Ninth Circuit Rules that Magnuson-Moss Warranty Act Prohibits Mandatory Arbitration in Warranties, Creating a Circuit Split

The Ninth Circuit in Kolev v. EuroMotors West/The Auto Gallery held that The Magnuson Moss Warranty Act (“MMWA”) “precludes enforcement of pre-dispute agreements . . . that require mandatory binding arbitration of consumer warranty claims.” The Ninth Circuit’s ruling would essentially prohibit manufacturers and distributors of consumer products from attempting to take advantage of the Supreme Court’s recent pro-arbitration rulings, including AT&T Mobility v. Concepcion, involving MMWA consumer warranty claims. Thus, to the extent the MMWA precludes arbitration clauses, class waivers in such clauses, which Concepcion rendered immune from invalidation under state laws, would thus likewise be unenforceable in MMWA actions, providing a complete end-run around Concepcion.

The Kolev court concluded that “[a]lthough the text of the MMWA does not specifically address the validity of pre-dispute mandatory binding arbitration, Congress expressly delegated rulemaking authority . . . to the Federal Trade Commission (“FTC”),” and the FTC has construed the MMWA as barring such binding arbitration clauses and “issued a rule prohibiting judicial enforcement of such provisions with respect to consumer claims brought under the MMWA.” The Kolev court found the FTC’s construction of the MMWA to be reasonable, explaining that the FTC’s position was grounded in the legislative history, it has persisted since 1975 and was reaffirmed by the FTC in 1999, it “advances the statute’s purpose of protecting consumers from being forced into involuntary agreements that they cannot negotiate,” and the agency’s interpretation is entitled to deference. The Kolev court expressly rejected “the argument that the FTC’s construction is unreasonable in light of the Supreme Court’s repeated holdings that Congress established a ‘liberal federal policy favoring arbitration agreements.’”

The Kolev majority parted company with the Fifth and Eleventh Circuits, which had concluded that the MMWA does not overcome the Federal Arbitration Act’s presumption that courts should enforce arbitration agreements. See Walton v. Rose Mobile Homes LLC; Davis v. S. Energy Homes, Inc. The Circuit split certainly raises the possibility of clarification from the High Court.

In a stinging dissent, Judge Smith concluded that the majority “conflat[ed]” the MMWA’s “informal dispute settlement mechanisms” (IDSM’s), an exceedingly narrow class of warranty dispute resolution procedures under the MMWA, with any alternative dispute resolution remedy. The IDSM’s “are unique ADR procedures that prevent consumers from pursuing warranty claims in court without first exhausting the warrantor’s [IDSM] procedures.” Under the dissent’s view, the binding arbitration agreement at issue operated “completely outside the optional IDSM procedures available under the MMWA” and that “neither Congress nor the FTC prohibits the use of binding, non-judicial remedies as an alternative to IDSMs.”

Michael R. McDonald is a Director in the Gibbons Business & Commercial Litigation Department.
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