Final Action Concerning Review of Interpretations of Magnuson-Moss Warranty Act; Rule Governing Disclosure of Written Consumer Product Warranty Terms and Conditions; Rule Governing Pre-Sale Availability of Written Warranty Terms; Rule Governing Informal Dispute Settlement Procedures; and Guides for the Advertising of Warranties and Guarantees, 42710-42723 [2015-14065]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 80, Number 138 (Monday, July 20, 2015)]
[Rules and Regulations]
[Pages 42710-42723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14065]


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FEDERAL TRADE COMMISSION

16 CFR Parts 700, 701, and 703

RIN 3084-AB24; 3084-AB25; 3084-AB26


Final Action Concerning Review of Interpretations of Magnuson-
Moss Warranty Act; Rule Governing Disclosure of Written Consumer 
Product Warranty Terms and Conditions; Rule Governing Pre-Sale 
Availability of Written Warranty Terms; Rule Governing Informal Dispute 
Settlement Procedures; and Guides for the Advertising of Warranties and 
Guarantees

AGENCY: Federal Trade Commission.

ACTION: Final revised Interpretations; Final clerical changes to Rules; 
and Conclusion of review proceedings.

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SUMMARY: The Federal Trade Commission (``the Commission'') is 
announcing its final action in connection with the review of a set of 
warranty-related Rules and Guides: The Interpretations of the Magnuson-
Moss Warranty Act (``Interpretations'' or ``part 700''); the Rule 
Governing Disclosure of Written Consumer Product Warranty Terms and 
Conditions (``Rule 701''); the Rule Governing Pre-Sale Availability of 
Written Warranty Terms (``Rule 702''); the Rule Governing Informal 
Dispute Settlement Procedures (``Rule 703''); and the Guides for the 
Advertising of Warranties and Guarantees (``the Guides'' or ``part 
239''). The Interpretations represent the Commission's views on various 
aspects of the Magnuson-Moss Warranty Act (``the Act'' or ``MMWA''), 
and are intended to clarify the Act's requirements. Rule 701 specifies 
the information that must appear in a written warranty on a consumer 
product. Rule 702 details the obligations of sellers and warrantors to 
make warranty information available to consumers prior to purchase. 
Rule 703 specifies the minimum standards required for any informal 
dispute settlement mechanism that is incorporated into a written 
consumer product warranty, and that the consumer must use prior to 
pursuing any legal remedies in court. The Guides are intended to help 
advertisers avoid unfair or deceptive practices in the advertising of 
warranties or guarantees.

[[Page 42711]]


DATES: The changes to the Interpretations and Rules will take effect on 
July 20, 2015.

FOR FURTHER INFORMATION CONTACT: Svetlana S. Gans, Staff Attorney, 
Division of Marketing Practices, Federal Trade Commission, Washington, 
DC 20580, (202) 326-3708.

SUPPLEMENTARY INFORMATION: The MMWA, 15 U.S.C. 2301-2312, is the 
federal law that governs consumer product warranties. Passed by 
Congress in 1975, the Act requires manufacturers and sellers of 
consumer products to provide consumers with detailed information about 
warranty coverage before and after the sale of a warranted product. 
When consumers believe they are the victim of an MMWA violation, the 
statute provides them the ability to proceed through a warrantor's 
informal dispute resolution process or sue in court. On August 23, 
2011, the Commission published a Federal Register request for public 
comment, soliciting written public comments concerning five warranty 
Rules and Guides: (1) The Commission's Interpretations of the Magnuson-
Moss Warranty Act, 16 CFR part 700; (2) the Rule Governing Disclosure 
of Written Consumer Product Warranty Terms and Conditions, 16 CFR part 
701; (3) the Rule Governing Pre-Sale Availability of Written Warranty 
Terms, 16 CFR part 702; (4) the Rule Governing Informal Dispute 
Settlement Procedures, 16 CFR part 703; and (5) the Guides for the 
Advertising of Warranties and Guarantees, 16 CFR part 239.\1\ The 
Commission requested comments on these Rules and Guides as part of its 
regulatory review program, under which it reviews rules and guides 
periodically in order to obtain information about the costs and 
benefits of the rules and guides under review, as well as their 
regulatory and economic impact. The information obtained assists the 
Commission in identifying rules and guides that warrant modification or 
rescission. After careful review of the comments received in response 
to the request, the Commission has determined to retain Rules 701, 702, 
and 703, and the Guides without change, and to modify the 
Interpretations in Sec. Sec.  700.10 and 700.11(a). The Commission is 
also updating the citation format in the Interpretations and Rules.\2\
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    \1\ 76 FR 52596 (Aug. 23, 2011).
    \2\ These clerical changes do not involve any substantive 
changes in the Rules' requirements for entities subject to the 
Rules. Accordingly, the Commission finds that public comment is 
unnecessary. See 5 U.S.C. 553(b)(3)(B).
    In addition, under the APA, a substantive final rule is required 
to take effect at least 30 days after publication in the Federal 
Register unless an agency finds good cause that the rule should 
become effective sooner. 5 U.S.C. 553(d). However, this is purely a 
clerical change and is not a substantive rule change. Therefore, the 
Commission finds good cause to dispense with a delayed effective 
date.
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    In addition, Commission staff has recently issued a number of 
guidance documents to better educate consumers and businesses 
concerning their rights and obligations under the MMWA. For example, in 
order to cure perceived misconceptions in the marketplace, staff issued 
and recently updated a consumer alert stating that the MMWA prohibits 
warrantors from voiding an automotive warranty merely because a 
consumer uses an aftermarket or recycled part or third-party services 
to repair one's vehicle (subject to certain exceptions).\3\ Staff also 
updated the .Com Disclosures to provide additional guidance concerning 
online warranty disclosure obligations \4\ and issued letters to 
various online sellers concerning their obligations under the pre-sale 
availability rule.\5\ Staff will continue to evaluate whether 
additional guidance is necessary to better inform both consumers and 
business concerning their rights and responsibilities under the MMWA.
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    \3\ FTC, Auto Warranties & Routine Maintenance (July 2011, 
updated May 2015) (``Consumer Alert on Auto Warranties''), available 
at https://www.consumer.ftc.gov/articles/0138-auto-warranties-routine-maintenance. A warrantor may condition the warranty on the 
use of certain parts or service if it provides these parts and 
services without charge to the consumer under the warranty, or 
alternatively, if the warrantor receives a waiver from the 
Commission. See 15 U.S.C. 2302(c).
    \4\ See FTC, .com Disclosures: How to Make Effective Disclosures 
in Digital Advertising (2013), available at https://ftc.gov/os/2013/03/130312dotcomdisclosures.pdf.
    \5\ Press Release, FTC, As Holiday Shopping Season Gets 
Underway, FTC Reminds Internet Retailers to Ensure Consumers Have 
Access to Warranty Information (Dec. 2, 2013), https://www.ftc.gov/news-events/press-releases/2013/12/holiday-shopping-season-gets-underway-ftc-reminds-internet.
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A. Background

1. 16 CFR Part 700: Interpretations of the Magnuson-Moss Warranty Act 
(``Interpretations'')

    The MMWA, 15 U.S.C. 2301-2312, which governs written warranties on 
consumer products, was signed into law on January 4, 1975. After the 
Act was passed, the Commission received many questions concerning the 
Act's requirements. In responding to these inquiries, the Commission 
initially published, on June 18, 1975, a policy statement in the 
Federal Register (40 FR 25721) providing interim guidance during the 
initial implementation of the Act. As the Commission continued to 
receive questions and requests for advisory opinions, however, it 
determined that more comprehensive guidance was appropriate. Therefore, 
on July 13, 1977, the Commission published in the Federal Register (42 
FR 36112) its Interpretations of the MMWA to assist warrantors and 
suppliers of consumer products in complying with the Act.
    These Interpretations are intended to clarify the Act's 
requirements for manufacturers, importers, distributors, and retailers. 
The Interpretations cover a wide range of subjects, including: The 
types of products considered ``consumer products'' under the Act; the 
differences between a ``written warranty,'' ``service contract'' and 
``insurance''; written warranty term requirements; the use of warranty 
registration cards under full and limited warranties; and illegal tying 
arrangements under Section 2302(c) of the Act. These Interpretations, 
like industry guides, are administrative interpretations of the law. 
Therefore, they do not have the force of law and are not independently 
enforceable. The Commission can take action under the Federal Trade 
Commission Act (``FTC Act'') and the MMWA, however, against claims that 
are inconsistent with the Interpretations if the Commission has reason 
to believe that such claims are unfair or deceptive practices under 
Section 5 or violate the MMWA.

2. 16 CFR Part 701: Disclosure of Written Consumer Product Warranty 
Terms and Conditions

    Section 2302(a) of the MMWA authorizes the Commission to promulgate 
rules regarding the disclosure of written warranty terms. Accordingly, 
on December 31, 1975, the Commission published in the Federal Register 
(40 FR 60188) its Rule Governing Disclosure of Written Consumer Product 
Warranty Terms and Conditions. Rule 701 establishes disclosure 
requirements for written warranties on consumer products that cost more 
than $15.00. It also specifies the aspects of warranty coverage that 
must be disclosed in the written document, as well as the exact 
language that must be used for certain disclosures regarding state law 
on the duration of implied warranties and the availability of 
consequential or incidental damages.
    Under Rule 701, warranty information must be disclosed in simple, 
easily understandable, and concise language in a single document. In 
promulgating Rule 701, the Commission determined that material facts 
about product warranties, the nondisclosure of which would be deceptive 
or misleading, must

[[Page 42712]]

be disclosed.\6\ In addition to specifying the information that must 
appear in a written warranty, Rule 701 also requires that, if the 
warrantor of a limited warranty uses a warranty registration or owner 
registration card, the warranty must disclose whether return of the 
registration card is a condition precedent to warranty coverage.\7\
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    \6\ See 40 FR 60168, 60169 (Dec. 31, 1975) (``The items required 
for disclosure by this Rule are material facts about warranties, the 
non-disclosure of which constitutes a deceptive practice.'').
    \7\ Notably, section 2014(b)(1) of the MMWA prohibits warrantors 
offering a full warranty from imposing duties other than the 
notification of a defect as a condition of securing warranty 
remedies. 15 U.S.C. 2304(b)(1).
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3. 16 CFR Part 702: Pre-Sale Availability of Written Warranty Terms

    Section 2302(b)(1)(A) of the MMWA directs the Commission to 
prescribe rules requiring that the terms of any written warranty on a 
consumer product be made available to the prospective purchaser prior 
to the sale of the product. Accordingly, on December 31, 1975, the 
Commission published Rule 702. Rule 702 establishes requirements for 
sellers and warrantors to make the text of any warranty on a consumer 
product available to the consumer prior to sale. Among other things, 
Rule 702 requires sellers to make warranties readily available either 
by: (1) Displaying the warranty document in close proximity to the 
product or (2) furnishing the warranty document on request and posting 
signs in prominent locations advising consumers that warranties are 
available. The Rule requires warrantors to provide materials to enable 
sellers to comply with the Rule's requirements, and also sets out the 
methods by which warranty information can be made available prior to 
the sale if the product is sold through catalogs, mail order, or door-
to-door sales. As discussed further below, Rule 702 also applies to 
online sales.

4. 16 CFR Part 703: Informal Dispute Settlement Procedures

    Section 2310(a)(2) of the MMWA directs the Commission to prescribe 
the minimum standards for any informal dispute settlement mechanism 
(``IDSM'' or ``Mechanism'') that a warrantor, by including a ``prior 
resort'' clause in its written warranty, requires consumers to use 
before they may file suit under the Act to obtain a remedy for warranty 
non-performance. Accordingly, on December 31, 1975, the Commission 
published Rule 703. Rule 703 contains extensive procedural safeguards 
for consumers that a warrantor must incorporate in any IDSM. These 
standards include, but are not limited to, requirements concerning the 
IDSM's structure (e.g., funding, staffing, and neutrality), the 
qualifications of staff or decision makers, and the IDSM's procedures 
for resolving disputes, recordkeeping, and annual audits.

