Request for Comments Concerning Rule Governing Informal Dispute Settlement Procedures

FEDERAL TRADE COMMISSION

16 CFR Part 703

Request for Comments Concerning Rule Governing Informal Dispute

Settlement Procedures

AGENCY: Federal Trade Commission.

[[Page 15637]]

ACTION: Proposed rule; request for public comments.

-----------------------------------------------------------------------

SUMMARY: The Federal Trade Commission (``the Commission'') is

requesting public comment on its Rule Governing Informal Dispute

Settlement Procedures (``Rule 703''). The Commission is also requesting

comments about the overall costs and benefits of Rule 703 and its

overall regulatory and economic impact as part of its systematic review

of all current Commission regulations and guides.

Rule 703 specifies the minimum standards which must be met by any

informal dispute settlement mechanism that is incorporated into the

written warranty of a consumer product and which the consumer must use

prior to pursuing any legal remedies in court.

DATES: Written comments will be accepted until June 2, 1997.

ADDRESSES: Comments should be directed to: Secretary, Federal Trade

Commission, Room H-159, Sixth and Pennsylvania Ave., NW., Washington,

DC 20580. Comments should be identified as ``Rule 703--Comment.''

FOR FURTHER INFORMATION CONTACT:

Carole I. Danielson, Investigator, Division of Marketing Practices,

Federal Trade Commission, Washington, DC 20580, (202) 326-3115.

SUPPLEMENTARY INFORMATION: The Commission has determined, as part of

its oversight responsibilities, to review rules and guides

periodically. Pursuant to these reviews, the Commission seeks

information about the costs and benefits of the rules and guides under

review, as well as their regulatory and economic impact. The

information obtained will assist the Commission in identifying rules

and guides that warrant modification or rescission. At this time, the

Commission solicits written public comments concerning its Rule

Governing Informal Dispute Settlement Procedures, 16 CFR Part 703

(``Rule 703'').

A. Background

In enacting the Magnuson-Moss Warranty Act (``Warranty Act'' or

``Act''),\1\ which governs written warranties on consumer products,

Congress recognized the growing importance of alternatives to the

judicial process in the area of consumer dispute resolution. In Section

110(a)(1) of the Act, Congress announced a policy of ``encourag[ing]

warrantors to establish procedures whereby consumer disputes are fairly

and expeditiously settled through informal dispute settlement

mechanisms'' (``IDSMs'') and erected a framework for their

establishment. As an incentive to warrantors to establish such IDSMs,

Congress provided in Section 110(a)(3) that warrantors may incorporate

into their written warranties a requirement that a consumer must resort

to an IDSM before pursuing any of his or her legal remedies for breach

of warranty. To ensure fairness to consumers, however, Congress also

directed that, if a warrantor were to incorporate such a ``prior resort

requirement'' into its written warranty, the warrantor must comply with

the minimum standards set by the Commission for such IDSMs; Section

110(a)(2) directed the Commission to establish those minimum standards.

Accordingly, on December 31, 1975, the Commission published its Rule

Governing Informal Dispute Settlement Procedures, 16 CFR Part 703.\2\

---------------------------------------------------------------------------

\1\ 15 U.S.C. 2301 et seq. (1975).

\2\ 40 FR 60,190.

---------------------------------------------------------------------------

Rule 703 contains extensive procedural standards that must be

followed by every warrantor who wishes to incorporate an IDSM, through

a prior resort clause, into the terms of a written warranty. These

standards include requirements concerning the mechanism's structure

(e.g., funding, staffing, and neutrality), the qualifications of staff

or decision makers, the mechanism's procedures for resolving disputes

(e.g., notification, investigation, time limits for decisions, and

follow-up), recordkeeping, and annual audits. The Rule is unique among

Commission rules because it is a voluntary regulation; that is, the

Rule applies only to those firms that choose to be bound by it by

placing a ``prior resort requirement'' in their warranties. The Act

does not require warrantors to set up IDSMs. Furthermore, a warrantor

is free to set up an IDSM that does not comply with Rule 703 as long as

the warranty does not contain a ``prior resort requirement.''

In the twenty years since Rule 703 was promulgated, most of the

activity in developing mediation and arbitration programs for the

resolution of consumer warranty disputes has taken place in the

automobile industry. It is unclear how many companies, if any continue

to participate in a Rule 703 mechanism.\3\ Most vehicle manufacturers

no longer include a ``prior resort requirement'' in their warranties;

thus, they and any dispute resolution programs in which they

participate are not required to comply with Rule 703.

---------------------------------------------------------------------------

\3\ General Motors ceased incorporating an IDSM in its warranty

beginning with its 1986 models and no longer operates a 703 program.

