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Kolev v. Euromotors West/The Auto Gallery

September 20, 2011


Appeal from the United States District Court for the Central District of California Andrew J. Guilford, District Judge, Presiding D.C. No. 8:07-cv-01171-AG-AN

The opinion of the court was delivered by: Reinhardt, Circuit Judge


Argued and Submitted February 7, 2011-Pasadena, California

Before: Dorothy W. Nelson, Stephen Reinhardt, and N. Randy Smith, Circuit Judges.

Opinion by Judge Reinhardt; Dissent by Judge N.R. Smith


Diana Kolev brought suit against Euromotors West/The Auto Gallery, Motorcars West LLC, HM Gray Family II Inc., Gray Family II LLC, Bennett Automotive I Inc., Bennett Automotive II Inc. ("the Dealership") and Porsche Cars North America, Inc. ("Porsche"), when the pre-owned (formerly known as "used") automobile that she purchased from the Dealership developed serious mechanical problems during the warranty period and the Dealership refused to honor her warranty claims. She alleges breach of implied and express warranties under the Magnuson-Moss Warranty Act ("MMWA"), and breach of contract and unconscionability under California law.

The district court granted the Dealership's petition to compel arbitration pursuant to the mandatory arbitration provision in the sales contract that Kolev signed when she bought the car. It also stayed the action against Porsche. After the arbitrator resolved most of the claims in favor of the Dealership, the district court confirmed the arbitration award. We review de novo the district court's order granting the petition to compel arbitration. See Davis v. O'Melveny & Myers, 485 F.3d 1066, 1072 (9th Cir. 2007).

[1] Kolev's principal argument on appeal is that the Magnuson-Moss Warranty Act ("MMWA"), 15 U.S.C. § 2301 et seq. (2000), bars the provision mandating pre-dispute binding arbitration of her warranty claims against the Dealership. Although the text of the MMWA does not specifically address the validity of pre-dispute mandatory binding arbitration, Congress expressly delegated rulemaking authority under the statute to the Federal Trade Commission ("FTC"). See 15 U.S.C. § 2310(a)(2). Pursuant to this authority, the FTC construed the MMWA as barring pre-dispute mandatory binding arbitration provisions covering written warranty agreements and issued a rule prohibiting judicial enforcement of such provisions with respect to consumer claims brought under the MMWA. See 16 C.F.R. § 703.5; 40 Fed. Reg. 60167, 60210 (Dec. 31, 1975).

We apply a two-step inquiry in reviewing agency constructions of statutes. See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The first step requires us to ask whether Congress has "directly spoken to the precise question at issue" in a way that renders its intention "clear" and "unambiguously expressed." Id. at 842-44. If we find that the "statute is silent or ambiguous with respect to the specific issue," then we proceed to the second step, and ask whether an interpretation by the agency to which Congress has delegated rulemaking authority "is based on a permissible construction of the statute." Id. at 843. If Congress' intent is not clear under the statute and if "Congress delegated authority to the agency generally to make rules carrying the force of law, and [ ] the agency interpretation claiming deference was promulgated in the exercise of that authority," United States v. Mead Corp., 533 U.S. 218, 226-27 (2001), then we must defer to the agency's reasonable construction of the ambiguous statutory provision.*fn1

"Under the first prong of Chevron, we use traditional tools of statutory construction to determine whether Congress expressed a clear intent on the issue in question." Schneider v. Chertoff, 450 F.3d 944, 953 (9th Cir. 2006) (internal citations omitted). We agree with the Fifth Circuit that "[t]he text of the MMWA does not specifically address binding arbitration," Walton v. Rose Mobile Homes LLC, 298 F.3d 470, 475 (5th Cir. 2002); see also Davis v. S. Energy Homes, Inc., 305 F.3d 1268, 1278 (11th Cir. 2002) ("Congress failed to directly address binding arbitration anywhere in the text . . . of the MMWA."), and conclude that Congress has not "directly spoken to the precise question," Chevron, 467 U.S. at 842, whether the MMWA bars warranty provisions that mandate pre-dispute binding arbitration of warranty claims.

[2] Accordingly, we proceed to the second prong of the Chevron inquiry, under which we ask whether the agency to which Congress delegated rulemaking authority resolved the statutory ambiguity based on a permissible construction of the statute. 467 U.S. at 843. In enacting the MMWA, Congress expressly delegated authority to the FTC to "prescribe rules setting forth minimum requirements for any informal dispute settlement procedure which is incorporated into the terms of a written warranty." 15 U.S.C. § 2310(a)(2). Pursuant to this authority, the FTC promulgated Rule 703, which provides that "[d]ecisions of [any] Mechanism shall not be legally binding on any person," 16 C.F.R. § 703.5(j), defining a "Mechanism" as an "informal dispute settlement procedure which is incorporated into the terms of a written warranty." § 703.1(e). If a consumer "is dissatisfied with [a Mechanism's] decision or warrantor's intended actions, or eventual performance," the Rule states, then "legal remedies, including use of small claims court, may be pursued." § 703.5(g).

