United States: FTC's Confusing Attempt To Comply With The E-Warranty Act

Last Updated: June 30 2016
Article by Karen F. Lederer

The Magnuson-Moss Warranty Act of 1975 imposes specific obligations on suppliers (in practice, almost always manufacturers) who provide written warranties on consumer products.1 The act's purpose was to improve the adequacy of warranty information available to consumers, prevent deception and improve competition in the marketing of consumer products. The act sought to accomplish this by prescribing the types of information that is to appear in the warranty document, requiring that warranties be designated as either "full" or "limited," requiring retailers, with the necessary assistance of the warranty issuers, to make warranty terms available for inspection by consumers prior to purchase and prohibiting certain warranty-related practices.2 The act was to be implemented through Federal Trade Commission rulemaking and the Interpretations, Rules and Guides (hereinafter the "rules") that the FTC promulgated are found at 16 CFR Parts 700-703.3

With the tremendous increase in internet sales, questions about whether suppliers can utilize the internet to satisfy their obligation to provide the warranty document upon sale, and to disseminate warranty terms prior to sale, have naturally arisen.

In 2011, as part of its systematic review of all current FTC rules and guides, the FTC sought public comments on its Mag-Moss and warranty advertising rules, including comments on the effect of technological changes on the rules. The FTC specifically requested comments on whether it should amend Rule 702, the Presale Availability Rule, to address making warranty documents accessible online.[4] The FTC announced its final action on July 20, 2015, see Federal Register Vol. 80, No. 138, 42710-42723. With particular regard to the internet, the FTC stated the following as regards Rule 702:

Although Rule 702 does not explicitly mention online commerce, it applies to the sale of warranted consumer products online. Staff recently updated the .com disclosures to provide additional guidance on disclosure obligations in the online context. As stated in the updated .com disclosures, warranties communicated through visual text online are no different than paper versions and the same rules apply. Online sellers of consumer products can easily comply with the presale availability rule in a number of ways. Online sellers can, for example, use "a clearly-labeled hyperlink, in close conjunction to the description of the warranted product, such as 'get warranty information here' to lead to the full text of the warranty."

As with other online disclosures, warranty information should be displayed clearly and conspicuously. Therefore, for example, warranty terms buried within voluminous "terms and conditions" do not satisfy the rule's requirement that warranty terms be in close proximity to the warranted product. Further, general references to warranty coverage, such as "one year warranty applies," are also not sufficient.

The commission however, does not agree with the view endorsed by commentators that offline sellers can comply with the presale availability rule by advising buyers of the availability of warranties on the warrantor's website. The intent of the rule is to make warranty information available at the point of sale. For brick and mortar transactions, the point of sale is in the store; for online transactions, the point of sale is where consumers purchase the product online.

The commission agrees with the commentator who notes: "Internet availability, however, is not a substitute for availability as specified in Rule 702 because many consumers make little or no use of the internet, while those who do still need the information at the point of sale as a fallback for when they haven't obtained the information online or when they want to verify that their online information is accurate."

In sum, because Rule 702 already covers the sale of consumer products online, and because staff has updated its .com guidance concerning compliance with presale obligations, the commission has chosen not to engage in additional rulemaking as to Rule 702 at this time.

There was not even any discussion of whether the internet could be used to satisfy the warranty issuer's obligation to provide a copy of the warranty with the product upon purchase under Rule 701, the disclosure of terms and conditions rule.5

Several months later Congress passed the E-Warranty Act. That act amended the Magnuson-Moss Warranty Act to require the FTC, within one year, to revise its Mag-Moss rules to permit a manufacturer to make its warranty terms available on its website, rather than enclosing it with the product, if the manufacturer provided on the product, on the product packaging or in the product manual, instructions on how to obtain the warranty terms from its website and the manufacturer's phone number, address or another reasonable noninternet based means of obtaining the warranty. As to presale availability, the act seemed to require the FTC to permit online sellers to use the internet for presale disclosure through a convoluted process of reliance on the manufacturer's website (if it was posted there); but that brick and mortar sellers, in-home sellers and catalog sellers would be permitted to utilize "electronic" means only if it was at the location of the sale.

