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Informal Dispute Resolution:
Is It Mandatory or Optional, and Is It a Benefit?

by Marshall Meyers of Weisberg & Meyers

Most state "Lemon Laws" are at least loosely modeled upon the Federal Lemon Law known as the Magnuson-Moss Warranty Act, 15 U.S.C. 2310 et seq. ("MMWA"). The MMWA was signed into law on July 4, 1975. This law began to come into being when President Lyndon Johnson created a "Task Force on Appliance Warranties and Service." See H. R. Rep. No. 93-1107, at 24 (1974), reprinted in 1974 U.S.C.C.A.N. 7702, 7707, prompted by a rising tide of consumer complaints, many of which involved warranties. Id. at 26, 1974 U.S.C.C.A.N. 7702, 7708. An FTC investigation found warrantors were not living up to their promises, issuing a report confirming this. Id. at 27, 1974 U.S.C.C.A.N. 7702, 7707.

One theme derived from this study evidenced "[t]oday's consumer product warranties are replete with limitations . . . [that] in most cases serve primarily to limit obligations otherwise owed to the buyer as a matter of law. This is done . . . by disclaimers and exemptions." Cong. Rec., House, September 17, 1974 at page H9311. Congress noted although such limitations "do no injustice to commercial buyers who are sophisticated in the ways of the marketplace and can judge the import of the express warranty and the meaning of the disclaimer of the implied warranty, unfortunately, the ordinary purchaser of consumer products does not know . . . the meaning of words in an express warranty which . . . without his knowledge, be limited rather than expanded." S.Rep. 93-1151 at p. 6 (1973). Congress recognized such disclaimers, limitations and exemptions left consumers with a "growing source of resentment [in] the inability to get many [warranted products] properly repaired and [with] the developing awareness that the paper with the filigree border bearing the bold caption 'Warranty' or 'Guarantee' was often of no greater worth than the paper it was printed on." 1974 U.S.C.C.A.N. 7702, 7709. The MMWA was thus enacted as a federal regulatory measure to ensure warranty compliance by providing compensation to consumers of defective automobiles and other products.

In an effort to provide consumers a manner to seek relief absent court intervention, Congress encouraged warrantors to establish "informal dispute settlement procedures" whereby warranty disputes are "fairly and expeditiously settled." 15 U.S.C. 2310 (a) (1). The main reason Congress felt it necessary to encourage these informal programs was the cost prohibitive nature of warranty litigation.

Cong. Rec. H 9305 at page 6 (1974). See also S.Rep. 93-151 at 7-8 (1973) (stating "enforcement of the warranty through the courts is prohibitively expensive, there exist[ed] no currently available remedy for consumers to enforce warranty obligations"). However, although Congress intended these Informal Dispute Resolution ("IDR") mechanisms to be an efficient way of resolving warranty disputes without litigation, Congress did not intend to sacrifice fairness for speed. Rather, to ensure the fairness of these mechanisms, Congress empowered the Federal Trade Commission ("FTC") to promulgate certain "minimum requirements" a warrantor's IDR program must meet before that warrantor could require an aggrieved consumer to resort to such a mechanism as a prerequisite to legal action. 15 U.S.C. 2310(a)(3)(2). These regulations, which must be strictly followed, were designed to ensure that IDR programs "not only look good on paper, but function effectively and fairly in practice" and that a given IDR mechanism "is fair and effective [and] does not just represent another hurdle that the consumer is forced to surmount before being provided a meaningful avenue of redress." Cong. Rec., S. 21976, 21977 (December 18, 1974) (emphasis added).

The reason the FTC created such intricate rules regarding informal dispute resolution mechanisms, and the reason warrantors must abide by said "elaborate and burdensome rules," was to ensure fairness. See Solomon, The Good, the Bad and the Rest: State Lemon Laws and Protection for Consumers, Journal of the American Bar Association (1994) (stating "[t]he major criticisms of manufacturer-funded dispute programs are that they are comparable to the 'wolf guarding the chicken coop.' And that the results are more protective of car makers than of consumer"). There were two primary reasons fairness was a concern for Congress.

First, warrantors fund said informal dispute resolution mechanisms. As such, they are likely to exert great influence on said mechanisms to ensure that the interests of the warrantors are met. See Generally Braucher, An Informal Resolution Model of Consumer Product Warranty Law, 1985 Wis. L. Rev. 1405. The 16 C.F.R. 703 regulations are intended to prevent such pressure by ensuring the IDR mechanisms "are sufficiently insulated from the warrantor and the sponsor, so that the decisions of the members and the performance of the staff are not influenced by either the warrantor or the sponsor." 16 C.F.R.703.3. This bias has been documented repeatedly. See Solomon at fn. 30 (stating "[i]n 1993, consumers receiving refunds/replacements of defective vehicles from California's manufacturer-sponsored dispute programs totaled 25%, compared to 65% from Washington's state-run arbitration program, 50% from Florida's state-run program, and 48% from New York's state-run program"). See also "Bitter Lemons," Smart Money magazine, January 1995.

Second, the complex 16 C.F.R. 703 regulations are required to level the playing field in light of the inherent inequity in the knowledge of the participating parties (e.g., a consumer with no knowledge of the law participating in the process for the first time versus a trained professional on the warrantor's side whose sole responsibility is to represent the warrantor in these proceedings). This inherent inequity caused one member of the FTC to remark, back when informal dispute resolution was just an "experiment" between General Motors and the Better Business Bureau, that

In the Matter of General Motors Corporation, 102 F.T.C. 1741 at page 1 (1983) (emphasis added).

Accordingly, while IDR may be beneficial, you should not just follow the warranty language attempting to require you to participate in IDR, but instead should consult a lawyer to determine whether your state actually requires such participation based on the warrantor's compliance or non-compliance with the governing regulations. Whether participation is required under your State Lemon law is also often a function of whether participation is required under the MMWA, but some states also have their own methods to evaluate fairness in the process.

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