5. 16 CFR Part 239: Guides for the Advertising of Warranties and 
Guarantees

    The Guides for the Disclosure of Warranties and Guarantees, 
codified in part 239, provide guidance concerning warranty and 
guarantee disclosures. Part 239 intends to help advertisers avoid 
unfair and deceptive practices when advertising warranties and 
guarantees. The 1985 Guides advise that advertisements mentioning 
warranties or guarantees should contain a disclosure that the actual 
warranty document is available for consumers to read before they buy 
the advertised product. In addition, the Guides set forth advice for 
using the terms ``satisfaction guarantee,'' ``lifetime,'' and similar 
representations. Finally, the Guides advise that sellers or 
manufacturers should not advertise that a product is warranted or 
guaranteed unless they promptly and fully perform their warranty 
obligations. The Guides are advisory in nature.

B. Analysis of the Comments on the Interpretations, Rule 701, Rule 702, 
Rule 703, and the Guides

    Twenty-nine entities and individuals submitted public comments in 
response to the August 23, 2011 Federal Register request for public 
comment.\8\ Comments generally reflect a strong level of support for 
the view that the Interpretations, Rules, and Guides are achieving the 
objectives they were fashioned to achieve--i.e., to facilitate the 
consumer's ability to obtain clear, accurate warranty information. A 
majority of the commenters, though endorsing retention of the present 
regulatory scheme, suggested modifications to the Interpretations, 
Rules, and Guides, which they believe would provide greater consumer 
protections and minimize burdens on firms subject to the regulations.
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    \8\ 76 FR 52596 (Aug. 23, 2011). Public comments in response to 
the Commission's 2011 FRN are located at https://www.ftc.gov/policy/public-comments/initiative-392. Comments cited herein to the Federal 
Register notice are designated as such, and are identified by 
commenter name, and, where applicable, page number.
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1. 16 CFR Part 700: Interpretations

a. Amend Sec.  700.10 To Provide Further Guidance on Prohibited Tying
    Generally, the MMWA prohibits warrantors from conditioning 
warranties on the consumer's use of a replacement product or repair 
service identified by brand or name, unless the article or service is 
provided without charge to the consumer or the warrantor has received a 
waiver.\9\ The Commission's Interpretations illustrate this concept by 
stating that phrases such as this warranty is void if service is 
performed by anyone other than an authorized ``ABC'' dealer and all 
replacement parts must be genuine ``ABC'' parts and the like, are 
prohibited unless the service or parts are provided free of charge. 
Such provisions violate the MMWA's ban on tying arrangements and are 
deceptive under Section 5 of the FTC Act, because a warrantor cannot 
avoid liability under a warranty where the defect or damage is 
unrelated to the consumer's use of ``unauthorized'' parts or service. 
This does not, however, preclude the warrantor from denying warranty 
coverage for repairs associated with defects or damage caused by the 
use of the ``unauthorized'' parts or service.\10\
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    \9\ See 15 U.S.C. 2302(c). The Commission may waive this 
prohibition if the warrantor demonstrates to the Commission that the 
warranted product will function properly only if the article or 
service so identified is used in connection with the warranted 
product, and the waiver is in the public interest. 15 U.S.C. 
2302(c).
    \10\ 16 CFR 700.10.
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    Several commenters \11\ assert that the Commission's 
Interpretations do not address the market realities of manufacturers' 
statements about the use of branded products. These commenters state 
that automotive and other consumer product manufacturers have employed 
language in consumer materials ``to suggest that warranty coverage 
directly or impliedly `requires' the use of a branded product or 
service'' \12\ leading reasonable consumers to believe that coverage 
under a written warranty will be void if

[[Page 42713]]

non-original parts or non-dealer services are utilized.\13\ Commenters 
suggest that these statements lead consumers to doubt the viability of 
non-original (or recycled) parts.\14\ ``Faced with such a choice a 
consumer is likely to use the `required' product in order to avoid the 
risk that they may later face potentially expensive repairs that may 
not be covered under their warranty, resulting in a `tie' created via 
warranty.'' \15\ Accordingly, these commenters request that the 
Commission ``make clear that warranty language that creates the 
impression that the use of a branded product or service is required in 
order to maintain warranty coverage is . . . impermissible.'' \16\
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    \11\ Ashland; Automotive Oil Change Association; Automotive 
Recyclers Association; BP Lubricants; Certified Auto Parts 
Association; Hunton & Williams; International Imaging Technology 
Council; LKQ Corporation; Motor & Equipment Manufacturers 
Association; Monro Muffler Brake; Property Casualty Insurers 
Association of America; and the Uniform Standards in Automotive 
Products Coalition (``USAP Coalition''). One commenter, the American 
Insurance Association, urges the Commission not to change Sec.  
700.10. The Coalition for Auto Repair Equality urges the Commission 
to uphold MMWA's tying prohibitions. Grandpa's Garage comments that 
GM's recommendation that consumers use its branded oil is helpful 
because GM explains the right products to use for repair and the 
prevention of premature failure. Consumer J. McKee generally 
supports the tying prohibitions.
    \12\ USAP Coalition at 6.
    \13\ Hunton & Williams at 4.
    \14\ Automotive Recyclers Association at 2.
    \15\ Id.
    \16\ USAP Coalition at 3.
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    The MMWA incorporates principles under Section 5 of the FTC Act 
that prohibit warrantors from disseminating deceptive statements 
concerning warranty coverage. The MMWA gives the Commission the 
authority to restrain a warrantor from making a deceptive warranty, 
which is defined as a warranty that ``fails to contain information 
which is necessary in light of all of the circumstances, to make the 
warranty not misleading to a reasonable individual exercising due 
care.'' \17\ Thus, a warrantor would violate the MMWA if its warranty 
led a reasonable consumer exercising due care to believe that the 
warranty conditioned coverage ``on the consumer's use of an article or 
service identified by brand, trade or corporate name unless that 
article or service is provided without charge to the consumer.'' \18\
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    \17\ 15 U.S.C. 2310(c).
    \18\ 16 CFR 700.10.
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    Moreover, misstatements leading a consumer to believe that the 
consumer's warranty is void because a consumer used ``unauthorized'' 
parts or service may also be deceptive under Section 5 of the FTC 
Act.\19\ Specifically, claims by a warrantor that create a false 
impression that a warranty would be void due to the use of 
``unauthorized'' parts or service may constitute a deceptive practice 
as outlined in the FTC Policy Statement on Deception: ``The deception 
theory is based on the fact that most ads making objective claims 
imply, and many expressly state, that an advertiser has certain 
specific grounds for the claims. If the advertiser does not, the 
consumer is acting under a false impression. The consumer might have 
perceived the advertising differently had he or she known the 
advertiser had no basis for the claim.'' \20\ A warrantor claiming or 
suggesting that a warranty is void simply because a consumer used 
``unauthorized'' parts or service would have no basis for such a claim 
(absent a Commission waiver pursuant to Section 2302(c) of the Act). 
This is consistent with staff's view, as expressed in recent opinion 
letters, that misinformation and misleading statements in conjunction 
with warranty coverage may be actionable.\21\
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    \19\ 15 U.S.C. 45(a). See generally Letter from James C. Miller 
III, Chairman, Fed. Trade Comm'n, et al., to Rep. John D. Dingell 
(Oct. 14, 1983), reprinted in Cliffdale Assocs., Inc., 103 F.T.C. 
110, 174 (1984), available at https://www.ftc.gov/public-statements/1983/10/ftc-policy-statement-deception (hereinafter ``FTC Policy 
Statement on Deception'') at 2.
    \20\ FTC Policy Statement on Deception, supra note 19 at n14; 
see also 15 U.S.C. 2310(c)(2).
    \21\ Consumer Alert on Auto Warranties, supra note 3.
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    Therefore, to clarify the tying prohibition of the MMWA, Sec.  
700.10(c) will be changed as described in amendatory instruction 11.
b. Require a Mandatory Disclosure Statement in Companies' Warranties
    Several commenters \22\ ask the Commission to mandate that 
warrantors providing a warranty to a consumer in connection with a 
motor vehicle incorporate standard language in their warranties, akin 
to the FTC's Consumer Alert on Auto Warranties.\23\ These commenters 
state that, although the FTC's Consumer Alert on Auto Warranties 
informs consumers of their rights under the MMWA, consumers should 
receive information about these rights in an owner's manual or warranty 
document pursuant to a Commission-mandated disclosure. These commenters 
ask the Commission to amend its Interpretations so that these 
warrantors would be required to provide in boldface type on the first 
page of a written automobile warranty: ``Warranty coverage cannot be 
denied unless the warrantor or service provide[r] [sic] can demonstrate 
that the defect or damage was caused by the use of unauthorized 
articles or services.'' \24\ Commenters base their recommendation, in 
part, on the language mandated by the Clean Air Act for use in user 
manuals, namely, that ``maintenance, replacement, or repair of the 
emissions control devices and systems may be performed by any 
automotive repair establishment or individual using any automotive 
part.'' \25\
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    \22\ Ashland at 3; Automotive Oil Change Association at 2; 
Certified Automotive Parts Association at 2-3; International Imaging 
Technology Council at 6-7; LKQ Corporation at 10; Monro Muffler 
Brake at 1-2; USAP Coalition at 14-15.
    \23\ The Consumer Alert on Auto Warranties informs consumers, 
among other things, that unless they have been provided parts or 
services without charge under the warranty, they do not have to use 
the dealer for repairs and maintenance to keep their warranty in 
effect, stating, ``An independent mechanic, a retail chain shop, or 
even you yourself can do routine maintenance and repairs on your 
vehicle. In fact, the Magnuson-Moss Warranty Act, which is enforced 
by the FTC, makes it illegal for manufacturers or dealers to claim 
that your warranty is void or to deny coverage under your warranty 
simply because someone other than the dealer did the work.'' 
Consumer Alert on Auto Warranties, supra note 3.
    \24\ USAP Coalition at 14. Elsewhere, however, the commenters 
propose other specific language for the Commission to add to its 
Interpretations that would not be limited to mandatory disclosures 
in warranty documents but would extend to owner's manuals and other 
communications with prospective consumers. USAP Coalition at 20, 
Att. B; Automotive Oil Change Association at 6 (referring to 
``warranty documents and related communications.'').
    \25\ USAP Coalition at 14, citing 42 U.S.C. 7541(c)(3)(A).
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    The Commission declines to make this change. As an initial matter, 
the MMWA, unlike the Clean Air Act, does not require a mandatory 
disclaimer on all warranties. Further, the current record lacks 
sufficient evidence to justify the imposition of a mandatory warranty 
disclosure requirement for a subset of warrantors.\26\
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    \26\ The Specialty Equipment Market Association (``SEMA'') asks 
the Commission to prepare a supplemental consumer alert to 
specifically reference ``specialty parts.'' SEMA at 2. A 
supplemental consumer alert is not necessary as the existing 
consumer alert applies to all non-original (or recycled) parts.
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c. Clarify That Use of an Aftermarket or Recycled Component is Not a 
Prima Facie Justification for Warranty Denial
    One commenter \27\ asks the Commission to clarify that the use of 
aftermarket components is not a prima facie justification for warranty 
denial. The Interpretations and related educational materials already 
make clear that the mere use of an aftermarket (or recycled) component 
alone is not a sufficient justification for warranty denial. As 
discussed above, a warrantor cannot disclaim warranty coverage if a 
defect or damage is unrelated to the consumer's use of ``unauthorized'' 
products or service, unless the warrantor provides the service or part 
without charge under the warranty or receives a Commission waiver.\28\ 
A warrantor can refuse coverage where the warrantor can demonstrate 
that the defect or damage was caused by the use of the ``unauthorized'' 
part or service.\29\
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    \27\ Ashland at 2.
    \28\ 16 CFR 700.10(c).
    \29\ Id.
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    Several commenters ask the Commission to better educate consumers 
on how to identify and report warranty tying in the marketplace. In 
July 2011, the staff