Ford discontinued operation under Rule 703 with its 1988 model year

cars. Chrysler discontinued its Rule 703 program with its 1991

models. Similarly, American Honda, Nissan, Volvo, and other auto

manufacturers have all discontinued operating Rule 703 programs.

Although they are not required to do so, the IDSMs for the major

auto manufacturers continue to file annual audits with the

Commission. These audits are placed on the public record and can be

obtained from the FTC's Public Reference Branch, Room 130, 6th St.

and Pennsylvania Ave., NW., Washington, DC 20580; (202) 326-2222.

(FTC File No. R711002)

---------------------------------------------------------------------------

The fact that most warrantors do not include ``prior resort

requirements'' in their warranties does not mean, however, that

warrantors have abandoned informal dispute resolution programs. On the

contrary, due to the terms of state lemon laws (as explained more fully

below), all major automakers participate in either manufacturer-

sponsored or state-run dispute resolution programs that frequently are

modeled on the minimum standards set out in Rule 703 even though they

are not required to do so under any provision of federal law. Today,

most automobile warranty disputes are handled either by state-operated

programs not subject to Rule 703 or by private programs which choose

not to operate under the Rule. As a result of these trends, the

Commission's enforcement responsibility for Rule 703 has virtually

ceased.

Since Rule 703 was promulgated, warrantors, consumer groups, state

governments and IDSMs have criticized the Rule. Some warrantors and

IDSMs have argued that the Rule is unduly burdensome, discourages the

formation of new IDSMs, and hinders the efficient operation of existing

ones. These critics have alleged high compliance costs of the

procedural provisions and burdensome recordkeeping requirements. Other

parties, by contrast, have asserted that the Rule is insufficiently

stringent in many respects. For example, consumer groups and state law

enforcement offices have alleged that decisionmakers are not adequately

trained and that the recordkeeping requirements are insufficient to

evaluate the programs' performance. Finally, because few, if any,

programs actually operate under Rule 703, some might argue that the

Rule no longer serves a useful purpose and has become irrelevant to

today's market.

In 1986, the Commission decided to evaluate Rule 703 in an effort

to address criticisms of the Rule and to develop proposals for reform.

In order to assist in this evaluation, the Commission conducted a

``regulatory negotiation'' with an advisory committee of 25

organizations representing the major

[[Page 15638]]

interests affected by the Rule.\4\ The Commission agreed to publish a

Notice of Proposed Rulemaking (``NPR'') to amend Rule 703 if the

advisory committee could reach a consensus recommendation regarding

revisions. The Commission agreed to incorporate any consensus

recommendation coming out of the negotiated rulemaking into any NPR.

However, the regulatory negotiation was unable to reach a consensus on

a proposed revision of the Rule and concluded its meetings in 1987.\5\

Since no consensus recommendation was reached, the Commission did not

publish an NPR.

---------------------------------------------------------------------------

\4\ The notice of intent to form an advisory committee for

regulatory negotiation appears at 51 FR 5205 (February 12, 1986).

The notice of formation of the advisory committee and notice of the

first meeting appears at 51 FR 29666 (August 20, 1986).

\5\ The record of that negotiated rulemaking and the

facilitators' final report were placed on the public record and is

available through the FTC's Public Reference Branch, Room 130, 6th

and Pennsylvania, N.W., Washington, D.C. 20580; 202-326-2222. (FTC

File No. R711002)

---------------------------------------------------------------------------

A second evaluation began in 1988, after the auto manufacturers

petitioned the Commission to initiate a rulemaking proceeding to amend

Rule 703.\6\ Among other things, the petitioners proposed that the

Commission institute a national certification program for IDSMs and

that the Commission preempt those provisions of state laws which impose

requirements upon warrantors' private IDSMs which differ from the

requirements specified in Rule 703. This petition was followed by a

Memorandum in Opposition to the petition filed by the Attorneys General

of 41 states.\7\ Because of the continuing interest in the issues

surrounding Rule 703 (as evidenced by the petition and the Memorandum

in Opposition), the Commission published an Advance Notice of Proposed

Rulemaking (``ANPR'') in order to generate a broad range of views on

which dispute resolution practices are sound and could form the basis

for possible revisions to the Rule.\8\ In addition, the Commission's

ANPR requested economic or cost data to buttress the petitioners'

allegations of injury due to non-uniformity and the costs and benefits

associated with a national certification program. On June 13, 1991, the

Commission denied the automakers' petition because the record failed to

provide the adequate factual basis regarding the costs of non-

uniformity that would have been necessary to justify a rulemaking

procedure, preemption of state laws governing IDSMs, or federal

certification of IDSMs.\9\

---------------------------------------------------------------------------

\6\ On April 11, 1988, the Motor Vehicle Manufacturers

Association of the United States, Inc. and the Automobile Importers

of America, Inc. filed their petition together with a proposed

revised Rule. The petition and the record of the ANPR which followed

is available through the FTC's Public Reference Branch, Room 130,

6th and Pennsylvania, N.W., Washington, D.C. 20580; 202-326-2222.

