South-Western Legal Studies in Business

FTC Regulation Restricting Binding Arbitration in Warranties Stricken
Description Appeals court held that an FTC regulation prohibiting the inclusion of binding arbitration clauses in warranty terms is contrary to federal policy supporting arbitration and that nothing in the Magnuson-Moss Warranty Act indicates that Congress intended to prohibit binding arbitration of warranty disputes.
Topic Administrative Law
Key Words Magnuson-Moss Warranty Act; Warranty; Binding Arbitration; FTC Regulation
C A S E   S U M M A R Y
Facts The Davises bought a manufactured home built by Southern Energy Homes. The sales contract included a binding arbitration agreement as part of the home warranty. Later, when a dispute arose over various defects in the home, the Davises sued in court for breach of warranty and for violation of the Magnuson-Moss Warranty Act (MMWA). Southern moved to dismiss the suit and to compel arbitration. The district court held that the MMWA prohibits binding arbitration. Southern appealed.

Reversed. The MMWA does not prohibit binding arbitration as part of a warranty. That restriction arises from a Federal Trade Commission regulation prohibiting binding arbitration of warranty claims brought under the Act. The FTC rule is contrary with the Federal Arbitration Act, which requires that contractual agreements to arbitrate disputes will be upheld. A review of the text of the MMWA shows that it does not address arbitration. Since Congress has encouraged its use otherwise, the FTC regulation restricting arbitration is contrary to federal policy. The FTC's construction of the MMWA is unreasonable and will not be given deference that is normally required of the courts under the Chevron standard.

Citation Davis v. Southern Energy Homes, Inc., 305 F.3d 1268 (11th Cir., 2002)

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