[[Page 42714]]

issued a consumer alert highlighting MMWA's tying prohibitions. The 
alert explained: ``Simply using an aftermarket or recycled part does 
not void your warranty. The Magnuson-Moss Warranty Act makes it illegal 
for companies to void your warranty or deny coverage under the warranty 
simply because you used an aftermarket or recycled part.'' \30\
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    \30\ See Consumer Alert on Auto Warranties, supra note 3. As 
stated in the updated consumer alert, the manufacturer or dealer 
can, however, require consumers to use select parts if those parts 
are provided to consumers free of charge under the warranty.
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d. Require That Warrantors Have Substantiation for Their Performance 
Claims Regarding Non-Original Parts
    Several commenters \31\ ask the Commission to require that 
warrantors have substantiation for their claims that original equipment 
manufacturer (``OEM'') parts work better than non-original or recycled 
parts. This specific request is outside the purview of the Act and 
relates generally to the requirement under Section 5 of the FTC Act 
that companies have sufficient basis for their claims. Section 5 
requires warrantors making performance claims regarding non-original or 
recycled parts to have a reasonable basis for those claims, thereby 
ensuring that such claims are not unfair, deceptive, false, or 
misleading. Similarly, advertisers must have adequate substantiation--
or a reasonable basis--for any advertising claims they make before the 
claims are disseminated. Under the substantiation doctrine, ``firms 
lacking a reasonable basis before an ad is disseminated violate Section 
5 of the FTC Act.'' \32\
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    \31\ Ashland at 6-7; LKQ Corporation at 8; USAP Coalition at 15-
16.
    \32\ FTC Policy Statement Regarding Advertising Substantiation, 
appended to Thompson Med. Co., 104 F.T.C. 648, 839 (1984), aff'd, 
791 F.2d 189 (D.C. Cir. 1986).
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e. Require Warranty Denial To Be in Writing
    The Commission's Interpretations state that a warrantor is not 
precluded from denying warranty coverage for defects or damage caused 
by the use of ``unauthorized'' parts or service if the warrantor 
``demonstrates'' that the ``unauthorized'' parts or service caused a 
defect or damage to the vehicle.\33\ Commenters \34\ state that, in 
some instances, warrantors have denied warranty coverage without 
sufficiently demonstrating to consumers that the use of 
``unauthorized'' parts or service caused defects or damage to the 
consumer's vehicle by, for example, giving consumers a copy of a 
service bulletin or just ``say[ing] so.'' \35\ Commenters therefore ask 
the Commission to require, in its Interpretations, that warrantors 
provide consumers with a written statement to support any warranty 
denial claim.
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    \33\ 16 CFR 700.10(c).
    \34\ Ashland at 3; Automotive Oil Change Association at 6-7; BP 
Lubricants at 3, Certified Auto Parts Association at 4-5; SEMA at 3; 
USAP Coalition at 15-16.
    \35\ Certified Auto Parts Association at 5.
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    The Commission does not believe a change is warranted because the 
current record lacks sufficient evidence showing that warrantors 
routinely deny warranty coverage orally without demonstrating to the 
consumer that the ``unauthorized'' part or service caused damage to the 
vehicle. At this time, the Commission believes the existing 
Interpretations adequately address this issue.
    Simply providing a consumer with a copy of a service bulletin or 
denying coverage with a bald, unsupported statement that the 
``unauthorized'' parts or service caused the vehicle damage would be 
insufficient under the Commission's existing Interpretations. 
Warrantors must have a basis for warranty denials by demonstrating to 
consumers that the use of ``unauthorized'' parts or service caused the 
defect or damage to the vehicle. Further, denying warranty coverage by 
simply pointing to a service bulletin that informs consumers that only 
``authorized'' parts or service should be used to maintain warranty 
coverage may also violate the MMWA's proscriptions against tying.\36\ 
Therefore, whether the demonstration is in writing or oral, a warrantor 
denying warranty coverage due to the use of ``unauthorized'' parts or 
service must show that such use caused the defect or damage to the 
vehicle.
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    \36\ 16 CFR 700.10(c).
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f. The Scope of Auto Dealers' Responsibilities Under the MMWA and 
Interpretations
    Two commenters \37\ address the scope of auto dealers' (which fall 
under MMWA's definition of ``supplier'' \38\) responsibilities under 
the MMWA and Interpretations.\39\ First, the National Consumer Law 
Center (``NCLC'') asks the Commission to add an interpretation stating 
that a supplier enters into a service contract with a consumer whenever 
the supplier offers a service contract to the consumer, irrespective of 
whether the supplier is obligated to perform under the service 
contract.\40\ The Commission declines to add the requested 
interpretation.
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    \37\ Center for Auto Safety at 2; NCLC at 10.
    \38\ The MMWA defines ``supplier'' as ``any person engaged in 
the business of making a consumer product directly or indirectly 
available to consumers.'' 15 U.S.C. 2301(4).
    \39\ Center for Auto Safety at 2.
    \40\ NCLC at 10.
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    Existing staff guidance provides that ``sellers of consumer 
products that merely sell service contracts as agents of service 
contract companies and do not themselves extend written warranties'' do 
not ``enter into'' service contracts.\41\ This guidance parallels the 
MMWA's provisions concerning a seller's liability under the MMWA for 
merely selling a third party's warranty: ``only the warrantor actually 
making a written affirmation of fact, promise, or undertaking shall be 
deemed to have created a written warranty, and any rights arising 
thereunder may be enforced under this section only against such 
warrantor and no other person.'' \42\
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    \41\ See FTC, The Businessperson's Guide to Federal Warranty 
Law, available at https://www.business.ftc.gov/documents/bus01-businesspersons-guide-federal-warranty-law; 15 U.S.C. 2308(a)(2).
    \42\ 15 U.S.C. 2310(f).
---------------------------------------------------------------------------

    In keeping with the MMWA, the Commission's Interpretations 
concerning parties ``actually making'' a written warranty provide that 
a supplier who simply distributes or sells a consumer product warranted 
by another person or business is not liable for failure of the written 
warranty to comply with the Act.\43\ Accordingly, the Commission will 
not add the requested interpretation concerning service contracts.
---------------------------------------------------------------------------

    \43\ 16 CFR 700.4. Section 700.4 further provides, however, that 
other actions and written and oral representations of such a 
supplier in connection with the offer or sale of a warranted product 
may obligate that supplier under the Act. If under State law the 
supplier is deemed to have ``adopted'' the written affirmation of 
fact, promise, or undertaking, the supplier is also obligated under 
the Act.
---------------------------------------------------------------------------

    The second commenter, the Center for Auto Safety, seeks clarity to 
address the discrepancy it perceives between the MMWA and the staff's 
guidance concerning the circumstances under which an auto dealer (i.e., 
supplier) can disclaim implied warranties when offering service 
contracts. It argues that, on one hand, Section 2308(a)(2) of the MMWA 
states: ``no supplier may disclaim or modify . . . any implied warranty 
to a consumer with respect to such consumer product if . . . at the 
time of sale, or within 90 days thereafter, such supplier enters into a 
service contract with the consumer which applies to such consumer 
product.'' \44\ On the other hand, the FTC's Businessperson's Guide to 
Federal Warranty Law states: ``[s]ellers of consumer products who make 
service contracts on their products are

[[Page 42715]]

prohibited under the Act from disclaiming or limiting implied 
warranties. . . . However, sellers of consumer products that merely 
sell service contracts as agents of service contract companies and do 
not themselves extend written warranties can disclaim implied 
warranties on the products they sell.'' \45\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 2308(a)(2).
    \45\ The Businessperson's Guide to Federal Warranty Law, supra 
note 41.
---------------------------------------------------------------------------

    The Commission does not believe any discrepancy exists. The 
confusion may stem from the usage of the word ``supplier,'' defined in 
the MMWA as: ``any person engaged in the business of making a consumer 
product directly or indirectly available to consumers.'' \46\ Thus, 
``supplier'' can mean either the entity that ``enters into a service 
contract with the consumer'' or the entity that ``merely sells'' a 
third-party's service contract, without more. The latter, as explained 
previously,\47\ has not entered into a service contract with the 
consumer, and therefore Section 2308(a)(2) would not apply.\48\
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    \46\ 15 U.S.C. 2301(4).
    \47\ The Businessperson's Guide to Federal Warranty Law, supra 
note 41.
    \48\ 15 U.S.C. 2308(a)(2).
---------------------------------------------------------------------------

    Suppliers, however, are not immune from liability. If a supplier 
sells a service contract that obligates it to perform under the 
contract, it will be deemed to have entered into the service contract 
within the meaning of the statute. In addition, suppliers who extend 
service contracts utilizing misrepresentations or material omissions 
may be subject to liability under the MMWA and Section 5 of the FTC 
Act.\49\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 2306(b) (requiring warrantors and suppliers to 
clearly and conspicuously disclose service contract terms and 
conditions); 15 U.S.C. 45.
---------------------------------------------------------------------------

Enforce the Act
    Commenters \50\ encourage the Commission to enforce the MMWA. The 
Commission enforces the Act by monitoring consumer complaints, 
reviewing audit reports, advising warrantors of their obligations, 
educating consumers and businesses, and taking enforcement action where 
appropriate.\51\
---------------------------------------------------------------------------

    \50\ LKQ Corp. at 1 and 5; Motor & Equipment Manufacturers 
Association at 2-3.
    \51\ See, e.g., Compl., BMW of N. Am., LLC, File No. 132 3150, 
available at https://www.ftc.gov/system/files/documents/cases/150319bmwcmpt.pdf (Fed. Trade Comm'n March 19, 2015); Consumer Alert 
on Auto Warranties, supra note 3. Consumers or businesses may file 
complaints with the Commission online through https://www.ftccomplaintassistant.gov or by calling the Commission's toll-
free number, 1-877-FTC-HELP (1-877-382-4357).
---------------------------------------------------------------------------

g. Apply Rules to Leases And Define ``Lease''
    NCLC urges the Commission to amend Sec.  700.10 to clarify that the 
MMWA covers consumer leases.\52\ The majority of courts have found that 
a lessee meets the definition of ``consumer'' in the MMWA because 
warranty rights are transferred to lessees or the lessees are permitted 
to enforce the contract under state law, among other reasons.\53\ As 
NCLC notes, however, some courts have held that a lessee does not meet 
the definition of ``consumer.'' These courts have generally found that 
the definition of ``consumer'' presupposes a transaction that qualifies 
as a sale under the Act, and that the lease transaction at issue was 
not a qualifying sale.\54\ NCLC therefore asks the Commission to add a 
new Interpretation, as Sec.  700.13, titled, ``consumer leases,'' to 
provide explicitly that the Act applies to consumer leases.\55\
---------------------------------------------------------------------------

    \52\ NCLC at 3.
    \53\ See, e.g., Voelker v. Porsche Cars N. Am., Inc., 353 F.3d 
516 (7th Cir. 2003); Mago v. Mercedes-Benz, U.S.A., Inc., 142 P.3d 
712 (Ariz. Ct. App. 2006); Am. Honda Motor Co. v. Cerasani, 955 
So.2d 543 (Fla. 2007).
    \54\ See, e.g., Stark v. Maserati N. Am., Inc., 2010 WL 4916981 
(E.D.N.Y. Oct. 13, 2010); DiCintio v. DaimlerChrysler Corp., 768 
NE.2d 1121 (N.Y. 2002).
    \55\ NCLC at 5.
---------------------------------------------------------------------------

