Magnuson-Moss Act prohibits agreement at time of sale to enter into binding arbitration on written warranty

Law Reporter, May 2001

Pitchford v. Oak-wood Mobile Homes, Inc., - F. Supp. 2d -, No. 5:99CV00053, 2000 WL 1728642 (W.D. Va. Nov. 13,2000).

A U.S. district court held that the Magnuson-Moss Warranty Act, 15 U.S.C. 2301 et seq., prohibits an agreement at the time of sale to enter into binding arbitration on a written warranty.

Here, Pitchford signed a retail installment contract with Oakwood Mobile Homes for the purchase of a home. She financed the balance owed on the home through Oakwood Acceptance Corporation. The sale of the home was subject to the contract terms and any separate documents issued that secured the contract. After signing the contract, Pitchford was given 16 pages of documents, none of which secured the contract. Of these documents, the only one to add materially to the contract's terms was an arbitration agreement.

When a dispute later arose between Pitchford and the companies, she filed suit. Defendants moved to compel arbitration under the agreement. A magistrate judge recommended that the court deny the motion, and the parties appealed.

Agreeing with the magistrate judge, the trial court noted that the threshold question in determining the enforceability of an arbitration agreement is whether the particular claim at issue is even arbitrable. In this case, the Magnuson-Moss Warranty Act regulates the warranty for the mobile home. Congress enacted the act to improve the adequacy of information available to consumers and prevent deception, the court explained. Congress also explicitly empowered the Federal Trade Commission (FTC) to prescribe rules setting forth the minimum requirements for any informal dispute mechanism to be used in conjunction with a written warranty.

These informal dispute mechanisms are the act's only exception to Congress's clear rule preserving a judicial forum for consumers, the court said. In addition, such mechanisms cannot be binding on any person in any action arising out of a warranty obligation. The clear intent of the act, the court explained, is to encourage alternate dispute settlement mechanisms, but not deprive any party of their right to have their warranty dispute adjudicated in a judicial forum.

Contrary to these regulations, the arbitration agreement states that disputes arising out of the warranty are to be submitted to a third party for binding arbitration. The FTC's regulations prohibit such language in written warranties, the court noted, yet defendants included the language in the arbitration agreement. The fact that this prohibited language appears in the arbitration agreement rather than the warranty, however, does not change the FTC's characterization of such a statement as deceptive, the court found. To allow defendants to include the warranty in the binding arbitration agreement where federal law prohibits a binding arbitration agreement to be incorporated into the warranty would eviscerate the purpose and effect of the act, the court noted. Thus, there can be no agreement at the time of sale to enter into binding arbitration on a written warranty, the court concluded.

Plaintiff's Counsel

Timothy Earl Cupp, Harrisonburg, Va. Thomas Dean Domonoske, Peterburg, Va. Dale Wood Pittman, Peterburg, Va.