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Federal Appeals Court: Consumers Not Required to Arbitrate Warranty Claims with Dealerships

By Jonathan Stempel

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Posted on 21 Sep 2011

A federal appeals court handed car owners a victory by striking down a requirement that they arbitrate warranty disputes with dealers.

Reversing a lower court ruling, the 9th U.S. Circuit Court of Appeals agreed with a Porsche 911 Turbo owner that her sales contract requiring her to submit warranty claims to mandatory arbitration violated the federal Magnuson-Moss Warranty Act, which governs consumer product warranties.

Written warranty provisions that mandate pre-dispute binding arbitration are invalid,” Judge Stephen Reinhardt wrote for a 2-1 panel of the 9th Circuit.

Tuesday’s decision is at odds with rulings by two other federal appeals courts that upheld similar arbitration clauses. That raises the prospect that the decision may be reconsidered by the 9th Circuit, or appealed to the U.S. Supreme Court.

Aaron Jacoby, a partner at Arent Fox who represents the defendant car dealer The Auto Gallery, said “the court went out of its way to sidestep” other rulings governing consumer arbitrations. He expects the case to be appealed to a larger Ninth Circuit panel.

Robin Baker, a spokeswoman for Porsche Cars North America Inc., a unit of Germany’s Porsche AG, declined to comment. Kolev’s lawyer was unavailable for immediate comment.

The plaintiff, Diana Kolev, said Porsche refused to repair her $92,000 Porsche under warranty after it began suffering from a stalling engine, suspension problems, a loose shifter and a foul smell coming from its interior vents.

In his decision, Reinhardt said Congress authorized the Federal Trade Commission to adopt rules governing warranties, and that it was “reasonable” for that agency to strike down binding arbitration under a different law.

The law’s purpose is “to protect consumers from predatory warrantors” and shield them from “involuntary agreements that they cannot negotiate,” he wrote.


Citing this and other factors, Reinhardt also rejected decisions by the 5th and 11th U.S. Circuit Courts of Appeals that the warranty law does not interfere with another federal law, the Federal Arbitration Act, that encourages courts to enforce arbitration agreements.

He distinguished an April ruling by the Supreme Court in favor of AT&T Inc. that upheld arbitrations under the FAA, which Reinhardt said was intended to enhance efficiency rather than promote consumer interests.

Judge N. Randy Smith dissented, saying the decision departs from Supreme Court precedent and “nullifies nearly every binding, non-judicial warranty dispute remedy adopted by private parties” in the 9th Circuit, where the ruling applies. That circuit includes California and eight other western U.S. states.

The 9th Circuit returned the Kolev case to the Santa Ana, California federal district court for further proceedings.

The majority consisted of Reinhardt and Judge Dorothy Nelson, who were appointed to the bench by President Jimmy Carter. Smith was appointed by President George W. Bush.


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