the seller. The Eleventh Circuit has since abrogated its Wilson decision, and it is not clear in what circumstances a court would refuse to look at related documents in a transaction to determine what method the parties intended for resolving disputes.
Where "informal" dispute resolution procedures are also provided, the separate arbitration agreement must be clear and should indicate that it will be governed and interpreted under the FAA.
Among other factors, the terms of the arbitration provision should be unambiguous and should provide clarity for the consumer. In addition, costs of consumer arbitration should be reasonable, providing the benefit of affordability. The arbitration also should be accessible to the consumer, and not require the consumer to travel to a distant or remote location. Selecting a recognized neutral arbitration administrator with a nationwide arbitral panel gives the parties the best assurance of having an enforceable arbitration agreement.
Courts that have considered these factors have stated: "[O]ther national arbitration organizations (Example: The National Arbitration Forum) have developed similar models for fair cost and fee allocation." Green Tree Financial v. Randolph, 531 U.S. 79 (2000) (Justice Ginsburg, citing the NAF Code); "The Court is satisfied that NAF will provide a reasonable, fair and impartial forum within which Plaintiff's may seek redress for their grievances. In addition, an arbitration award is subject to review by the Court." Marsh v. First USA Bank, 103 F. Supp.2d 925 (N.D. Tex. 2000); "[N]umerous courts have found the NAF to be an adequate and fair arbitral forum and have upheld arbitration provisions requiring arbitration in the NAF ..." Hale v. First USA Bank, 2001 WL 687371 (S.D.N.Y. June 19, 2001).
In conclusion, the federal circuit courts of appeals are in agreement that MMWA does not bar arbitration of a consumer's claims under the act, and arbitration agreements in consumer product warranties governed by the MMWA are enforceable under the FAA. MMWA's goal of expeditious and affordable resolution of warranty disputes may be best served in some transactions by using "informal" dispute resolution procedures supplemented with an arbitration agreement. Because arbitration has been found to be both faster and less expensive than litigation, binding arbitration serves MMWA's ultimate purpose.
Warranties for consumer products ranging from appliances to automobiles may specify that disputes will be resolved through arbitration, but the arbitration agreement must be included within the text of the written warranty agreement. When parties follow the courts' guidance about arbitration of disputes under warranties governed by the MMWA, the arbitration provision should be enforceable and all parties will receive the benefits of arbitration.
Philip B. Ytterberg is Vice President & Assistant General Counsel of the National Arbitration Forum. He can be reached at email@example.com. Lynn Jokela, law clerk with the National Arbitration Forum, contributed to this article.