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