On May 24, 2016, the FTC released the proposed revisions to its rules ostensibly to satisfy the E-Warranty Act. See Federal Register Vol. 81, No. 100, 32680-32686. To this writer, at least, it seems the FTC may not have done entirely as instructed. The revisions would be almost entirely to Rule 702, the presale availability rule. They would give sellers the following electronic option:

a Duties of the seller. ... the seller of a consumer product with a written warranty shall make the text of the warranty readily available for examination by the prospective buyer by:

1 Displaying it in close proximity to the warranted product (including through electronic or other means, if the warrantor has elected the option described in paragraph (b)(2) of this section), or

2 Furnishing it upon request prior to sale (including through electronic or other means, if the warrantor has elected the option described in paragraph (b)(2) of this section) and placing signs reasonably calculated to elicit the prospective buyer's attention in prominent locations in the store or department advising such prospective buyers of the availability of warranties upon request. ...

b Duties of the warrantor. ...

2 As an alternative method of compliance with paragraph (b)(1) of this section, a warrantor may provide the warranty terms in an accessible digital format on the warrantor's internet website. If the warrantor elects this option, the warrantor must:

i Provide information to the consumer that will inform the consumer how to obtain warranty terms by indicating, in a clear and conspicuous manner, in the product manual or on the product or product packaging:

A The internet website of the warrantor where such warranty terms can be reviewed; and

B The phone number, the postal mailing address of the warrantor or other reasonable non-internet based means for the consumer to request a copy of the warranty terms;

ii Provide a hard copy of the warranty terms promptly and free of charge upon request by a consumer or seller made pursuant to paragraph (b)(2)(i)(B) of this section;

iii Ensure that warranty terms are posted in a clear and conspicuous manner and remain accessible to the consumer on the internet website of the warrantor; and

iv Provide information with the consumer product or on the internet website of the warrantor sufficient to allow the consumer to readily identify on such internet websites the warranty terms that apply to the specific product purchased by consumer.

There are also electronic accommodations for catalog and in-home sellers.

There are no proposed revisions to Rule 701 that would permit, under any circumstances, the use of the internet to supply the warranty document to a consumer who has purchased the product — a technology-driven option seemingly required by the E-Warranty Act.

Adding to the confusion, the proposed revisions refer to "the product the consumer purchased" and disclosing information in the "product manual," in a rule about presale inspection.

Hopefully, this will all get hashed out in the commenting process.

Footnotes

1 There are different price thresholds for the various obligations, with the most significant obligations being applicable to written warranties on products costing more than $15.

2 The act also addresses informal dispute settlement procedures that are incorporated into written warranties.

3 There is a separate set of FTC regulations governing the advertising of warranties and guarantees that was promulgated under the FTC Act and is found at 16 CFR Part 239.

4 Currently, sellers are obliged to provide warranty terms presale to consumers through a variety of methods such as displaying them in close proximity to the warranted products, or furnishing them upon request prior to sale and posting prominent signs to let customers know that warranties can be examined upon request, posting them in a catalog in close conjunction to the warranted product, or having them available for consumers' review in an in-home sales presentation. And, warrantors currently must provide retailers with the warranty materials sellers need to meet their obligations, such as providing copies of the warranty, providing warranty stickers, tags, signs or posters, or printing the warranty on the product's packaging.

5 This should not lead one to believe that the FTC's view at that time was that only a warranty in paper form could satisfy Rules 701 and 702. FTC staff had already issued staff advisory opinions stating, for example, that a warranty that was included on a CD, DVD or on the internal drive of a warranted electronic product could qualify as being "provided with" or "accompanying the product," as required under Rule 701, and that an electronic version of the warranty could constitute a "copy" of the warranty for purposes of a brick and mortar retailer complying with Rule 702 provided that the retailer had the capability to display it and personnel available to assist consumers to view it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Karen F. Lederer
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