    The Commission does not agree with the view held by a minority 
number of courts that lessees cannot be a ``consumer'' under the MMWA 
because each prong of the ``consumer'' definition \56\ presupposes a 
sale to the end-consumer (which in this case is a lessee). Rather, as 
the majority of courts have held, lessees meet the definition of a 
``consumer'' because warranty rights are either transferred to lessees 
or the lessees are permitted to enforce the contract under state 
law.\57\ Given that a majority of courts hold that the MMWA applies to 
certain leases, consistent with past agency guidance,\58\ a new 
Interpretation is not necessary.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 2301(3) (``The term `consumer' means a buyer 
(other than for purposes of resale) of any consumer product, any 
person to whom such product is transferred during the duration of an 
implied or written warranty (or service contract) applicable to the 
product, and any other person who is entitled by the terms of such 
warranty (or service contract) or under applicable State law to 
enforce against the warrantor (or service contractor) the 
obligations of the warranty (or service contract).'').
    \57\ See, e.g., supra note 53.
    \58\ The agency has provided similar guidance. See Advisory 
Opinion from Rachel Dawson to Raymond Asher (June 10, 1976) (``A 
leased product would be covered if the lease is essentially 
equivalent to a sale. For example, a product would be covered if the 
total compensation to be paid by the lessee is substantially 
equivalent to or in excess of the value of the product, and the 
lessee will own the product, or has an option to buy it for a 
nominal consideration, upon full compliance with his obligations 
under the lease.'').
---------------------------------------------------------------------------

h. Certain 50/50 Warranties Should Be Interpreted To Violate the Act's 
Anti-Tying Prohibition
    NCLC urges the Commission to reconsider its 2002 opinion letter 
\59\ finding ``50/50 warranties'' permissible under the Act. Fifty/
fifty warranties are those where the dealer promises to pay 50% of the 
labor costs and 50% of the parts cost, and the consumer pays the 
remainder. NCLC argues that allowing the warrantor to choose the 
repairs or parts is contrary to the goals of the MMWA, and leads to 
monopolistic pricing practices and a decrease in competition.\60\
---------------------------------------------------------------------------

    \59\ NCLC at 6-7, citing Letter from Donald S. Clark to Keith E. 
Whann (Dec. 2, 2002), available at https://www.ftc.gov/system/files/documents/advisory_opinions/national-independent-automobile-dealer-association/clark_to_whann_letter.pdf.
    \60\ NCLC at 6.
---------------------------------------------------------------------------

    Although the Commission found that 50/50 warranties may violate the 
Act in certain circumstances in its 1999 rule review, in 2002, the 
Commission clarified its position on 50/50 warranties. The Commission 
stated that the Act prohibits warrantors from conditioning their 
warranties on the use of branded parts or service where the warranted 
articles or services are ``severable from the dealer's responsibilities 
under the warranty.'' \61\ Therefore, when a warranty covers only 
replacement parts, and the consumer pays the labor charges, the 
warrantor cannot mandate specific service or labor to install those 
parts. Conversely, when a warranty covers only labor charges, and the 
consumer pays for parts, the warrantor cannot mandate the use of 
specific parts. With 50/50 warranties, however, ``the warranting dealer 
has a direct interest in providing the warranty service for which it is 
partly financially responsible. . . . Rather than conditioning the 
warranty on the purchase of a separate product or service not covered 
by the warranty, a 50/50 warranty shares the cost of a single product 
or service.'' \62\ For that reason, the warrantor needs some control 
over the repair needed and quality of repair.\63\ The Commission has 
decided to retain its 2002 position on 50/50 warranties. The Commission 
has reviewed the issue and believes that its 2002 interpretation 
continues to be correct.
---------------------------------------------------------------------------

    \61\ Letter from Donald S. Clark to Keith E. Whann (Dec. 2, 
2002), supra note 59.
    \62\ Id. at 2.
    \63\ Id.

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[[Page 42716]]

i. The Commission's Interpretation Under Sec.  700.11(a) Conflicts With 
the McCarran-Ferguson Act and Supreme Court Precedent
    NCLC asserts that the Commission has incorrectly interpreted the 
meaning of the McCarran-Ferguson Act in Sec.  700.11(a).\64\ The 
McCarran-Ferguson Act provides that ``[n]o Act of Congress shall be 
construed to invalidate, impair, or supersede any law enacted by any 
State for the purpose of regulating the business of insurance, or which 
imposes a fee or tax upon such business, unless such Act specifically 
relates to the business of insurance: Provided, That . . . the Sherman 
Act, . . . the Clayton Act, and . . . the Federal Trade Commission Act 
. . . shall be applicable to the business of insurance to the extent 
that such business is not regulated by State Law.'' \65\ Section 700.11 
states that agreements regulated by state law as insurance are subject 
to the MMWA ``only to the extent they are not regulated in a particular 
state as the business of insurance.'' \66\
---------------------------------------------------------------------------

    \64\ NCLC at 9.
    \65\ 15 U.S.C. 1012(b).
    \66\ 16 CFR 700.11(a).
---------------------------------------------------------------------------

    NCLC states that the Interpretation is inconsistent with both the 
McCarran-Ferguson Act and Supreme Court precedent.\67\ First, NCLC 
argues that because the MMWA is not one of the three enumerated 
statutes (the Sherman Act, Clayton Act or the FTC Act), the correct 
standard is the standard applicable to all other federal statutes. In 
other words, the MMWA can regulate the business of insurance so long as 
it does not ``invalidate, impair, or supersede'' state law. Therefore, 
even if a state regulates a service agreement as the business of 
insurance, the MMWA may still apply.\68\ Second, NCLC asserts the 
Commission's Interpretation is contrary to Supreme Court precedent, 
Humana v. Forsyth, 525 U.S. 299 (1999). There, the Supreme Court held 
that states' regulation of insurance fraud would not displace remedies 
under federal law for the same misconduct because they do not ``impair 
the insurance regulatory scheme.'' \69\ Consequently, NCLC states, 
``even though state insurance law provides a remedial scheme for breach 
of a service contract regulated as insurance, the additional 
availability of Magnuson-Moss remedies for the same misconduct does not 
`impair' the insurance regulatory scheme.'' \70\
---------------------------------------------------------------------------

    \67\ NCLC at 8-9.
    \68\ Id. at 8.
    \69\ Id. at 9.
    \70\ Id.
---------------------------------------------------------------------------

    The Commission agrees that the McCarran-Ferguson Act's 
``invalidate, impair, or supersede'' standard is applicable to the 
MMWA. The Commission will revise the Interpretation as described in 
amendatory instruction 12.
j. Amend Definition of ``Consumer Product''
    SEMA asks the Commission to amend the definition of ``consumer 
product'' to include specialty equipment.\71\ The Commission has 
determined that no definitional change is warranted because specialty 
equipment is already covered by the definition of ``consumer product.'' 
``Consumer product'' is defined as ``any tangible personal property 
which is distributed in commerce and which is normally used for 
personal, family, or household purposes.'' \72\
---------------------------------------------------------------------------

    \71\ SEMA at 2. Specialty equipment includes performance, 
functional, restoration and styling-enhancement products for use on 
passenger cars and light-duty trucks. Id. at 1.
    \72\ 16 CFR 701.1(b).
---------------------------------------------------------------------------

2. 16 CFR Part 701: Disclosure of Terms and Conditions (Rule 701)

a. Regulate Service Contract Disclosures
    The request for public comment specifically asked whether the 
Commission should amend the Rules to cover service-contract 
disclosures.\73\ The Commission received six comments on this issue: 
four commenters urge the Commission not to add specific service-
contract disclosure requirements, while two commenters take the 
opposite view.\74\ The four opponents of disclosure rules for service 
contracts state that service contracts are different from warranties in 
that they do not form the basis of the bargain. They argue that no 
federal regulation is needed because states already regulate service 
contracts and adding federal regulation to the mix would create 
unnecessary burdens to both the industry and to federal and state 
governments.\75\
---------------------------------------------------------------------------

    \73\ The Association of Home Appliance Manufacturers (``AHAM'') 
asks for additional changes to Rule 701. First, AHAM asks the 
Commission to amend Rule 701.3 by adding that any warrantor 
complying with the Rule is entitled to a presumption in any breach 
of warranty litigation that the warranty is not unconscionable, 
deceptive, or misleading. AHAM at 2. It argues that consumers file 
hundreds of class actions each year asking courts to invalidate or 
modify the terms of a written warranty. Id. Although Rule 701.3 sets 
out minimum federal disclosure requirements for consumer product 
warranties, warrantors must also follow the proscriptions of Section 
5 of the FTC Act, prohibiting unfair and deceptive practices, and 
various applicable state laws. Because there are other laws 
governing unfairness or deception in warranties, the Commission does 
not believe it would be appropriate to create a new provision in the 
Warranty Rules specifying that warrantors complying with Rule 701.3 
are entitled to a presumption that their warranties are not 
unconscionable, deceptive, or misleading. Second, AHAM asks the 
Commission to amend Rule 701.3 by adding that a warrantor can 
exclude any latent defects that may manifest after the written 
warranty period expires. Id. at 3. AHAM asserts that many lawsuits 
seek to expand or modify the express warranty's terms after sale, 
and beyond the contractually-limited time period, to cover an 
alleged latent defect that manifests itself post-warranty period. 
However, Rule 701.3 focuses on disclosure requirements for consumer 
product warranties. It requires the disclosure of several items of 
material information in a clear and conspicuous manner. Rule 701.3 
does not mandate specific warranty coverage. Nor does the Rule 
itself cover post-warranty conduct. Therefore, no change is 
warranted. Mr. Steinborn asks the Commission to modify Rule 701 so 
that third-party manufacturers or re-fillers of consumables, such as 
ink and toner, must include a marking prominently displayed on the 
consumable that clearly directs the end user to contact the party 
that remanufactured the consumable (or its designee) for all 
warranty claims and information. Steinborn at 2. However, Rule 701 
already requires that warranty terms include a step-by-step 
explanation of the procedure which the consumer should follow in 
order to obtain performance of any warranty obligation. 16 CFR 
701.3(a)(5). For this reason, the Commission has chosen not to 
incorporate the specific change advocated by Mr. Steinborn.
    \74\ Opponents of federal service-contract disclosure 
regulations are the AHAM, Florida Service Agreement Association, 
Service Contract Industry Council, and Property Casualty Insurers 
Association of America. Mr. Johnson and NCLC support the 
Commission's promulgation of service-contract disclosure 
regulations.
    \75\ See Florida Service Agreement Association at 2-3; Service 
Contract Industry Council at 2-3. For example, the Service Contract 
Industry Council states that thirty-five states specifically 
regulate service contracts on consumer goods, thirty-five states 
regulate service contracts on homes, and thirty-eight states 
regulate service contracts on motor vehicles. Commenters assert that 
many of these state laws provide greater protection to consumers 
than the MMWA by, for example, ``ensuring that service contract 
obligors are financially sound and that their obligations to 
consumers are secure.'' Because the MMWA preempts state warranty law 
unless the state law ``affords protection to consumers greater than 
the requirement of Magnuson-Moss,'' these commenters argue that 
additional federal regulations may have little practical effect.
---------------------------------------------------------------------------

    On the other hand, two commenters, Mr. Evan Johnson and NCLC, argue 
that the Commission should amend the Rules to prescribe the manner and 
form in which service-contract terms are disclosed. Mr. Johnson argues 
that service contracts have been a ``huge source'' of consumer 
complaints. ``Many of these complaints concern marketing but many also 
arise from the unclear wording and structure of the contracts.'' \76\ 
NCLC provides two reasons why the Commission should specifically 
regulate service contracts. First, the reasons for mandatory disclosure 
requirements for warranties apply equally to service contracts; 
regulating one and not the other makes little sense.\77\ Second, 
service contracts

[[Page 42717]]

are widely sold and expensive, and consumers have little information 
concerning costs, coverage, and claims process.\78\
---------------------------------------------------------------------------

    \76\ Johnson at 4.
    \77\ NCLC at 12.
    \78\ Id.
---------------------------------------------------------------------------

