April 13, 2018

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Breaking A Sticker Doesn't Break Your Warranty: How The FTC Is Taking Aim At Manufacturers of Game Consoles, Electronics and Automobiles

By Jason L. Cassidy, Attorney at Ryley Carlock & Applewhite

We’ve all seen them: hard-to-remove stickers that say, “Warranty void if removed,” or “Tampering with this sticker voids the warranty.” Or perhaps a company states or implies that your use of a third-party repair service will void the warranty. These threats are especially common with sales of expensive electronics (I’m looking at you, Sony, Microsoft, and Apple). But as the Federal Trade Commission (“FTC”) affirmed again in a press release this week, these threats haven’t been effective since 1975. Manufacturers of gaming systems, cars, phones, and other electronic devices should pay particular attention to this article—and the recommended legal solution—to avoid potential FTC scrutiny.

Congress increased the FTC’s jurisdiction regarding warranties in 1975.
The law at issue is the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301, et seq, a consumer-protection statute enacted by Congress in 1975 (the “MMWA”). The MMWA is primarily enforced by the FTC and generally applies to any consumer product that costs more than $15 and is normally used for personal, family, or household purposes. So does the MMWA cover Xboxes? Check. iPhones? Check again. A single box of tissues? No, they’re too cheap. Jackhammers? Probably not, as that’s not a typical “household” item.

Like any other law, the MMWA has a lot of moving parts, but what’s relevant to this article is that it controls what a company can offer (and what it may not withhold) in a written warranty. The MMWA governs both the text of a warranty (which must use “simple and readily understood language”) and the conditions of a warranty (you don’t have to offer a warranty, but if you do, it has to meet certain minimum requirements). Specifically, the MMWA forbids a company from “tying” its warranty to a particular brand of part or service.

What does “tying” mean under the MMWA?
The language at issue here is found at 15 U.S.C. § 2302(c): “No warrantor of a consumer product may condition his written or implied warranty of such product on the consumer’s using, in connection with such product, any article or service (other than article or service provided without charge under the terms of the warranty) which is identified by brand, trade, or corporate name….”  In other words, a company may not say that its warranty will only be honored if the consumer uses a specific product or service. Or put another way, Apple may not tell you (or threaten) that you’ll void the warranty on your iPhone if you replace a broken screen with non-Apple glass.1

The MMWA does have exceptions. For example, if Toyota only honored its warranty to cover work done by Toyota-branded mechanics, that would breach the MMWA—unless those mechanics did the warranty work absolutely free of charge to the consumer. But even then, Toyota may not refuse to honor the warranty just because the consumer had installed aftermarket parts. Unless, that is, Toyota can prove that the aftermarket part caused the problem for which the consumer is seeking warranty coverage. Sorting this out can get complicated.2 

If these warranty conditions have been illegal since 1975, why do companies still use this language?
The simple answer is that companies still recite these conditions because they can get away with it. The vast majority of people believe it when a company says that it won’t honor a warranty if you cut that sticker, so they don’t cut it. And most people won’t go through the hassle of a court proceeding over a company’s refusal to cover a $50 repair charge. Even if someone does take the company to court, it’s usually far cheaper for the company to pay out a settlement than to change the way the business is run.3 But all this may change if the FTC steps up its enforcement on “tied” warranties.

Why is the FTC ramping up enforcement of the MMWA?
In its April 10, 2018 press release, the FTC said that it was warning six as-yet-unnamed “major companies”4 who make cars, phones, and gaming systems that their warranties appeared to violate the MMWA and so could be considered “deceptive” under the FTC Act. The FTC explained that it found these warranties offensive because the warranty was conditioned on the use of a specific brand of parts, or on an intact “warranty seal.” If the six companies don’t comply with the FTC’s friendly warning within 30 days, it may result in an enforcement action.

To be clear, if you make or sell something, you don’t want the FTC to decide that you acted deceptively. The FTC (often acting in concert with a state attorney general) will sue you. And while you will likely be able to settle, it will probably cost you a hefty sum to do so. Between July 2016 and June 2017, courts entered orders in favor of the FTC totaling more than $12.7 billion in cases that alleged unfair or deceptive business practices.

So what should a company do to comply with the MMWA and avoid FTC scrutiny?
Companies should be aware that the FTC has been taking a closer eye at warranty issues under the MMWA. In 2015, the FTC issued guidance clarifying that a company cannot “tie” its warranty to a particular brand under the MMWA or even imply that the warranty is tied to a specific brand. That same year, BMW settled an FTC lawsuit on this exact issue under the MMWA after BMW told consumers that they would void their warranty unless they used BMW’s parts and dealers to perform maintenance and repair work. BMW doesn’t appear to have paid a fine as part of its 2015 settlement. But now we are in 2018 and if these six not-yet-identified companies (and more companies to follow) don’t revise their warranties to comply with the MMWA, the FTC is not likely to be so lenient with them.

There is a clear legal solution. To avoid exposure, a company should never tie its warranty to the use of a particular brand of part or servicer unless it is certain that it will fall under one of the narrow exceptions to the MMWA. Neither should a company’s warranty be written in dense legalese or in such a way that a consumer might reasonably *think* that the warranty is contingent on use of a particular brand.

Are your company’s warranties potentially problematic under the MMWA? Attorneys at Ryley Carlock & Applewhite can help you by proactively reviewing your warranties for compliance with the MMWA before the FTC starts sending threatening letters in your direction.

About the Author:
Jason L. Cassidy is still uncomfortable taking the tags off of his mattresses. He is a member of the firm’s Litigation and Cybersecurity practice groups and has experience helping clients resolve disputes involving contract disputes, data security breaches, the False Claims Act, infrastructure and real estate, water use, Reclamation law, defamation, land use/zoning, ADA/disability issues, and a wide variety of business issues. Jason can be reached at 602.440.4812 and jcassidy@rcalaw.com.

References:
1Apple has a clever approach to the MMWA in the text of its warranty. As of April 10, 2018, it states that the warranty will not apply “…(f) to damage caused by service (including upgrades and expansions) performed by anyone who is not a representative of Apple or an Apple Authorized Service Provider.…”  Does this language say to a reasonable consumer that she must use an Apple repair service? If so, that would trigger the MMWA.

2Sometimes it isn’t complicated to sort out whether the MMWA restricts coverage. People arguably had the right under the MMWA to install mod chips on their Xboxes without violating their warranties, but if the installation process damaged the circuitry or if the mod chip caused a short circuit, that wouldn’t be covered under Microsoft’s warranty and the MMWA.
   
3This concept was taken to the extreme in the infamous 1977 Ford Pinto memo, which performed a cost/benefit analysis and determined that it would be more cost-effective for the company to absorb the cost of lawsuits for burn deaths and injuries compared to the expense of recalling and replacing a defective fuel tank. 
 
4Who might these companies be? Perhaps it’s mere coincidence, but as of April 10, 2018, the warranty for a PlayStation 4 says that the warranty does not apply if the console “…(G) HAS HAD THE WARRANTY SEAL ON THE PS4™ SYSTEM ALTERED, DEFACED, OR REMOVED” and the warranty for an Xbox One says that a warranty does not apply if the Xbox is “…(f) repaired by anyone other than Microsoft.”

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