Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—4th Cir.: Renters required to submit Magnuson-Moss claim to arbitration, (Dec 12, 2013)

By Jody Coultas, J.D.

A district court properly compelled renters to arbitrate a Magnuson-Moss Warranty Act (MMWA) claim filed against Rent-A-Center, Inc. (RAC), the U.S. Court of Appeals in Richmond has held (Seney v. Rent-A-Center, Inc., December 11, 2013, Motz, D.).

The renters agreed to rent a bed for two weeks from RAC, with an option to renew the lease. If the renters leased the bed for an additional six months, RAC would transfer title to them. The contract also contained a purchase option. The rental contract contained a warranty to repair, replace, and service the bed during the term of the lease. The parties also agreed to submit any contract dispute to binding arbitration.

After the renters’ son was diagnosed with bedbug bites, the renters realized the bed provided by RAC had bedbugs. At first, RAC replaced the mattress but not the frame, which also contained bedbugs. The second time, RAC removed both the mattress and the frame, but its workers caused the bedbugs to spread throughout the house. RAC paid for a partial fumigation, but the company refused to treat the entire house.

The renters appealed a district court’s order compelling arbitration of their breach of warranty claim under the MMWA.

The MMWA provides a private right of action to consumers damaged by the failure of a company to comply with a written warranty, implied warranty, or service contract. Consumers may sue in court or submit to informal dispute settlement procedures in advance of litigation. The Federal Trade Commission has promulgated regulations describing a variety of “mechanisms” to which consumers may be required to resort before pursuing their claims in court.

Although the court ultimately agreed with the district court’s dismissal of the MMWA claim, the court found that the district court erred in holding that the FTC regulations did not contain a ban on binding arbitration. The FTC regulations provide that decisions of informal dispute resolution mechanisms must be nonbinding. However, the regulations distinguish between so-called “pre-dispute” and “post-dispute” binding arbitration. If the parties first engage in nonbinding dispute resolution, a warrantor may then require a consumer dissatisfied with the “mechanism” decision to submit to binding arbitration. Thus, the regulations contain a ban on arbitration.

The FTC’s ban on arbitration did not apply to the rental agreement with RAC because the regulations do not apply to warranties included in leases, according to the court. If a supplier provides for dispute resolution by way of a written warranty, the decisions of the warranty shall not be legally binding under the FTC regulations. A written warranty must implicate a sale. The promise that RAC made to the renters was not in connection with a sale. Also, a plaintiff cannot purport to be a buyer before title has passed to him, and holding an option to purchase does not make the plaintiff a buyer.

The cases cited by the renters holding that lessees are appropriate plaintiffs under the MMWA did not alter the court’s interpretation of whether they were required to initially submit the cause of action to binding arbitration. In every case cited, a lessor bought a product from a manufacturer and obtained a manufacturer’s warranty. As long as the manufacturer made a written promise “in connection with a sale” to someone, and that someone assigned the promise to the lessee, the lessee could sue the manufacturer. Here, the renters were not suing under the manufacturer’s warranty and RAC’s warranty did not accompany the sale. Therefore, the renters failed to establish the existence of a written warranty under FTC regulations.

The case is No. 13-1064.

Attorneys: Daniel Warren Whitney, Sr. (Whitney & Borgris LLP) for Christine Seney. James Charles Mehigan (Wilson Elser Moskowitz Edelman & Dicker LLP) for Rent-A-Center, Inc.

Companies: Rent-A-Center, Inc.

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