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

even when the consumer knows about... warranties (obligations owed to the buyer by the seller and/or the manufacturer), costs of litigation often make pursuit of such rights prohibitive. Because of costs, such as for attorney fees, litigation is seldom feasible unless personal injury is involved or when the alleged defective product is very expensive. Going to court charging breach of warranty to not likely to be practical where the damage sought is $20 for replacement of a detective toaster. Thus, the fate of aggrieved consumers usually rests with the seller/manufacturer and its willingness to live up to its promises as contained in the written warranties given with most products sold today.

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

The comments from consumers and consumer groups across the country provide eloquent testimony that case-by-case arbitration, in place of automatic redress to injured consumers, is a bitterly unpopular as well as unfair feature of this settlement. Consumer fury and frustration over the felt injustice of this burdensome remedy explodes from the letters. The hundreds of consumer comments that we received, most of them spontaneous expressions of outrage from unorganized individuals, are to my knowledge unprecedented in Commission history. Over 70% of them are opposed to the arbitration agreement, which they view as a repudiation of their right to automatic redress... Moreover, many despair that they will ever recover their losses under this deal, since they feel individual arbitration with an adversary like GM could never be a fair fight. One person, an attorney from Michigan experienced in dealing with GM, the consumer's chances this way: It will be like sending a team of Chinese, who have never seen or studied or played the game of football, into a contest with the Dallas Cowboys! Comments from consumer groups, such as the Center for Auto safety and Consumers Against GM, passionary [sic] criticized the arbitration settlement as unjust... State attorneys general collectively voiced ‘grave reservations' about the fairness and workability of the Better Business Bureau arbitration system under the agreement . . .Only a handful of individuals and organizations—e.g., GM and the BBB themselves, the American Arbitration Association, and two Attorneys General—took exception to this overwhelming expression of public opposition by favoring the settlement...

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.