Volume 10, Issue 4 - May 2012

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A Horse of a Different Color: Binding Arbitration and the FTC’s Interpretation of the Magnuson-Moss Warranty Act’s “Informal Dispute Settlement Procedures”

Jennifer Hart 

On September 19, 2011, the Ninth Circuit held in Kolev v. Euromotors West/The Auto Gallery that the Federal Trade Commission’s Rule 703, which prohibits pre-dispute binding arbitration of warranty claims, was not preempted by the FAA, and therefore, warranty claims under the MMWA must be allowed to proceed to court for a trial.  The decision created a circuit split that the Supreme Court may choose to resolve in the next term, as it presents an opportunity to further solidify the law surrounding the arbitration of statutory claims.  Specifically, the decision would clarify the proper deference to give an agency interpretation that may run contrary to the strong federal policy favoring arbitration. If the court upholds the Ninth Circuit’s ruling, it will mark a dramatic shift in the way that the Supreme Court has interpreted the FAA and would seem to weaken the “strong federal policy favoring arbitration.” Alternatively, if the Court overturns the Ninth Circuit, it will strengthen the already strong policy favoring arbitration, creating a precedent for rejecting agency rules and regulations that prohibit or hamper arbitration.

It is unlikely that the current Supreme Court will uphold the ruling, though. The Ninth Circuit’s analysis is predicated on an FTC interpretation of the term “informal dispute settlement procedure” that the Court is unlikely to accept.  The FTC’s interpretation of “informal dispute settlement procedures” is far broader than the language of the statute supports, as according to the FTC arbitration falls within that scope.  Under the MMWA, informal dispute settlement procedures are supposed to be precursors to litigation, but the court has repeatedly held that arbitration is a substitute for litigation.  As the FTC overreached by including binding arbitration within the term “informal dispute settlement procedure,” the Court will not accept the agency changing the Court’s definition of arbitration.  Thus, if the Court took the case, it would overturn the Ninth Circuit’s decision and resolve the split in favor of the Fifth and Eleventh Circuits.


Posted in: Volume 10, Issue 4

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