ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, September 26, 2011

9th Circuit's Reinhardt Reverses Compelled Arbitration Award

Reinhardt Last week, the 9th Circuit issued its opinion in Kolev v. Euromotors West/The Auto Gallery.  The facts are pretty humdrum.  Diana Kolev brought a "pre-owned" car that developed mechanical problems that she believed were covered under a warranty.  The dealership refused to honor her warranty claims, and when she sued for breach of warranties under the Magnuson-Moss Warranty Act (MMWA), breach of contract and unconscionability, the dealership moved to compel arbitration.  The District Court granted the motion to compel.  After the arbitrator largely sided with the dealership, Ms. Kolev challenged that ruling in the District Court, which upheld the arbitral decision. 

On appeal, Judge Stephen Reinhardt (pictured) authored the majority opinion, reversing the District Court's decision to compel arbitration.  Ms. Kolev argued that the MMRA bars compelled arbitration of her warranty claims.  The majority undertook a two-part Chevron analysis to determine whether that was indeed in the case.  In the first part of the Chevron test, the Court found that the MMRA expressed no clear congressional intent with respect to compelled arbitration.  However, in the second part of its analysis, the Court found that Congress had delegated to the Federal Trade Commission (FTC) to “prescribe rules setting forth minimum requirements for any informal dispute settlement procedure which is incorporated into the terms of a written warranty.” The FTC then promulgated Rule 703, which prohibits pre-disptue compelled binding arbitration.  The Court found this decision of the FTC to be reasonable and therefore binding on the Court, notwithstanding the Supreme Court's repeated admonitiions that the Federal Arbitration Act was to be liberally construed in favor of arbitration.  

In so doing, the 9th Circuit created a split, as the 5th and 11th Circuits have both found that the MMRA may not bar pre-dispute mandatory arbitration of warranty claims.  The Majority explained its reasoning as follows:

We do so for the following reasons: (1) the FTC interpreted the statute consistent with its carefully reasoned understand- ing of the enacting Congress’s intent, as evidenced by the statute’s language and legislative history; (2) the FTC’s con- struction advances the MMWA’s purpose to protect consum- ers from predatory warrantors and to provide them with fair and informal pre-filing procedures that preserve their rights to enforce their claims for breach of warranty through civil liti- gation in the state or federal courts; and (3) the persistence of the FTC’s rule that the MMWA bars pre-dispute mandatory binding arbitration — expressly reaffirmed more than a decade after the Supreme Court held that the FAA “mandates enforcement of agreements to arbitrate statutory claims” absent “contrary congressional command — requires that the courts afford the agency’s construction particularly strong deference. Because we are required to defer to the reasonable construction of a statute by the agency that Congress has authorized to interpret it, we hold that the MMWA precludes enforcement of pre-dispute agreements such as Porsche’s that require mandatory binding arbitration of consumer warranty claims.

There was, of course, a dissent, which accused the Majority of departing from Supreme Court precedent as well as the decisions of other Circuit Courts.  The real problem, in the dissent's view, was a conflation of a a narrow category under the MMWA, "informal dispute settlement procedures" with any altnerative dispute resolution procedure provided by a private contract.  As a result, Chevron deference to FTC rules is inappropriate in this case, as the arbitration at issue here is not the kind of informal dispture settlement procedure addressed in Rule 703.  Moreover, according to the dissent, the FTC Rule would not be reasonable if it were indeed in tension with the federal policy under the FAA favoring arbitration.

The dissent predicts dire effects if Judge Reinhardt's opinion is allowed to stand.  Stay tuned.


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