    The Commission does not believe such a rule amendment is needed 
because the MMWA and Section 5 already require that warrantors, 
suppliers, and service contract providers clearly and conspicuously 
disclose service contract terms and conditions. Section 2306(b) of the 
Act provides: ``[n]othing in this chapter shall be construed to prevent 
a supplier or warrantor from entering into a service contract with the 
consumer in addition to or in lieu of a written warranty if such 
contract fully, clearly, and conspicuously discloses its terms and 
conditions in simple and readily understood language.'' \79\ In 
addition, Section 5 prohibits service contract providers from failing 
to clearly and conspicuously disclose material terms and conditions or 
otherwise deceiving consumers with respect to the scope and nature of 
service contracts. This is in accord with the Businessperson's Guidance 
to the MMWA: ``If you offer a service contract, the Act requires you to 
list conspicuously all terms and conditions in simple and readily 
understood language.'' \80\ The Commission has issued a number of 
consumer education pieces on service contracts and extended warranties 
and will take action where warranted.\81\
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 2306(b).
    \80\ The Businessperson's Guide to Federal Warranty Law, supra 
note 41.
    \81\ See, e.g., FTC, Auto Service Contracts and Warranties, 
https://www.consumer.ftc.gov/articles/0054-auto-service-contracts-and-warranties; see also FTC v. Voicetouch, Civ. No. 09CV2929 (N.D. 
Ill., filed May 13, 2009) (action involving deceptive telemarketing 
of extended auto warranties); FTC v. Transcontinental Warranty, 
Inc., Civ. No. 09CV2927 (N.D. Ill., filed May 13, 2009) (same). The 
Commission will continue to examine service contract disclosures.
---------------------------------------------------------------------------

3. 16 CFR Part 702: Pre-Sale Availability Rule (Rule 702)

    Generally, under Rule 702, sellers who offer written warranties on 
consumer products must include certain information in their warranties 
and make them available for review at the point of purchase. The 
Commission's request for public comment asked whether the Commission 
should amend Rule 702 to specifically address making warranty documents 
accessible online.
    The Commission received seven comments on this specific 
question.\82\ One commenter noted at the outset that Rule 702 
``continues to be very important to consumers. Consumers are very aware 
of warranties and use warranty differences as a basis for choosing a 
product. The current rule is a reasonable and cost-effective approach 
to providing the information.'' \83\
---------------------------------------------------------------------------

    \82\ AHAM at 3; Center for Auto Safety at 2; Eisenberg at 1; 
Johnson at 2-3; National Automobile Dealers Association at 2; 
National Independent Automobile Dealers Association at 2; Steinborn 
at 2-3. Ms. Eisenberg asks the Commission to amend the Rule to 
permit private actions for violations of Rule 702. However, the MMWA 
already provides a private cause of action to any consumer ``who is 
damaged by the failure of a supplier, warrantor, or service 
contractor to comply with any obligation'' under the MMWA. 15 U.S.C. 
2310(d)(1).
    \83\ Johnson at 2.
---------------------------------------------------------------------------

    Three commenters ask the Commission to specifically reference 
Internet sales in Rule 702 and provide additional guidance on how 
retailers can comply with the Rule by referring consumers to 
warrantors' Web sites.\84\ Although Rule 702 does not explicitly 
mention online commerce, it applies to the sale of warranted consumer 
products online. Staff recently updated the .Com Disclosures to provide 
additional guidance on disclosure obligations in the online context. As 
stated in the updated .Com Disclosures, warranties communicated through 
visual text online are no different than paper versions and the same 
rules apply.\85\ Online sellers of consumer products can easily comply 
with the pre-sale availability rule in a number of ways. Online sellers 
can, for example, use ``a clearly-labeled hyperlink, in close 
conjunction to the description of the warranted product, such as `get 
warranty information here' to lead to the full text of the warranty.'' 
\86\
---------------------------------------------------------------------------

    \84\ AHAM at 3; National Independent Automobile Dealers 
Association at 2; Steinborn at 2-3. The Center for Auto Safety 
recommends that Rule 702.3 point of sale requirements be maintained 
and enforced, requiring hard copy warranty materials to be available 
at physical retail locations, not on CD or DVD. Staff's guidance 
allows warranties to be available on CDs and DVDs, but does not 
allow sellers to meet their pre-sale obligations by referring 
consumers to CDs or DVDs that are not readily accessible at the 
point of sale. See Letter from Allyson Himelfarb to Thomas M. Hughes 
(Feb. 17, 2009), available at https://www.ftc.gov/bcp/warranties/opinion0901.pdf.
    \85\ See .com Disclosures, supra note 4, at 3, n7.
    \86\ Id.
---------------------------------------------------------------------------

    As with other online disclosures, warranty information should be 
displayed clearly and conspicuously. Therefore, for example, warranty 
terms buried within voluminous ``terms and conditions'' do not satisfy 
the Rule's requirement that warranty terms be in close proximity to the 
warranted product. Further, general references to warranty coverage, 
such as ``one year warranty applies,'' are also not sufficient.\87\
---------------------------------------------------------------------------

    \87\ FTC Staff has found several instances in which online 
sellers have not fully complied with the pre-sale availability rule 
and has contacted these sellers to inform them of their obligations. 
https://www.ftc.gov/opa/2013/12/warningletters.shtm
---------------------------------------------------------------------------

    The Commission however, does not agree with the view endorsed by 
commenters \88\ that offline sellers can comply with the pre-sale 
availability rule by advising buyers of the availability of warranties 
on the warrantor's Web site. The intent of the Rule is to make warranty 
information available at the point of sale. For brick and mortar 
transactions, the point of sale is in the store; for online 
transactions, the point of sale is where consumers purchase the product 
online.
---------------------------------------------------------------------------

    \88\ AHAM at 4-5; see also Steinborn at 2 (``Where manufacturers 
and resellers have Internet presences, click-through access to and/
or a conspicuous reference to the manufacturers' Web site containing 
the applicable warranty should be recognized as sufficient means for 
sellers to meet the requirements of 702.'').
---------------------------------------------------------------------------

    The Commission agrees with the commenter who notes: ``Internet 
availability, however, is not a substitute for availability as 
specified in Rule 702 because many consumers make little or no use of 
the internet, while those who do still need the information at the 
point of sale as a fallback for when they haven't obtained the 
information online or when they want to verify that their online 
information is accurate.'' \89\
---------------------------------------------------------------------------

    \89\ Johnson at 2.
---------------------------------------------------------------------------

    In sum, because Rule 702 already covers the sale of consumer 
products online, and because staff has updated its .Com Guidance 
concerning compliance with pre-sale obligations online, the Commission 
has chosen not to engage in additional rulemaking as to Rule 702 at 
this time.

4. Rule 703--Informal Dispute Settlement Procedures

    The Commission's request for public comment specifically asked 
whether it should change Rule 703, and if so, how. Six commenters 
submitted responses to this question.\90\ At the outset, commenters 
highlighted the importance of the Rule in serving as a standard for 
IDSMs in general, and more specifically, in providing a benchmark for 
state lemon law IDSMs and certification programs for IDSMs. Many 
states' criteria focus on the IDSM's compliance with Rule 703's 
provisions. Therefore, commenters stressed that any repeal or change to 
Rule 703 will also affect state lemon law and certification 
programs.\91\ Notwithstanding this fact, some commenters ask the 
Commission to change certain elements of the Rule,

[[Page 42718]]

including the Mechanism's procedure, record-keeping, and audit 
requirements, and also reassess the Commission's position on binding 
arbitration clauses in warranty contracts. These comments are discussed 
below. Overall, the Commission leaves Rule 703 unchanged.
---------------------------------------------------------------------------

    \90\ AHAM at 6; Center for Auto Safety at 1; Johnson at 3; 
International Association of Lemon Law Administrators at 1; NCLC at 
14-15; Nowicki at 1-2.
    \91\ See International Association of Lemon Law Administrators 
at 1.
---------------------------------------------------------------------------

a. Modify the IDSM Procedures
    AHAM claims that the procedures prescribed in Rule 703 are 
difficult to follow and implement.\92\ It urges the Commission to 
simplify the procedures so they would be ``more easily and widely 
implemented by warrantors.'' \93\ It further asserts that ``a change 
would benefit consumers, businesses, and courts by streamlining the 
dispute resolution procedure and, thereby, reducing the burden on state 
and federal courts of adjudicating some warranty disputes, as many more 
could be handled through informal, but structured proceedings.'' \94\ 
AHAM does not proffer any specific changes that should be made, or 
provide examples of why the procedures described in Rule 703 are 
difficult to follow. As the Commission stated in 1975 when adopting the 
Rule, ``[t]he intent is to avoid creating artificial or unnecessary 
procedural burdens so long as the basic goals of speed, fairness, and 
independent participation are met.'' \95\ Further, staff's review of 
IDSM audits have not indicated any significant concern with IDSM 
procedures. The Commission therefore retains the Rule 703 procedures.
---------------------------------------------------------------------------

    \92\ AHAM at 6.
    \93\ Id.
    \94\ Id.
    \95\ 40 FR 60168, 60193 (Dec. 31, 1975).
---------------------------------------------------------------------------

b. Change Rules on Mechanism and Auditor Impartiality
    Two commenters \96\ state that Rule 703.4 should be amended because 
neither the Mechanism nor the auditor, who is selected by the 
Mechanism, is impartial. Mr. Nowicki asks the Commission to require the 
Mechanism to be completely independent of any warrantor or trade 
association. Further, both the Center for Auto Safety and Mr. Nowicki 
assert that a Mechanism should not select an auditor because doing so 
creates a conflict of interest. The Center for Auto Safety recommends 
that the Commission select an auditor for a fee, and determine whether 
the Mechanisms are fair and expeditious.
---------------------------------------------------------------------------

    \96\ Center for Auto Safety at 1; Nowicki at 1.
---------------------------------------------------------------------------

    No changes are warranted because Rule 703 already imposes specific 
requirements concerning the impartiality of both the Mechanism and the 
auditor that the Mechanism selects. For example, Rule 703.3(b) requires 
the warrantors and sponsors of IDSMs to take all necessary steps to 
ensure that the Mechanism, and its members and staff, are sufficiently 
insulated from the warrantor and the sponsor, so that the members' and 
staff's decisions and performance are not influenced by either the 
warrantor or the sponsor.\97\ The Rule imposes minimum criteria in this 
regard: (1) Committing funds in advance; (2) basing personnel decisions 
solely on merit; and (3) not assigning conflicting warrantor or sponsor 
duties to the Mechanism.\98\ Additional safeguards for impartiality are 
set forth in Rule 703.4 governing qualification of members.
---------------------------------------------------------------------------

    \97\ 16 CFR 703.3(b).
    \98\ Id.
---------------------------------------------------------------------------

    As to auditors' impartiality, although the Mechanism may select its 
own auditor, Rule 703.7(d) provides that ``[n]o auditor may be involved 
with the Mechanism as a warrantor, sponsor or member, or employee or 
agent thereof, other than for purposes of the audit.'' \99\ Further, 
IDSM audits have found ``no situation of conflict or circumstance which 
might give rise to an impression that [a conflict of interest] 
exists.'' \100\ Therefore, the Rule contains sufficient safeguards 
against partiality.
---------------------------------------------------------------------------

    \99\ 16 CFR 703.7(d).
    \100\ See, e.g., Morrison and Company, 2013 Audit of BBB Auto 
Line, available at https://www.ftc.gov/sites/default/files/documents/reports_annual/2013-audit-better-business-bureau-auto-line-including-state-florida-and-state-ohio/2013bbbautoline.pdf, at 6. 
The audit further found that ``consumers are pleased with the 
impartiality and the quality of dispute resolution services . . . 
.'' Id.
---------------------------------------------------------------------------

c. Modify the Information To Be Submitted to the Mechanism
    Rule 703.5(d) requires the Mechanism to render a decision ``at 
least within 40 days of notification of the dispute.'' \101\ The Center 
for Auto Safety asks the Commission to amend Section 703.5 to provide 
that the ``40 day deadline begins upon the consumer filing a 
substantially complete application regardless of whether the VIN is 
provided or not.'' \102\ The Center for Auto Safety claims that the 
Better Business Bureau is evading the 40-day deadline, because the BBB 
does not request Vehicle Identification Number (``VIN'') information on 
its consumer intake form but the BBB will only begin to consider the 
dispute after it receives the VIN number.
---------------------------------------------------------------------------

