The Federal Trade Commission has long construed the Magnuson-Moss Warranty Act, a.k.a the “federal lemon law,” as barring binding arbitration provisions that consumers are asked to sign upon purchasing a product.  In fact, the FTC issued a rule that prohibits courts from enforcing binding arbitration clauses in written warranty agreements covered by the statute.  In 2002, both the Fifth Circuit and Eleventh Circuits rejected the FTC’s rule, and enforced arbitration clauses within warranties.  In a new opinion, the Ninth Circuit sided with the FTC, and against the Fifth and Eleventh Circuits. 

In Kolev v. Euromotors West/The Auto Gallery, __ F.3d __, 2011 WL 4359905 (9th Cir. Sept. 20, 2011), a dissatisfied buyer of a used Porsche brought multiple warranty claims against the dealership and manufacturer.   The sales contract contained a mandatory arbitration provision and the dealership successfully compelled arbitration.  (The order compelling arbitration could not be appealed under the FAA, nor under the usual “final judgment” rules because the district court action was stayed against Porsche during the arbitration.)  The arbitrator largely sided with the dealership.  After the arbitration award was confirmed by the district court, the Ninth Circuit reviewed and reversed the district court’s order granting the motion to compel arbitration.  In other words, after both sides had spent time and money conducting the entire arbitration, the Ninth Circuit decided that the Porsche plaintiff should not have had to arbitrate in the first place.

In the Kolev opinion, two doctrines duke it out.  On one hand, the doctrine of deference to federal agencies that are authorized to implement statutes (Chevron) weighed heavily in favor of enforcing the FTC’s prohibition on arbitration of warranty claims.  On the other hand, the “liberal federal policy favoring arbitration agreements” under the FAA weighed in favor of enforcing the warranty arbitration clause.  The doctrine of deference to agencies prevailed, however, because Congress does have the right to override the FAA’s “liberal federal policy,” and the court applied statutory interpretation rules to find Congress (and the FTC) had sufficiently overridden the FAA’s mandate to enforce arbitration agreements. 

This case is interesting not only because it may give consumers leverage to get out of arbitration provisions, but also because it may remind members of Congress they can effectively “override” the FAA.  While large-scale overhauls of the FAA are currently unlikely to garner enough support to pass, a sufficient number of members may find it palatable to legislatively prohibit the arbitration of claims arising under particular statutes.