News Details

October 01, 2011-CHANGING TIDE FOR PRE-DISPUTE MANDATORY BINDING ARBITRATION UNDER THE MAGNUSON-MOSS WARRANTY ACT?

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10/01/2011

By Deborah E. Lewis

 Whether a consumer will be compelled to abide by pre-dispute mandatory binding arbitration, pursuant to a written sales agreement, when a consumer alleges breach of warranty claims has come into greater question by the recent Ninth Circuit opinion of Kolev V. Euromotors West et al, --- F.3d ---, 2011 WL 4359905 (9th cir., September 20, 2011). The Kolev opinion holds that a written warranty provision that mandates pre-dispute binding arbitration lacks validity under the Magnuson-Moss Warranty Act (the "Act").

The Kolev facts are not unusual or unique. Kolev brought breach of implied and express warranty claims under the Magnuson-Moss Warranty Act against an automobile manufacturer and dealership after her automobile developed mechanical problems that occurred during the warranty period. The dealership sales agreement included a pre-dispute mandatory binding arbitration provision, and the district court granted the dealership's motion to compel arbitration. After the arbitrator found in favor of the dealership on most of the claims, the district court confirmed the arbitration award.

At issue was whether the district court erred in compelling arbitration. Kolev argued that the Act barred mandatory binding arbitration of the warranty claims. In particular, the Federal Trade Commission ("FTC"), as the delegated rulemaking authority under the Act, had already construed the Act as barring pre-dispute mandatory binding arbitration provisions covering written warranty agreements. Furthermore, the FTC had issued a rule prohibiting judicial enforcement of such provisions at 16 C.F.R. § 703.5; 40 Fed. Reg. 60167, 60210 (Dec. 31, 1975). The Ninth Circuit agreed with Kolev's argument, stating that not only did FTC Rule 703.5(j) expressly state that "reference within the written warranty to any binding, non-judicial remedy is prohibited by the Rule and the Act", but the FTC had previously declined to amend Rule 703.5(j) to permit binding arbitration. Id. at *5. Accordingly, the Ninth Circuit reversed the district court's order to compel arbitration.

Manufacturers and sellers who provide written warranties and may be subject to the Magnuson-Moss Warranty Act should watch with care how Kolev plays out. The Kolev opinion may gain traction in other factually similar lawsuits brought by consumers under the Act because the Ninth Circuit carefully distinguished its reasoning and conclusion from other opinions in sister circuits (Fifth and Eleventh Circuits) upholding mandatory arbitration agreements under the Act, and in U.S. Supreme Court opinions that have ruled in favor of mandatory binding arbitration agreements. Notwithstanding several U.S. Supreme Court opinions that espouse the liberal policy behind the Federal Arbitration Act as favoring arbitration agreements, the Kolev court reasoned that none of those U.S. Supreme Court cases involved a federal statute where an authorized agency had construed the statute to bar pre-dispute mandatory binding arbitration. Id. at *6.

For further information, please contact Deborah E. Lewis at (214) 665-4157 or dlewis@whitewiggins.com.

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