    \101\ 16 CFR 703.5(d).
    \102\ Center for Auto Safety at 1.
---------------------------------------------------------------------------

    Section 703.5 requires the Mechanism to ``investigate, gather and 
organize all information necessary for a fair and expeditious decision 
in each dispute.'' \103\ This provision ``implicitly permits Mechanisms 
to require consumers to provide the Mechanism with information 
`reasonably necessary' to decide the dispute.'' \104\ When adopting the 
final Rule in 1975, the Commission noted the Rule's ``intent is to 
avoid creating artificial or unnecessary procedural burdens so long as 
the basic goals of speed, fairness and independent participation are 
met.'' \105\ Therefore, because the Mechanism must have some 
flexibility in deciding the information necessary for it to make a 
determination, the Commission will retain Rule 703.5 unchanged. The 
Commission encourages, however, open dialogue between industry groups 
and the BBB to address any remaining concerns.\106\
---------------------------------------------------------------------------

    \103\ 16 CFR 703.5(c).
    \104\ See Staff Advisory Opinion to Mr. Dean Determan, at 6, n6 
(Aug. 28, 1985).
    \105\ 40 FR 60168, 60193 (Dec. 31, 1975).
    \106\ According to the BBB Autoline program, a claim is 
initiated only after a consumer provides the VIN and signs the 
application. A claim cannot be initiated online without this 
information.
---------------------------------------------------------------------------

d. Mechanism's Decisions as Non-Binding
    The Commission received three comments concerning Rule 703.5(j)'s 
provision prohibiting binding arbitration provisions in warranty 
contracts.\107\ AHAM urges the Commission to delete this provision 
because ``it creates disincentives for manufacturers or sellers to 
create a Mechanism in the first instance and leads to wasted and 
duplicative efforts in cases between the consumers and manufacturers or 
sellers.'' \108\ NCLC and Mr. Johnson ask the Commission to retain Rule 
703.5(j).\109\
---------------------------------------------------------------------------

    \107\ See NCLC at 13-14; Johnson at 3; AHAM at 6.
    \108\ AHAM at 6-7.
    \109\ NCLC at 13-18; Johnson at 3.
---------------------------------------------------------------------------

    When the Commission first promulgated Rule 703.5(j) in 1975, it did 
so based on the MMWA's language, legislative history, and purpose: to 
ensure that consumer protections were in place in warranty 
disputes.\110\ The Commission explained that ``reference within the 
written warranty to any binding, non-judicial remedy is prohibited by 
the Rule and the Act.'' \111\ The Commission's underlying premise was 
that its authority over Mechanisms encompassed all nonjudicial dispute 
resolution procedures referenced within a written warranty, including 
arbitration.
---------------------------------------------------------------------------

    \110\ 40 FR 60168, 60210 (Dec. 31, 1975).
    \111\ 40 FR 60168, 60211 (Dec. 31, 1975).
---------------------------------------------------------------------------

    During the 1996-97 rule review, some commenters asked the 
Commission to deviate from its position that Rule 703

[[Page 42719]]

bans mandatory binding arbitration in warranties. The Commission, 
however, relying on its previous analysis and the MMWA's statutory 
language, reaffirmed its view that the MMWA and Rule 703 prohibit 
mandatory binding arbitration.\112\ As the Commission noted, Section 
2310(a)(3) of the MMWA states that, if a warrantor incorporates an IDSM 
provision in its warranty, ``the consumer may not commence a civil 
action (other than a class action) . . . unless he initially resorts to 
such procedure.'' \113\ The Commission concluded ``Rule 703 will 
continue to prohibit warrantors from including binding arbitration 
clauses in their contracts with consumers that would require consumers 
to submit warranty disputes to binding arbitration.'' \114\
---------------------------------------------------------------------------

    \112\ 64 FR 19700, 19708 (Apr. 22, 1999).
    \113\ Id. (quoting 15 U.S.C. 2310(a)(3)(C)(i)).
    \114\ 64 FR 19700, 19708 (Apr. 22, 1999).
---------------------------------------------------------------------------

    Since the issuance of the 1999 FRN, courts have reached different 
conclusions as to whether the MMWA gives the Commission authority to 
ban mandatory binding arbitration in warranties.\115\ In particular, 
two appellate courts have questioned whether Congress intended binding 
arbitration to be considered a type of IDSM, which would potentially 
place binding arbitration outside the scope of the MMWA.\116\ 
Nonetheless, the Commission reaffirms its long-held view that the MMWA 
disfavors, and authorizes the Commission to prohibit, mandatory binding 
arbitration in warranties.\117\
---------------------------------------------------------------------------

    \115\ See, e.g., Kolev v. Euromotors West/The Auto Gallery, 658 
F.3d 1024 (9th Cir. 2011), withdrawn, 676 F.3d 867 (9th Cir. 2012) 
(withdrawn pending the issuance of a decision on a separate issue by 
the California Supreme Court in Sanchez v. Valencia Holding Co., 
S199119); Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th 
Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir. 
2002); see also Seney v. Rent-A-Center, Inc., 738 F.3d 631 (4th Cir. 
2013).
    \116\ Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th 
Cir. 2002); Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir. 
2002).
    \117\ See 40 FR 60168, 60210 (Dec. 31, 1975) and 64 FR 19700, 
19708 (Apr. 22, 1999).
---------------------------------------------------------------------------

    First, as the Commission observed during the 1999 rule review, the 
text of section 2310(a)(3)(C)(i) contemplates that consumers will 
``initially resort'' to IDSMs before commencing a civil action. That 
language clearly presupposes that ``a mechanism's decision cannot be 
binding, because if it were, it would bar later court action.'' \118\ 
Similarly, section 2310(a)(3)(C) specifies that ``decisions'' in IDSMs 
shall be admissible in any subsequent ``civil action.'' \119\ As that 
language confirms, Congress intended that IDSMs resulting in a 
``decision''--i.e., arbitration decisions rather than conciliation or 
mediation mechanisms--would precede and influence, but not foreclose, a 
subsequent judicial decision.
---------------------------------------------------------------------------

    \118\ 64 FR 19700, 19708 (Apr. 22, 1999).
    \119\ 15 U.S.C. 2310(a)(3).
---------------------------------------------------------------------------

    As the Commission has previously noted, the legislative history 
provides additional evidence that Congress intended all IDSMs, 
including arbitration proceedings, to be nonbinding.\120\ The House 
committee report stated that ``[a]n adverse decision in any informal 
dispute settlement proceeding would not be a bar to a civil action on 
the warranty involved in the proceeding. . . .'' \121\ That language 
confirms what Congress strongly implies in the statutory text: 
arbitration should precede but not preclude a subsequent court action.
---------------------------------------------------------------------------

    \120\ 64 FR 19700, 19708 (Apr. 22, 1999).
    \121\ Report to Accompany H.R. 7917, H.R. Rep. No. 93-1107, at 
41 (1974) (report of the House Committee on Interstate and Foreign 
Commerce); see also S. Rep. No. 93-151, at 3 (1973) (report of the 
Senate Committee on Commerce) (``[I]f the consumer is not satisfied 
with the results obtained in any informal dispute settlement 
proceeding, the consumer can pursue his legal remedies in a court of 
competent jurisdiction. . . .'').
---------------------------------------------------------------------------

    The statutory scheme forecloses any argument that warranty-related 
arbitration proceedings fall outside the statutory category of 
``informal dispute resolution mechanisms'' and thus outside the FTC's 
rulemaking authority. As many legislators, policymakers, and courts 
understood at the time of the MMWA's enactment, any arbitration 
proceeding is, by comparison to judicial proceedings, an ``informal'' 
``mechanism'' for ``dispute settlement,'' and it thus falls squarely 
within the plain meaning of the term ``informal dispute settlement 
mechanism.'' \122\ Similarly, the MMWA's conference report indicates 
that ``arbiters''--i.e., the decisionmakers in any arbitration 
proceeding--are responsible for making determinations in IDSMs, and 
thus further confirms that arbitration is a form of IDSM.\123\
---------------------------------------------------------------------------

    \122\ See, e.g., 119 Cong. Rec. 33,498 (1973) (statement of Sen. 
Magnuson); Consumer Protection: Hearings Before the Consumer 
Subcomm. of the S. Comm. on Commerce, S. Doc. No. 91-48, at 69 
(1969) (statement of FTC Commissioner Elman); Alexander v. Gardner-
Denver Co., 415 U.S. 36, 58 (1974). The Supreme Court has repeatedly 
confirmed that arbitration is a method of informal dispute 
resolution. See, e.g., AT&T Mobility LLC v. Concepcion, 131 S. Ct. 
1740, 1749 (2011) (``[T]he informality of arbitral proceedings is 
itself desirable, reducing the cost and increasing the speed of 
dispute resolution.''); Mitsubishi Motors v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 628 (1985) (``By agreeing to arbitrate 
. . ., [a party] trades the procedures and opportunity for review of 
the courtroom for the simplicity, informality, and expedition of 
arbitration.'').
    \123\ Section 2304(b)(1) prohibits warrantors from imposing any 
additional duty on consumers unless the duty has been found 
reasonable in ``an administrative or judicial enforcement 
proceeding'' or ``an informal dispute settlement proceeding.'' 15 
U.S.C. 2304(b)(1). The conference report indicates that the 
reasonableness of the additional duty is to be determined by ``the 
Commission, an arbiter, or a court.'' S. Rep. No. 93-1408, at 25, 
H.R. Rep. No. 93-1606, at 25 (1974) (Conf. Rep.) (emphasis added).
---------------------------------------------------------------------------

    Just as important, any argument that an ``arbitration'' can somehow 
elude classification as an IDSM would subvert the purposes of the 
MMWA's IDSM provisions. To effectuate its declared policy of 
encouraging IDSMs that ``fairly and expeditiously'' settle consumer 
disputes, Congress: (1) Created incentives for warrantors to develop 
IDSMs and (2) directed the Commission to issue and enforce baseline 
rules for IDSMs.\124\ Congress would not have created this elaborate 
structure for warrantor incentives and agency supervision of warrantors 
who want to mandate use of certain contractual procedures in their 
warranties, while simultaneously permitting warrantors to evade that 
structure simply by using another contractual procedure and calling it 
something else (e.g., ``binding arbitration'') and thereby immunizing 
it from all agency oversight.\125\ Other courts have upheld binding 
arbitration in this context on the ground that the rationale of Rule 
703 demonstrates an impermissible hostility toward arbitration in 
general and binding arbitration in particular.\126\ The Commission does 
not believe this is correct. Like the statutory text, the Commission's 
rules encourage arbitration proceedings when they comply with IDSM 
procedural safeguards and are not both mandatory and binding. Moreover, 
the Commission's rules permit ``post-dispute'' binding arbitration, 
where the parties agree--after a warranty dispute has arisen--to 
resolve their disagreement through arbitration.\127\ The Commission has 
also recognized that post-Mechanism binding arbitration is 
allowed.\128\ The Commission's prohibition is limited only to instances 
where binding arbitration is incorporated into the terms of a written 
warranty governed by the MMWA.\129\
---------------------------------------------------------------------------

    \124\ 15 U.S.C. 2310(a)(1)-(4).
    \125\ 9 U.S.C. 1-16.
    \126\ See, e.g., Davis v. S. Energy Homes, Inc., 305 F.3d 1268 
(11th Cir. 2002).
    \127\ See 40 FR 60168, 60211 (Dec. 31, 1975).
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

