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
"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
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
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,"
"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
"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.
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."
"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
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
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
- The FTC Explains Its Decision
- Consumer Advocates Object
- Dealers Defend Use of 50/50 Warranties
- How NIADA Did It
- Advice Columns Warn Against 50/50