(FTC File No. R711002)

\7\ The Memorandum in Opposition was filed on June 22, 1988.

\8\ 54 FR 21070 (May 16, 1989).

\9\ The record for the ANPR proceeding was placed on the public

record and is available through the FTC's Public Reference Branch,

Room 130, 6th and Pennsylvania, N.W., Washington, D.C. 20580; 202-

326-2222. (FTC File No. R711002)

---------------------------------------------------------------------------

Rule 703 is brought into play only if the warranty includes a

``prior resort requirement.'' Because few warrantors have a ``prior

resort requirement'' in their warranties, they and their dispute

resolution programs are not governed by Rule 703. Nonetheless, although

few warrantors operate Rule 703 IDSMs today, there is a recurring issue

that arise from the interplay between Rule 703 and state ``lemon

laws.'' Many state lemon laws, paralleling Section 110(a)(3) of the

Warranty Act, prohibit the consumer from pursuing any state lemon law

rights in court unless the consumer first seeks a resolution of the

claim to the manufacturer's (or a state-operated) IDSM.\10\ Those

statutes also provide that the consumer is required to use the

manufacturer's IDSM only if it complies with the FTC's standards set

out in Rule 703. Thus, in effect, these states incorporate Rule 703

into their lemon laws.\11\ A threshold question for many state lemon

law suits is whether the IDSM complies with Rule 703 and thus whether

the consumer must use that IDSM or may proceed directly to a court

action.

---------------------------------------------------------------------------

\10\ ``Lemon Laws'' entitle the consumer to obtain a replacement

or a refund for a defective new car if the warrantor is unable to

repair the car after a reasonable number of repair attempts.

\11\ Some state lemon laws also require that the IDSM comply

with additional state standards in addition to complying with the

Rule 703 provisions.

---------------------------------------------------------------------------

B. Issues for Comment

There are issues surrounding Rule 703 that continue to be of

interest to many parties. A review of the Rule and its provisions,

including the specific issue of the interplay of Rule 703 and lemon law

litigation, will be helpful in determining what direction the

Commission might take in the area of setting standards for informal

dispute settlement procedures. Therefore, at this time, the Commission

solicits written public comments on the following questions with regard

to Rule 703:

1. Is there a continuing need for Rule 703? Does the Rule continue to

serve a useful purpose?

(a) What benefits has the Rule provided to consumers?

(b) Has the Rule imposed costs on consumers?

2. What changes, if any, should be made to Rule 703 to increase the

benefits of the Rule to consumers? How would these changes affect the

costs that the Rule imposes on firms subject to its requirements?

3. What significant burdens or costs, including costs of compliance,

has Rule 703 imposed on firms subject to requirements? Has the Rule

provided benefits to such firms?

4. What changes, if any, should be made to Rule 703 to reduce the

burdens or costs imposed on firms subject to its requirements? How

would these changes affect the benefits provided by the rule?

5. Does Rule 703 overlap or conflict with other federal, state, or

local government laws or regulations?

6. Since Rule 703 was issued, what effects, if any, have changes in

relevant technology or economic conditions had on the Rule? Are there

ways in which new electronic technology, such as the Internet, could be

used to further the purpose of the Rule?

7. What are the aggregate costs and benefits of Rule 703? Are there

provisions in the Rule that are not necessary to implement the

Magnuson-Moss Warranty Act or that have imposed costs not outweighed by

benefits? Who has benefited and who has born the costs? Have the costs

or benefits of the Rule changed over time?

8. Many state lemon laws require that, before the consumer pursues any

legal remedies in court, the consumer first must resort to the

manufacturers' informal dispute resolution mechanism if that mechanism

complies with Rule 703.

(a) What costs and benefits, if any, result to the parties in a

state lemon law dispute from Rule 703 with respect to the issues of:

(1) Whether a particular IDSM complies with the Rule; and

(2) whether a plaintiff must first resort to such an IDSM before

bringing suit in state court.

(b) What changes, if any, could be made to Rule 703 that might

minimize burdens and maximize benefits to parties in state lemon law

disputes?

List of Subjects in 16 CFR Part 703

Warranties, trade practices.

Authority: 15 U.S.C. 41-58.

[[Page 15639]]

By direction of the Commission.

Benjamin I. Berman,

Acting Secretary.

[FR Doc. 97-8411 Filed 4-1-97; 8:45 am]

BILLING CODE 6750-01-M