    AHAM also argues that eliminating the prohibition on binding 
arbitration would remove disincentives for warrantors to create a 
Mechanism and reduce judicial costs spent dealing with duplicative 
warranty cases. However,

[[Page 42720]]

Congress already considered the issues of warrantor incentives and 
availability of judicial remedies. To encourage warrantors to create 
Mechanisms, Section 2310(a)(3) allows warrantors to specify that use of 
a Mechanism is a prerequisite to filing a MMWA suit.\130\ The 
Commission believes that the current Rule appropriately implements the 
incentive structure that Congress established in the MMWA.
---------------------------------------------------------------------------

    \130\ 15 U.S.C. 2310(a)(3).
---------------------------------------------------------------------------

e. Change the Statistical Requirements
    Rule 703.6 requires the Mechanism to prepare indices and 
statistical compilations on a variety of issues, including warrantor 
performance, brands at issue, all disputes delayed beyond 40 days, and 
the number and percentage of disputes that were resolved, decided, or 
pending.\131\ The Commission requires the compilation of indices and 
statistics in part so any person can review a Mechanism's files. ``On 
the basis of the statistically reported performance, an interested 
person could determine to file a complaint with the Federal Trade 
Commission . . . and thereby cause the Commission to review the bona 
fide operation of the dispute resolution mechanism.'' \132\
---------------------------------------------------------------------------

    \131\ See generally 16 CFR 703.6(b)-(e).
    \132\ 40 FR 60168, 60213 (Dec. 31, 1975).
---------------------------------------------------------------------------

    Two commenters, the Center for Auto Safety and Mr. Nowicki, ask the 
Commission to repeal the Mechanism's record-keeping requirements 
contained in Rule 703.6.\133\ The Center for Auto Safety claims that 
most of the categories for statistical analysis ``are ambiguous, 
misleading or deceptive. Unfavorable consumer outcomes can be reported 
as favorable; untimely resolutions can be reported as timely.'' \134\
---------------------------------------------------------------------------

    \133\ Center for Auto Safety at 1; Nowicki at 2.
    \134\ Center for Auto Safety at 1. Nowicki claims that empirical 
evidence suggests that the ``compliance self-proclamations'' may be 
false and warranties may be deceptive.
---------------------------------------------------------------------------

    Similar comments were received during the previous rule review. 
Then, commenters urged the Commission to abolish Rule 703.6 because the 
categories of statistical compilation were ``either moot, nebulous, or 
even worse, misleading or deceptive.'' \135\ The Commission then stated 
that it appreciated that Rule 703.6(e)'s statistical compilations 
cannot provide an in-depth picture of the workings of the Mechanism. 
``However, the statistics were not intended to serve that function. The 
statistical compilations attempt to provide a basis for minimal review 
by the interested parties to determine whether the IDSM program is 
working fairly and expeditiously. Based on that review, a more detailed 
investigation could then be prompted.'' \136\ In addition, the 
Commission was mindful of the costs associated with substantial record-
keeping requirements, so as not to discourage the establishment of 
IDSMs. ``Therefore, the Commission sought to minimize the costs of the 
recordkeeping burden on the IDSM while ensuring that sufficient 
information was available to the public to provide a minimal review.'' 
\137\ The Commission has reviewed the issue and believes that its 
previous position continues to be correct.
---------------------------------------------------------------------------

    \135\ See 64 FR 19700, 19710 (Apr. 22, 1999) (discussing Mr. 
Nowicki's comment).
    \136\ Id.
    \137\ Id.
---------------------------------------------------------------------------

f. Audits and Recordkeeping Availability
    Rule 703.7 contains the audit requirements for the Mechanism. The 
Rule requires that an audit be performed annually evaluating: (1) 
Warrantors' efforts to make consumers aware of the Mechanism and (2) a 
random sample of disputes to determine the adequacy of the Mechanism's 
complaint intake-process and investigation and accuracy of the 
Mechanism's statistical compilations.\138\ Each audit should be 
submitted to the Commission and made available to the public at a 
reasonable cost. For the last several years, the Commission has 
published the audits on its Web site, making them available to the 
public free of charge.
---------------------------------------------------------------------------

    \138\ 16 CFR 703.7.
---------------------------------------------------------------------------

    One commenter asks the Commission to change Rule 703.8 to ``mak[e] 
all IDSM documents available online, and requir[e] the Commission to 
review samples of disputes to determine whether the mechanism fairly 
and expeditiously resolves disputes.'' \139\ Another commenter 
recommends that the Commission repeal the audit requirements for the 
same reasons as the statistical compilation requirements.\140\ Similar 
to the Commission's reasoning in upholding the statistical compilation 
requirements, the Commission has decided to retain the audit 
requirements without change for two reasons. First, like the 
statistical compilation requirements, the audit function attempts to 
provide a general basis for interested parties to determine whether the 
IDSM program is working fairly and expeditiously. Second, the IDSM must 
make available the statistical summaries to interested parties upon 
request, and hold open meetings to hear and decide disputes.\141\ Given 
that Rule 703 already contemplates public access to Mechanism 
information, and that the Commission was mindful that substantial 
recordkeeping costs may discourage the establishment of IDSMs, the 
Commission will not impose at this time a mandatory electronic access 
requirement. Further, the Commission staff reviews the audits annually 
and confirms they are Rule 703 compliant. For these reasons, the 
Commission retains Rule 703.8 unchanged.
---------------------------------------------------------------------------

    \139\ Nowicki at 2.
    \140\ Center for Auto Safety at 1.
    \141\ 16 CFR 703.8.
---------------------------------------------------------------------------

5. 16 CFR Part 239: Warranty Guides

    Several commenters ask the Commission to revise its Warranty 
Guides. First, three commenters \142\ ask the Commission to modify 
Sec.  239.2 to allow for the advertising of warranties online. The 
Commission's Guides are not specific to any medium, and already are 
applicable to all media. Second, commenters recommend that the Guides 
provide explicit, detailed guidance explaining how retailers and 
warrantors can comply with the MMWA. As stated previously, the .Com 
Disclosures and the Businessperson's Guide to Federal Warranty Law both 
provide additional guidance concerning online disclosure obligations. 
Therefore, part 239 will remain unchanged.\143\
---------------------------------------------------------------------------

    \142\ AHAM at 3; National Automobile Dealers Association at 2; 
Steinborn at 3.
    \143\ AHAM and Steinborn ask the Commission to amend part 239 to 
recognize that ``referral of consumers to manufacturer Internet 
sites which make available warranty information satisfies the 
requirement to disclose the actual product warranty information 
prior to purchase by consumer.'' AHAM at 3; Steinborn at 3-4. Such 
reference is already contemplated for online retailers. Such 
reference, however, would be contrary to the requirements imposed 
for offline retailers, as discussed above. Second, AHAM recommends 
that the Guides be amended to require advertisers ``to clearly and 
conspicuously disclose what component/system is warranted and for 
what duration and if the balance of the product is not covered or 
covered for a different duration disclose that as well to prevent 
the consumer from believing that the terms of the warranty apply to 
the entire product.'' AHAM at 3-4. These requirements, however, are 
already encompassed in Rule 701.3(a)(2) and therefore not needed in 
the Guides.
---------------------------------------------------------------------------

List of Subjects

16 CFR Part 700

    Trade practices, Warranties.

16 CFR Part 701

    Trade practices, Warranties.

16 CFR Part 703

    Trade practices, Warranties.

    For the reasons set forth above, the Federal Trade Commission 
amends 16 CFR parts 700, 701, and 703 as follows:

[[Page 42721]]

PART 700--INTERPRETATIONS OF MAGNUSON-MOSS WARRANTY ACT

0
1. The authority citation for part 700 continues to read as follows:

    Authority:  Magnuson-Moss Warranty Act, Pub. L. 93-637, 15 
U.S.C. 2301.


0
2. Amend Sec.  700.1 by revising the second and fifth sentences of 
paragraph (g) and the first sentence of paragraph (i) to read as 
follows:


Sec.  700.1  Products covered.

* * * * *
    (g) * * * Section 103, 15 U.S.C. 2303, applies to consumer products 
actually costing the consumer more than $10, excluding tax.* * * This 
interpretation applies in the same manner to the minimum dollar limits 
in section 102, 15 U.S.C. 2302, and rules promulgated under that 
section.
* * * * *
    (i) The Act covers written warranties on consumer products 
``distributed in commerce'' as that term is defined in section 101(13), 
15 U.S.C. 2301(13). * * *

0
3. Amend Sec.  700.2 by revising the first sentence to read as follows:


Sec.  700.2  Date of manufacture.

    Section 112 of the Act, 15 U.S.C. 2312, provides that the Act shall 
apply only to those consumer products manufactured after July 4, 1975.* 
* *

0
4. Amend Sec.  700.3 by revising the fourth and sixth sentences and 
footnote 1 of paragraph (a), the first sentence of paragraph (b), and 
the sixth sentence of paragraph (c) to read as follows:


Sec.  700.3  Written warranty.

    (a) * * * Section 101(6), 15 U.S.C. 2301(6), provides that a 
written affirmation of fact or a written promise of a specified level 
of performance must relate to a specified period of time in order to be 
considered a ``written warranty.'' \1\ * * * In addition, section 
111(d), 15 U.S.C. 2311(d), exempts from the Act (except section 102(c), 
15 U.S.C. 2302(c)) any written warranty the making or content of which 
is required by federal law.* * *
---------------------------------------------------------------------------

    \1\ A ``written warranty'' is also created by a written 
affirmation of fact or a written promise that the product is defect 
free, or by a written undertaking of remedial action within the 
meaning of section 101(6)(B), 15 U.S.C. 2301(6)(B).
---------------------------------------------------------------------------

    (b) Certain terms, or conditions, of sale of a consumer product may 
not be ``written warranties'' as that term is defined in section 
101(6), 15 U.S.C. 2301(6), and should not be offered or described in a 
manner that may deceive consumers as to their enforceability under the 
Act.* * *
    (c) * * * Such warranties are not subject to the Act, since a 
written warranty under section 101(6) of the Act, 15 U.S.C. 2301(6), 
must become ``part of the basis of the bargain between a supplier and a 
buyer for purposes other than resale.'' * * *

0
5. Amend Sec.  700.4 by revising the first sentence to read as follows:


Sec.  700.4  Parties ``actually making'' a written warranty.

    Section 110(f) of the Act, 15 U.S.C. 2310(f), provides that only 
the supplier ``actually making'' a written warranty is liable for 
purposes of FTC and private enforcement of the Act.* * *

0
6. Amend Sec.  700.5 by revising paragraph (a) and the first and second 
sentences of paragraph (b) to read as follows:


Sec.  700.5  Expressions of general policy.

    (a) Under section 103(b), 15 U.S.C. 2303(b), statements or 
representations of general policy concerning customer satisfaction 
which are not subject to any specific limitation need not be designated 
as full or limited warranties, and are exempt from the requirements of 
sections 102, 103, and 104 of the Act, 15 U.S.C. 2302-2304, and rules 
thereunder. However, such statements remain subject to the enforcement 
provisions of section 110 of the Act, 15 U.S.C. 2310, and to section 5 
of the Federal Trade Commission Act, 15 U.S.C. 45.
    (b) The section 103(b), 15 U.S.C. 2303(b), exemption applies only 
to general policies, not to those which are limited to specific 
consumer products manufactured or sold by the supplier offering such a 
policy. In addition, to qualify for an exemption under section 103(b), 
15 U.S.C. 2303(b), such policies may not be subject to any specific 
limitations.* * *

0
7. Amend Sec.  700.6 by revising the first sentence of paragraph (a) 
and the first, second, and fourth sentences of paragraph (b) to read as 
follows:


Sec.  700.6  Designation of warranties.

