FTC Revises Interpretation of Magnuson-Moss Warranty Act

Today the Federal Trade Commission (“FTC”) announced revisions to its Interpretations, Rules, and Guides under the Magnuson-Moss Warranty Act, 16 C.F.R. 700.1 et seq.  The Magnuson-Moss Warranty Act (“Mag-Moss”), 15 U.S.C. 2301 et seq., is the federal act that regulates warranties on consumer goods by, among other things, requiring various disclosures in the warranty text and prohibiting certain practices by warrantors.  The number of revisions made by the FTC were minimal, but potentially have significant consequences for warrantors on consumer goods.

Based on comments received concerning what it called “market realities of manufacturers’ statements,” the FTC clarified its interpretation of Mag-Moss’s prohibition on “tying” within warranties.  See 15 U.S.C. 2302(c).  Mag-Moss’s “tying” prohibition prevents companies from requiring consumers to use a specified product or service provider for warranty repairs if such product or service requires the consumer to pay additional costs, and also prohibit companies from requiring consumers to obtain non-warranty repairs from a specified service provider in order to maintain coverage under the warranty.  See 16 C.F.R. 700.10.  Current FTC interpretations specifically prohibit warranty provisions which expressly “tie” the warranty to specific products or service providers, finding that they are “deceptive under [15 U.S.C. 2310].”  16 C.F.R. 700.10(c).  The FTC’s revisions recognize that, in some circumstances, tying may be implied by some terms of a warranty, and a consumer may incorrectly assume that in order to maintain warranty coverage they are required to obtain all warranty and non-warranty repair from a specific service provider, or use specific replacements parts or products, despite a lack of any express tying provision.  Thus, the FTC clarifies that its interpretation of Mag-Moss’s tying prohibition extends to both express and implied tying provisions.  Examples of implied tying the FTC gives are provisions such as “ ‘use only an authorized ‘ABC’ dealer’ or ‘use only ‘ABC’ replacement parts’”, which, although crafted as recommendations, could lead a consumer to believe that they must use the specified dealers or replacement parts.  The FTC recognizes, however, that a warrantor would not be required to accept liability for damage caused by “unauthorized” replacement parts or service providers, nor would a warrantor be prohibited from expressly disclaiming such liability in the warranty.

Additionally, the FTC revised its interpretation of how the McCarran-Ferguson Act (“McCarran-Ferguson”), 15 U.S.C. 1011 et seq., interacts with Mag-Moss.  McCarran-Ferguson provides that a federal law cannot be read to “invalidate, impair, or supersede” state law regulating the business of insurance unless the federal law specifically relates to insurance; however, McCarran-Ferguson clarifies the Sherman Act, the Clayton Act, and the FTC Act in particular are “applicable to the business of insurance to the extent that such business is not regulated by State Law.” 15 U.S.C. 1012(b).  Prior to these revisions, the FTC applied the latter standard—that agreements on consumer products are subject to Mag-Moss “only to the extent they are not regulated in a particular state as the business of insurance.”  Id. In other words when a state determines that a particular type of agreement constitutes insurance under its state laws, the agreement is no longer subject to regulation under Mag-Moss.  Under the FTC’s revised interpretation, however, McCarran-Ferguson’s “invalidate, impair, or supersede” standard will apply.  This is significant because it creates a situation where, even if a state has interpreted a particular type of agreement to be the business of insurance regulated under state law, the agreement may still be subject to regulation under Mag-Moss to the extent that Mag-Moss does not directly conflict with the state laws regulating the product.

It is also worth noting that the FTC’s revisions were not adopted unanimously.  Although not disagreeing with any of the above revisions, Commissioner Maureen Ohlhausen dissented based on the FTC’s failure to revise its prohibition on mandatory binding arbitration provisions in warranties.  Commissioner Ohlhausen noted that both the 5th and 11th Circuit have determined that Mag-Moss does not bar binding arbitration provisions, and that these courts declined to afford the FTC’s interpretation of Mag-Moss Chevron deference.  Commissioner Ohlhaussen, in support of her dissent, also cited various United States Supreme Court cases over the past five years that have demonstrated “a strong preference for arbitration” as a means of resolving disputes.

The FTC’s revisions will take effect upon publication in the Federal Register.  The full text of the FTC’s decision, as well as Commissioner Ohlhausen’s dissent, are available here.