FTC Opinion Protects Dealers From Consumer Lawyers’ Attacks on 50/50 Limited Warranties

Keith Whann

The Magnuson-Moss Warranty Act, which was enacted in 1975, requires manufacturers and sellers of consumer products to provide consumers with detailed information about warranty coverage offered in written warranties. The Act also prohibits them from offering limited warranties that contain “tie-in” provisions. Section 102(c) prohibits warrantors from conditioning warranty coverage on the consumer’s “using, in connection with the warranted product,” an article or service identified by brand, trade, or corporate name, unless the warrantor provides the article or service without charge. This provision has been the focus of a contentious debate between consumer groups and industry representatives that dates back to the 1990s.

It has been the practice for quite some time in the used motor vehicle industry for dealers to offer a “50/50” (or similar type) limited warranty in connection with the sale of used motor vehicles in order to offer consumers protections that would otherwise be unavailable to them. The typical limited warranty offered in the used motor vehicle industry generally states that in the event of a problem, the consumer will bring the vehicle back to the selling dealer to have the repairs and/or warranty services performed with the dealer paying for 50% of the repair costs (parts and labor) and the remaining 50% of the repair costs to be borne by the consumer. While some motor vehicle dealers will offer the limited warranty for a duration of up to 1 year, most limited warranties are for a period of 30, 60 or 90 days. The percentage of coverage and the duration of the limited warranty may vary depending on the type of vehicle, its age and prior use.

In 2001, consumer advocates across the Country began to take an aggressive position arguing that these types of limited warranties violate the Magnuson-Moss Warranty Act tie-in provisions. Their position was based on a 1999 Statement published by the FTC in a Federal Register Notice and an Assurance of Voluntary Compliance between the Pennsylvania Attorney General’s Bureau of Consumer Protection and a used car dealership. In the Final Action Concerning the FTC’s Review of Interpretations of the Magnuson-Moss Warranty Act, the FTC stated that used car warranties that cover a percentage of parts and labor and provide that the repair must be done by the dealer/warrantor “likely violate Section 102(c).” Two years later, the Pennsylvania Attorney General’s Bureau of Consumer Protection, relying in part on the FTC’s statement, entered into an Assurance of Voluntary Compliance with a used car dealership that it claimed offered 50/50 warranties that did not comply with the requirements of the Magnuson-Moss Warranty Act and, in turn, Pennsylvania’s Automotive Trade Practices and Consumer Law Statutes.

News of the Pennsylvania Attorney General’s action spread quickly across the Country spurring on the distribution of materials at consumer protection seminars regarding how to assert these types of clams against motor vehicle dealerships. In addition to the filing of individual lawsuits, motions for class certification were being filed and granted in a number of states. A finding of these limited warranties to be a deceptive act or practice under State Unfair and Deceptive Acts and Practices Statutes could lead to millions of transactions being rescinded and dealers losing their dealerships. Given the magnitude of the potential impact an adverse decision could have on the motor vehicle industry, in December of 2001, I contacted representatives of the FTC and began a dialogue with them on behalf of the National Independent Automobile Dealers Association (NIADA) to explore possible resolutions. It was my long held belief that these types of limited warranties did not constitute a violation of applicable law. My belief was based upon pertinent Sections of the Magnuson-Moss Warranty Act, the FTC’s Interpretations of the Magnuson-Moss Warranty Act, its Guide to the Used Car Rule and the FTC’s Businessperson’s Guide to Federal Warranty Law. It was apparent, however, that given the 1999 FTC Statement and the Pennsylvania Attorney General’s Action, it would be necessary for the FTC to issue a definitive statement to stop the ground swell of consumer litigation.

Over the course of a year, I had the opportunity to meet with the FTC on numerous occasions and submitted three written memorandums in support of my position. In response to my request for clarification on the issue, on December 31, 2002, the FTC wrote an opinion letter to me as the representative for the NIADA which states: “To resolve any uncertainty, the Commission is issuing this letter opinion, adopting the staff’s long-held opinion that Section 102(c) does not prohibit 50/50 warranties (or other warranties under which the warrantor pays a percentage of the costs for covered repairs) from requiring that the warrantor perform all covered repairs.” The FTC’s vote to issue the Letter of Opinion was unanimous. We strongly recommend that every dealer take the time to consider this issue and its impact on the dealership’s paperwork and operations.

This information is provided by Keith Whann of the law firm Whann & Associates, LLC and is for general information purposes only. You should contact legal counsel for specific application. © Keith Whann January, 2003.