    (a) Section 103 of the Act, 15 U.S.C. 2303, provides that written 
warranties on consumer products manufactured after July 4, 1975, and 
actually costing the consumer more than $10, excluding tax, must be 
designated either ``Full (statement of duration) Warranty'' or 
``Limited Warranty''.* * *
    (b) Based on section 104(b)(4), 15 U.S.C. 2304(b)(4), the duties 
under subsection (a) of section 104, 15 U.S.C. 2304, extend from the 
warrantor to each person who is a consumer with respect to the consumer 
product. Section 101(3), 15 U.S.C. 2301(3), defines a consumer as a 
buyer (other than for purposes of resale) of any consumer product, any 
person to whom such product is transferred during the duration of an 
implied or written warranty (or service contract) applicable to the 
product.* * * However, where the duration of a full warranty is defined 
solely in terms of first purchaser ownership there can be no violation 
of section 104(b)(4), 15 U.S.C. 2304(b)(4), since the duration of the 
warranty expires, by definition, at the time of transfer.* * *

0
8. Amend Sec.  700.7 by revising the first sentence of paragraph (a) to 
read as follows:


Sec.  700.7  Use of warranty registration cards.

    (a) Under section 104(b)(1) of the Act, 15 U.S.C. 2304(b)(1), a 
warrantor offering a full warranty may not impose on consumers any duty 
other than notification of a defect as a condition of securing remedy 
of the defect or malfunction, unless such additional duty can be 
demonstrated by the warrantor to be reasonable.* * *

0
9. Amend Sec.  700.8 by revising the third sentence to read as follows:


Sec.  700.8  Warrantor's decision as final.

    * * * Such statements are deceptive since section 110(d) of the 
Act, 15 U.S.C. 2310(d), gives state and federal courts jurisdiction 
over suits for breach of warranty and service contract.

0
10. Amend Sec.  700.9 by revising the first and third sentences to read 
as follows:


Sec.  700.9  Duty to install under a full warranty.

    Under section 104(a)(1) of the Act, 15 U.S.C. 2304(a)(1), the 
remedy under a full warranty must be provided to the consumer without 
charge.* * * However, this does not preclude the warrantor from 
imposing on the consumer a duty to remove, return, or reinstall where 
such duty can be demonstrated by the warrantor to meet the standard of 
reasonableness under section 104(b)(1), 15 U.S.C. 2304(b)(1).

0
11. Amend Sec.  700.10 by revising the section heading, paragraph (a), 
the first sentence in paragraph (b), and paragraph (c) to read as 
follows:


Sec.  700.10  Prohibited tying.

    (a) Section 102(c), 15 U.S.C. 2302(c), prohibits tying arrangements 
that condition coverage under a written warranty on the consumer's use 
of an article or service identified by brand, trade, or corporate name 
unless that article or service is provided without charge to the 
consumer.
    (b) Under a limited warranty that provides only for replacement of

[[Page 42722]]

defective parts and no portion of labor charges, section 102(c), 15 
U.S.C. 2302(c), prohibits a condition that the consumer use only 
service (labor) identified by the warrantor to install the replacement 
parts.* * *
    (c) No warrantor may condition the continued validity of a warranty 
on the use of only authorized repair service and/or authorized 
replacement parts for non-warranty service and maintenance (other than 
an article of service provided without charge under the warranty or 
unless the warrantor has obtained a waiver pursuant to section 102(c) 
of the Act, 15 U.S.C. 2302(c)). For example, provisions such as, ``This 
warranty is void if service is performed by anyone other than an 
authorized `ABC' dealer and all replacement parts must be genuine `ABC' 
parts,'' and the like, are prohibited where the service or parts are 
not covered by the warranty. These provisions violate the Act in two 
ways. First, they violate the section 102(c), 15 U.S.C. 2302(c), ban 
against tying arrangements. Second, such provisions are deceptive under 
section 110 of the Act, 15 U.S.C. 2310, because a warrantor cannot, as 
a matter of law, avoid liability under a written warranty where a 
defect is unrelated to the use by a consumer of ``unauthorized'' 
articles or service. In addition, warranty language that implies to a 
consumer acting reasonably in the circumstances that warranty coverage 
requires the consumer's purchase of an article or service identified by 
brand, trade or corporate name is similarly deceptive. For example, a 
provision in the warranty such as, ``use only an authorized `ABC' 
dealer'' or ``use only `ABC' replacement parts,'' is prohibited where 
the service or parts are not provided free of charge pursuant to the 
warranty. This does not preclude a warrantor from expressly excluding 
liability for defects or damage caused by ``unauthorized'' articles or 
service; nor does it preclude the warrantor from denying liability 
where the warrantor can demonstrate that the defect or damage was so 
caused.

0
12. Amend Sec.  700.11 by:
0
a. Revising the fourth and fifth sentences and adding a sixth sentence 
in paragraph (a); and
0
b. Revising the first sentence of paragraph (b) and the first and 
second sentences of paragraph (c).
    The revisions and addition read as follows:


Sec.  700.11  Written warranty, service contract, and insurance 
distinguished for purposes of compliance under the Act.

    (a) * * * The McCarran-Ferguson Act, 15 U.S.C. 1011 et seq., 
provides that most federal laws (including the Magnuson-Moss Warranty 
Act) shall not be construed to invalidate, impair, or supersede any law 
enacted by any State for the purpose of regulating the business of 
insurance. While three specific laws are subject to a separate proviso, 
the Magnuson-Moss Warranty Act is not one of them. Thus, to the extent 
the Magnuson-Moss Warranty Act's service contract provisions apply to 
the business of insurance, they are effective so long as they do not 
invalidate, impair, or supersede a State law enacted for the purpose of 
regulating the business of insurance.
    (b) ``Written warranty'' and ``service contract'' are defined in 
sections 101(6) and 101(8) of the Act, 15 U.S.C. 2301(6) and 15 U.S.C. 
2301(8), respectively.* * *
    (c) A service contract under the Act must meet the definitions of 
section 101(8), 15 U.S.C. 2301(8). An agreement which would meet the 
definition of written warranty in section 101(6)(A) or (B), 15 U.S.C. 
2301(6)(A) or (B), but for its failure to satisfy the basis of the 
bargain test is a service contract.* * *

PART 701--DISCLOSURE OF WRITTEN CONSUMER PRODUCT WARRANTY TERMS AND 
CONDITIONS

0
13. The authority citation for part 701 continues to read as follows:

    Authority:  15 U.S.C. 2302 and 2309.

0
14. Amend Sec.  701.1 by revising paragraph (d) to read as follows:


Sec.  701.1  Definitions.

* * * * *
    (d) Implied warranty means an implied warranty arising under State 
law (as modified by sections 104(a) and 108 of the Act, 15 U.S.C. 
2304(a) and 2308), in connection with the sale by a supplier of a 
consumer product.
* * * * *

0
15. Amend Sec.  701.3 by revising paragraph (a)(7) to read as follows:


Sec.  701.3  Written warranty terms.

    (a) * * *
    (7) Any limitations on the duration of implied warranties, 
disclosed on the face of the warranty as provided in section 108 of the 
Act, 15 U.S.C. 2308, accompanied by the following statement:
    Some States do not allow limitations on how long an implied 
warranty lasts, so the above limitation may not apply to you.
* * * * *

PART 703--INFORMAL DISPUTE SETTLEMENT PROCEDURES

0
16. The authority citation for part 703 continues to read as follows:

    Authority: 15 U.S.C. 2309 and 2310.

0
17. Amend Sec.  703.1 by revising paragraph (e) to read as follows:


Sec.  703.1  Definitions.

* * * * *
    (e) Mechanism means an informal dispute settlement procedure which 
is incorporated into the terms of a written warranty to which any 
provision of Title I of the Act applies, as provided in section 110 of 
the Act, 15 U.S.C. 2310.
* * * * *

0
18. Amend Sec.  703.2 by revising the second sentence of paragraph (a) 
to read as follows:


Sec.  703.2  Duties of warrantor.

    (a) * * * This paragraph (a) shall not prohibit a warrantor from 
incorporating into the terms of a written warranty the step-by-step 
procedure which the consumer should take in order to obtain performance 
of any obligation under the warranty as described in section 102(a)(7) 
of the Act, 15 U.S.C. 2302(a)(7), and required by part 701 of this 
subchapter.
* * * * *

0
19. Amend Sec.  703.5 by revising paragraph (g)(2), the first sentence 
in paragraph (i), and the third sentence in paragraph (j) to read as 
follows:


Sec.  703.5  Operation of the Mechanism.

* * * * *
    (g) * * *
    (2) The Mechanism's decision is admissible in evidence as provided 
in section 110(a)(3) of the Act, 15 U.S.C. 2310(a)(3); and
* * * * *
    (i) A requirement that a consumer resort to the Mechanism prior to 
commencement of an action under section 110(d) of the Act, 15 U.S.C. 
2310(d), shall be satisfied 40 days after notification to the Mechanism 
of the dispute or when the Mechanism completes all of its duties under 
paragraph (d) of this section, whichever occurs sooner. * * *
    (j) * * * In any civil action arising out of a warranty obligation 
and relating to a matter considered by the Mechanism, any decision of 
the Mechanism shall be admissible in evidence, as provided in section 
110(a)(3) of the Act, 15 U.S.C. 2310(a)(3).


[[Page 42723]]


    By direction of the Commission, Commissioner Ohlhausen 
dissenting.
Donald S. Clark,
Secretary.

    Note: The following dissent will not appear in the Code of 
Federal Regulations.

Dissenting Statement of Commissioner Maureen K. Ohlhausen

    I voted against the Commission's Final Revised Interpretations of 
the Magnuson-Moss Warranty Act (MMWA) Rule because it retains Rule 
703.5(j)'s prohibition on pre-dispute mandatory binding arbitration.\1\
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    \1\ I do not object to the other final actions taken in this 
review.
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    Since the last Rule review in 1997, two federal appellate courts 
have held that the MMWA does not prohibit binding arbitration.\2\ 
Noting the federal policy favoring arbitration expressed in the Federal 
Arbitration Act (FAA),\3\ these courts concluded that the MMWA's 
statutory language and legislative history did not overcome the 
presumption in favor of arbitration and that the purposes of the MMWA 
and the FAA were not in inherent conflict. The courts also declined to 
give the Commission's contrary interpretation Chevron deference.\4\ 
Although some lower courts have reached a different conclusion, there 
is no circuit court precedent upholding the Commission's interpretation 
of the MMWA in Rule 703.5(j). Additionally, in several recent cases, 
the Supreme Court has indicated a strong preference for arbitration.\5\
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    \2\ See Walton v. Rose Mobile Homes, LLC, 298 F.3d 470 (5th Cir. 
2002); Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th 
Cir. 2002).
    \3\ 9 U.S.C. 1. See Shearson/Am. Express Inc. v. McMahon, 482 
U.S. 220 (1987) (noting that the presumption of the FAA is that 
arbitration is preferable and Congress must clearly override that 
presumption if it is to be disregarded).
    \4\ Chevron U.S.A., Inc. v. Natural Resources Defense Council, 
Inc., 467 U.S. 837 (1984) (holding that courts defer to an agency's 
interpretation of a statute if ``(1) Congress has not spoken 
directly to the issue; and (2) the agency's interpretation `is based 
on a permissible construction of the statute' '').
    \5\ See, e.g,. Am. Express Co. v. Italian Colors Rest., 133 S. 
Ct. 2304 (2013), AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 
(2011).
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    The courts have sent a clear signal that the Commission's position 
that MMWA prohibits binding arbitration is no longer supportable.\6\ 
When faced with such a signal, the Commission should not reaffirm the 
rule in question. I therefore respectfully dissent.
---------------------------------------------------------------------------

    \6\ See Davis, 305 F.3d at 1280 (``[T]he FTC's interpretation of 
the MMWA is unreasonable, and we decline to defer to the FTC 
regulations of the MMWA regarding binding arbitration in written 
warranties.'').
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[FR Doc. 2015-14065 Filed 7-17-15; 8:45 am]
 BILLING CODE 6750-01-P