The FTC Explains Its Change of Heart:
How "Likely Does" Turned Into "Definitely Doesn't"
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.
At issue is the so-called tie-in prohibition of the
Magnuson-Moss Warranty Act, which makes it illegal
for a warrantor to require the buyer to make an
additional purchase in order for the warranty to
remain effective. But also at issue is the nature
of the split-cost warranty itself, which consumer
advocates say are subject to potential abuse
because the warrantor gets to decide the cost, and
therefore the amount to be split.
Exchange of Letters
In April 2002, a letter written by Keith Whann,
counsel for the National Independent Automobile
Dealers Association, asked the FTC to clarify its
position on split-cost warranties that require all
warranted service to be performed by the dealer.
The FTC's answer came in the form of a letter of opinion drafted on Dec. 31, 2002, and announced in
the Jan. 3, 2003 weekly wrap-up (File No. P864207). It's not a prohibited tie-in of a service to a warranty because the repair is the very service promised by the warranty, the FTC reasons.
Lemuel W. Dowdy, staff attorney at the FTC's Bureau
of Consumer Protection, told Warranty Week that the
FTC Commissioners unanimously concluded the tie-in
prohibitions of the Magnuson-Moss Warranty Act do
not cover split-cost warranties, such as the "50/50
warranty" popular with used car dealers.
"The opinion letter only goes to the issue of
split-cost warranties, where the consumer pays a
percentage and the warrantor pays a percentage of
the actual repair that's covered under the
warranty," he said. So it is not at all like the
FTC's classic example of a prohibited tie-in:
making an automobile warranty conditional on the
customer using a certain brand of motor oil.
"That [oil] doesn't have anything to do with the
warranty," he said, "and that's the very reason why
the tie-in provision is there: to prevent
warrantors from requiring the buyer to use things
that don't have anything to do with the warranty,
in order to be eligible for warranty coverage."
No Problem with Percentages
Dowty noted that it would be allowable for a used
car dealer to provide a 100% warranty, but to make
it conditional on all the warranty service and
repair work being done exclusively at his shop. It
also would be allowable to make it a 25/75
split-cost warranty, or an 80/20 split, for that
matter. In other words, the FTC has no problem
with the percentages. There's also no problems
with a deductible, if it's used instead of or in
addition to a percentage split.
The FTC further acknowledges that one cannot separate either the labor or the parts into two pieces -- one covered by the warrantor and one not. So the customer is in reality not free to take the auto elsewhere for their 50% of the job, and then bringing it in so the dealer can do their 50%. The job must, by its very nature, be done all at once. Therefore it is permissible to tie that repair to the warrantor's shop.
The FTC is well aware that as the sole provider of
warranty service, the dealer has an
opportunity to inflate total costs so as to
increase the amount paid by the consumer. However,
the FTC believes the consumer who's faced with an
overcharging warrantor is always free to take their
auto elsewhere for non-warranty service, where the
consumer pays 100% of the cost and the dealer pays
0%. They're also free to report the deception to
state and federal regulators, as they would be any
time a service station tries to overcharge them.
In Footnote 8 of the FTC's letter to Whann, "The
Commission recognizes that there is some concern
that dealers may inflate the costs of warranted
repairs and in this way impose all or most of the
repair cost on the purchaser. If such practices
occur, they would likely constitute deceptive
practices and could also constitute breaches of
warranty (as failing to provide the benefit
promised in the warranty)."
Fraud Is Fraud
In other words, fraud is fraud, but in this case
it's conduct that's separable from the warranty. The FTC found
that the 50/50 warrantor also has an opportunity to
split costs honestly. It's not the nature of the
warranty that's the problem; it's the dealer's
honesty or lack thereof. And the FTC will not
outlaw something just because dishonest behavior is
"The Commission, in analyzing the tie-in provision,
just didn't see how we could logically fit the
conduct into the legislative purpose of the tie-in
provision," Dowty said. "If deceptive practices
are occurring with regards to these warranties,
they certainly should be attacked. It's not
appropriate to challenge these warranties under the
tie-in provision. But it is appropriate to
challenge them under deception theories or breach
of warranty theories."
Furthermore, there are legitimate reasons why used
car dealers would want to provide split-cost
warranties, the FTC found. According to the FTC's
letter to attorney Whann: "Rather than
conditioning the warranty on the purchase of a
separate product or service not covered by the
warranty, a 50/50 warranty shares the cost of a
single product or service. Dealers who pay a
proportion of repair costs need some control over
the diagnosis of the repair needed and the quality
of the repair. Barring dealers from providing the
repair under these types of warranties could impose
hardships and costs on both consumers and dealers
that do not appear warranted by the purpose or
intent of the statute."
Red Light, Green Light
The FTC has twice in the past issued comments that
led some to believe that split-cost warranties were
permissible, and others to believe they were
prohibited. In 1998, the FTC publication, "A
Dealer's Guide: The Used Car Rule," stated that
dealers must always disclose the percentage of
parts and labor that will be covered under a
limited warranty. The booklet even discusses
instances where dealers offer 50 percent coverage
for parts and labor. Some took that to mean that
all the FTC required of the split-cost warrantor
was complete disclosure of the terms.
Then in 1999, the FTC told Congress that split-cost
warranties "likely violate" the Warranty Act. The
key phrase, which the FTC's own letter sources in
Footnote 11, came during a 1999 review of the
Magnuson-Moss Warranty Act that's now entombed in
the Federal Register (Volume 64, Number 77, Pages 19703-19704, April 22, 1999).
Back then, the FTC took the
position that split-cost warranties which require
the customer to use the warrantor's shop "already likely
violate Section 102(c)," the Warranty Act's tie-in
rule. The FTC also told Congress: "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." Ironically, that sentence was part of an explanation of why the FTC didn't think it needed to ban 50/50 warranties: because they already were illegal.
The current-day FTC noted in its Dec. 31 letter
that the four-year-old comment used the word
"likely," not the word "definitely." And as much
as the word likely suggests more probably true than
not, it still leaves enough wiggle room for a
change of mind. And so by 5-0 vote, after careful
consideration of opinions from both sides, the
Commissioners of late 2002 changed their mind to
say that split-cost warranties "definitely do not"
violate Section 102(c). Or maybe they aren't
changing their minds as much as they're merely
"adopting the staff's long-held opinion," as the
The bottom line? The FTC never came down
decisively on one side or the other, although it
gave both sides reason to believe they were
correct. Now that the Commissioners have had a
chance to deliberate, they've decided to agree with
the used auto dealers.
The FTC already had the power to grant case-by-case
waivers of the tie-in rules to used auto dealers
who could make a case for one. In "A Businessperson's Guide to Federal Warranty Law,"
the FTC states that "Although tie-in sales
provisions generally are not allowed, you can
include such a provision in your warranty if you
can demonstrate to the satisfaction of the FTC that
your product will not work properly without a
specified item or service. If you believe that this
is the case, you should contact the warranty staff
of the FTC's Bureau of Consumer Protection for
information on how to apply for a waiver of the
tie-in sales prohibition."
- 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