State Regulators and Consumer Advocates Say the FTC Got It Right in 1999, and Was Wrong in 2002

The Federal Trade Commission, seemingly reversing itself and contradicting a growing amount of casework at the state level, has told the attorney for a used auto dealer association that split-cost warranties are permissible, even when they require the buyer to bring their car back to the dealer that sold it to them.

Carolyn Carter, an attorney with the National Consumer Law Center Inc. in Boston, said the non-profit group believes the opinion stated in the FTC's Dec. 31 letter is not in keeping with past precedent.

"We urged the FTC to stick with the view that it had published in 1999, that 50/50 warranties 'likely violated' the prohibition against tie-ins," she said. "I certainly think that the 1999 opinion was correct and that this one is incorrect."

Carter disagrees with people who believe that the mentions of split-cost warranties in a 1998 guide book somehow create precedent. "The FTC never explicitly said 'these are OK,'" she noted, "and it's OK to require the work to be done at the selling dealership. Those previous statements had never said that. And that's the issue here."

No Problem with Percentages

To be clear: Carter says the NCLC sees no problem with 100% warranties where the consumer pays nothing but must come back to the dealership for service. Likewise, there's no problem with 50/50 splits if the consumer can make a choice among numerous repair shops authorized by the warrantor. And there's no problem with an "as is" sale, where if something breaks the consumer pays 100% but is free to go to any service station they like.

The problem the NCLC sees is how these warranty arrangements tie the consumer's 50% to the selling dealership, because then "you're requiring the consumer to purchase something from you as a condition of the warranty," Carter said.

"Our argument was that requiring the consumer to pay the dealer for the dealer's labor or a portion of the parts, as a condition of the warranty coverage, was a violation of the tie-in prohibition," she said. Buyers don't really have a choice of locations that will honor their warranty if the warrantor's repair bill is inflated. Therefore, the choice is really between using the warranty or not using the warranty.

"Any repair shop can try to overcharge you, but if you're a captive customer, that is, if you use this warranty, then you can't shop around for a cheaper repair shop," Carter said.

Pennsylvania Precedent

One of the precedents established at the state level came in 2001, when the Pennsylvania Attorney General's office brought an illegal tie-in case against the owners of Harry's Auto Sales in Meadville PA. Leslie Grey, the deputy attorney general who brought that case on behalf of the Erie Regional Office, Bureau of Consumer Protection, said she was disappointed by the FTC's letter.

In May 2001, her office issued a press release that called 50/50 warranties "illegal." But it didn't mark the conclusion of a court case. Rather, it was a voluntary and negotiated end to the matter in which the defendant admitted no wrongdoing but still had to pay a fine.

"That was my case, and it was an Assurance," Grey said. "The case did not go to an argument before a judge. It was concluded through an Assurance of Voluntary Compliance. So it was a negotiated end." But it relied on precedent, specifically previous comments from the FTC reprinted in the Federal Register that said 50/50 warranties were illegal tie-ins.

Disappointed by the FTC's Inconsistency

"We're disappointed in this conclusion, obviously," Grey said. "It's not in keeping with our reasoning that led us to pursue at least this one auto dealer. But upon further reading, when we go through it, it does mention a 1999 statement by the Commission."

That statement, which the FTC's own letter also sources in Footnote 11, came during a 1999 review of the Magnuson Moss Warranty Act that's now entombed in the Federal Register. Back then, the FTC took the position that split-cost warranties which require the customer to use the warrantor's shop "likely violate Section 102(c)," the Warranty Act's tie-in rule.

Here's the full quote. On page 19703-04 of the Federal Register for April 22, 1999, the FTC states the following in connection with a Congressional review of interpretations of the Magnuson-Moss Warranty Act, and specifically within a discussion of prohibited tying arrangements:

"Section 700.10 sets out the Commission's interpretations regarding the use of tying arrangements in connection with warranties. Among other things, Sec. 700.10 prohibits conditioning the continued validity of a warranty on the use of authorized repair service for non-warranty service and maintenance. [The National Consumer Law Center] recommended that the Commission amend Sec. 700.10 to prohibit used car warranties which provide for a percentage (e.g., 25 percent) of parts and labor costs provided the repair is done by the dealer or a place of the dealer's choosing. According to NCLC, these warranties allegedly are for a short term, often 30-days or 1,000 miles.

"NCLC stated that these warranties are common among "low-end" used car dealers and alleges that the warranties harm consumers because they provide little value and that the consumer has little control over the prices charged for the repair. Since the consumer is paying 75 percent of the repair cost under the warranty, the consumer may actually lose money by using the warranty to obtain repairs, according to NCLC.

"The Commission has determined not to incorporate the change NCLC proposed into the Interpretations for two reasons. First, a drafting change probably is not necessary to accomplish what NCLC advocated, since such warranties already likely violate section 102(c) of the Act. Section 102(c) prohibits arrangements that condition warranty coverage on the use of an article or service identified by brand, trade, or corporate name unless that article or service is provided without charge to the consumer. Since the consumer must pay a significant charge for parts and labor under these warranties, the warranties may violate section 102(c) by restricting the consumer's choices for obtaining warranty service.

"Second, the Commission notes that, although consumers may have little control over the prices charged for repairs under such warranties, they do have a choice of whether to use the warranty. Many states have enacted legislation requiring auto servicers to give estimates on any repair to be done. These estimates allow the consumer to shop for the best price. If the consumer realizes that having a repair done under the warranty may actually cost more than having the repair done by an independent servicer, the consumer can go elsewhere for the work. For these reasons, the Commission has decided to retain Sec. 700.10 as written."

(emphasis added)

"We believe that reasoning is more in keeping with the statute and the legislative history," Grey said. "We're disappointed in this new interpretation. Our contention was that these [50/50 warranties] are subject to potential abuse by the dealer, that repair costs are inflated, leaving the consumer to pay what they thought was half the stated price but which in reality reflects the entire cost of the repair. Which would make the warranty illusory, leaving the consumer to believe they were getting something when in fact they weren't getting something."

Grey said if consumers end up paying 100%, they're really buying the car "as is," but they're misled into thinking it's being sold to them under warranty. "That's the one obvious abuse that we were concerned about," she said. "If a consumer buys a car "as is," they know they're getting a car without a warranty, and they can decide from the position of knowing exactly what they're choosing to bargain for."

Higher Minimum in Massachusetts

The Pennsylvania Attorney General's own advice brochures allow warranties that cover only parts and not labor, as long as that fact is clearly disclosed before the sale. So perhaps Pennsylvania's regulators are doing the same thing as the FTC, providing inconsistent advice about the legality of split-cost warranties in their various comments and brochures?

Other states have passed laws that make 50/50 splits unnecessary. In Massachusetts, for instance, under the state's Used Vehicle Warranty Law, auto dealers must issue a 100 percent warranty for all defects that impair the car's use or safety, as long as the car is sold with less than 125,000 miles on the odometer. The warranty's duration depends on the mileage at the time of sale, but the minimum is 30 days or 1,250 miles (for a car sold with 124,999 miles!), whichever comes first.

In other states, as noted, most 50/50 used car warranties last for only 30 days. Therefore, in Massachusetts, such a warranty would provide less coverage than what is automatically included under state law. Therefore, they are not so much illegal as they are pointless.

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