close

Articles

IS INCLUDING ARBITRATION CLAUSE IN PRODUCT WARRANTIES A LEGAL PRACTICE?

By: William A. Dreier
February 2003

As noted in earlier Alerts, we too often forget that warranty claims are an integral part of products liability law. A problem has recently arisen in the consumer product area involving the inclusion by a manufacturer of a binding arbitration clause within the product warranty. Trial courts throughout the country have split on the legality of this practice. Some, supported by recent cases in the Eleventh Circuit and Fifth Circuit, have determined that nothing in the Magnusson-Moss Warranty Act, or other binding state or federal law, prohibits the practice.

Other lower state and federal courts and the Federal Trade Commission (FTC) have taken a contrary view. In fact, the FTC, the administrative agency administering the Magnusson-Moss Warranty Act, issued a regulation (16 CFR § 703.5(j) (1999)). The regulation states that Rule 703 continues “to prohibit warrantors from including binding arbitration clauses in their contracts with consumers that would require consumers to submit warranty disputes to binding arbitration.”

The most recent federal decision, Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th Cir. 2002), analyzed the Federal Arbitration Act, 9 U.S.C. § 1, et. seq. and the Magnusson-Moss Warranty Act, and determined that the FTC had misinterpreted the statute, thus requiring binding arbitration under the warranty in that case.

The dust has not yet settled on this issue unless and until all of the Federal Circuits or the United States Supreme Court resolve the question. On one side is the claim that a manufacturer should be able to limit its promise by reasonable conditions, including the use of arbitration. On the other side is the claim that the consumer purchaser should be able to have his or her disputes resolved in a court of law. New Jersey has taken no position on this issue. The closest case is Paul v. Timco, Inc., 356 N.J. Super. 180 (App. Div. 2002), decided December 20, 2002. There, the purchaser of a Honda paid an additional sum for an extended warranty in which there was a requirement of arbitration (although the document was not sent to the purchaser until after the sales transaction). The court found that because the purchaser had not specifically agreed to the arbitration provision when the extended warranty was purchased, and nothing in the sales agreement signed by the purchaser indicated that she had given up her resort to the courts in the event of a dispute, the provision was unenforceable. “One party to a contract may not unilaterally impose an obligation to arbitrate upon another party to the contract.” The New Jersey Supreme Court, on several occasions, the most recent in 2001, has stated that contractual language depriving a citizen of access to the courts must clearly state its purpose and indicate clearly that these rights are waived in favor of arbitration. Garfinkel v. Morristown Obstetrics and Gynecology Associates, P.A., 168 N.J. 124, 131-32 (2001). The Court has not yet decided, however, the issue of a binding arbitration clause contained in a consumer warranty contained in a purchase agreement or issued at the time of sale, giving rise to all of the issues inherent in contracts of adhesion.