Are Binding Arbitration Clauses In Written Warranties Legal ?

Rule 703 has been interpreted to prohibit the use of binding arbitration clauses in written warranties.

See 64 Fed. Reg. at 19,708 (discussing Rule 703's prohibition against binding arbitration clauses in written warranties); see also Southern Energy Homes, Inc. v. Lee, 732 So. 2d 994, 996 (Ala. 1999) (citing Wilson v. Waverlee Homes, Inc., 954 F. Supp. 1530, 1537-40 (M.D. Ala. 1997), aff'd, 127 F.3d 40 (11th Cir. 1997)).

The Federal Trade Commission reaffirmed its view that "reference within the written warranty to any binding non-judicial remedy is prohibited by the Rule and the Act." 64 Fed. Reg. at 19708 (quoting 40 Fed. Reg. 60168, 60211(1975)).

The Commission, noting "that this interpretation continues to be correct," declined to amend the rule, and stated, "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." Id. at 19708-09.

The Commission cited with approval a decision by an Alabama federal district court, Wilson v. Waverlee Homes, Inc., 954 F. Supp. at 1530, holding that the Act prohibits warrantors from including binding arbitration clauses in written warranties on consumer products. 64 Fed. Reg. at 19709.

In Wilson v. Waverlee Homes, 954 F. Supp. 1530, 1539 (M.D. Ala. 1997), the issue before the court was whether a defendant manufacturer could rely on an arbitration clause in an installment contract between a mobile home retailer and a consumer (where the manufacturer was not a party to the sales contract) to compel the consumer to submit to binding arbitration.

The court held the manufacturer could not compel arbitration in such circumstances.

Because the Act precluded the manufacturer from including a binding arbitration agreement in its own written warranty to the consumer, the court concluded the manufacturer could not "do by surrogate or vicarious means what it is forbidden to do on its own behalf." Waverlee, 954 F. Supp. at 1539.

The court reasoned that a contrary holding would result in "the complete and utter evisceration of the Magnuson-Moss Act." Waverlee, 954 F. Supp. at 1540.

In Southern Energy Homes, Inc. v. Lee, 732 So. 2d 994, 999 (Ala. 1999) the Alabama Supreme Court reached a similar conclusion:

Suffice it to say that although several sections of the Magnuson-Moss Act make reference to informal dispute-resolution procedures or mechanisms, those and other provisions also make it clear that a consumer is to have access to a judicial remedy.

In short, a warranty may expressly set forth an informal dispute-resolution mechanism and may make the use of that mechanism a prerequisite for filing a court action, but it may not provide that the use of such a mechanism is binding or that it is a bar to a court action. Southern Energy, 732 So. 2d at 996.