When it published Rule 703, the FTC explained:

Several industry representatives contended that warrantors should be allowed to require consumers to resort to mechanisms whose decisions would be legally binding (e.g., binding arbitration). The Rule does not allow this for two reasons. First, as the Staff Report indicates, Congressional intent was that decisions of Section 110 Mechanisms n4 not be legally binding. Second, even if binding mechanisms were contemplated by Section 110 of the Act, the [FTC] is not prepared, at this point in time, to develop guidelines for a system in which consumers would commit themselves, at the time of product purchase, to resolve any difficulties in a binding, but non-judicial, proceeding. The [FTC] is not now convinced that any guidelines which it set out could ensure sufficient protection for consumers.

n4 "Section 110 Mechanisms" is a reference to those informal dispute settlement mechanisms authorized by Section 110 of the MMWA, found at 15 U.S.C. § 2310.

40 Fed. Reg. 60167, 60210 (Dec. 31, 1975). The FTC's explanation concluded that "reference within the written warranty to any binding, non-judicial remedy is prohibited by the Rule and the Act." Id. at 60211.*fn2 In 1999, the FTC restated its position that mandatory pre-dispute binding arbitration clauses are invalid under the MMWA and affirmed that "this interpretation continues to be correct." 64 Fed. Reg. 19700, 19708 (Apr. 22, 1999). Expressly declining to amend 16 C.F.R. § 703.5(j) to permit binding arbitration, the FTC concluded that "Rule 703 will continue to prohibit warrantors from including binding arbitration clauses in their contracts with consumers that would require consumers to submit warranty disputes to binding arbitration." Id. at 19708-09.

[3] There are three reasons why the FTC's interpretation of the MMWA as precluding pre-dispute mandatory binding arbitration is a reasonable construction of the statute. First, the FTC sought in devising Rule 703 to implement Congress's intent, based on evidence from the legislative history of the MMWA. Specifically, in its Statement of Basis and Purpose for Rule 703, the FTC cited to the House Subcommittee Staff Report as evidence that "[c]ongressional intent was that decisions of Section 110 Mechanisms not be legally binding." 40 Fed. Reg. at 60210. The Subcommittee Staff Report on which the FTC based its independent interpretation of Congress's intention makes clear that consumers must be made aware of their rights, including their right to pursue litigation, because otherwise "the fate of aggrieved consumers usually rests with the seller/manufacturer and its willingness to live up to its promises." 120 Cong. Rec. 31,318 (1974). The FTC's reliance on such legislative history in seeking to implement Congress's intent is the first reason that its rule barring judicial enforcement of pre-dispute mandatory binding arbitration agreements is a reasonable construction of the MMWA.

[4] Second, the FTC's interpretation that the MMWA bars pre-dispute mandatory binding arbitration advances the statute's purpose of protecting consumers from being forced into involuntary agreements that they cannot negotiate. In enacting the MMWA, Congress sought to address the extreme inequality in bargaining power that vendors wielded over consumers by "providing consumers with access to reasonable and effective remedies" for breaches of warranty, and by "provid[ing] the Federal Trade Commission (FTC) with means of better protecting consumers." H.R. Rep. No. 93-1107, at 24 (1974), reprinted in 1974 U.S.C.C.A.N. 7702, 7702. The FTC, however, was "not . . . convinced that any guidelines which it set out could ensure sufficient protection for consumers." 40 Fed. Reg. at 60211. Most important, the agency construed the statute as prohibiting vendors from including provisions that mandate arbitration of disputes over breaches of warranty before a dispute arises, in order to prevent them from depriving consumers of the right that it guaranteed them to litigate breaches of warranty. See H.R. Rep. No. 93-1107, at 41, 1974 U.S.C.C.A.N. at 7723 ("An adverse decision in any informal dispute settlement proceeding would not be a bar to a civil action on the warranty involved in the proceeding.").

[5] Third, we "should accord particular deference to the FTC's regulatory interpretation of the MMWA because the regulations represent a longstanding, consistent interpretation of the statute." Walton, 298 F.3d at 490 (King, C.J., dissenting). The Supreme Court has made clear that "a court may accord great weight to the longstanding interpretation placed on a statute by an agency charged with its administration," NLRB v. Bell Aerospace Co. Div. Textron Inc., 416 U.S. 267, 274-75 (1974), because "agency interpretations that are of long standing come before us with a certain credential of reasonableness, since it is rare that error would long persist." Smiley v. Citibank, 517 U.S. 735, 740 (1996). In this case, the agency's interpretation of the statute has persisted for more than thirty-five years, ever since in 1975 the FTC promulgated Rule 703 shortly after the enactment of the MMWA. In 1999, the FTC published a regulatory review statement reaf-firming its interpretation of the MMWA to preclude pre-dispute mandatory binding arbitration agreements. Although we summarized the FTC's 1999 statement briefly above, it is worth quoting here at greater length:

The Commission examined the legality and the merits of mandatory binding arbitration clauses in written consumer product warranties when it promulgated Rule 703 in 1975. Although several industry representatives at that time had recommended that the Rule allow warrantors to require consumers to submit to binding arbitration, the Commission rejected that view as being contrary to the Congressional intent.

The Commission based this decision on its analysis of the plain language of the Warranty Act. Section 110(a)(3) of the Warranty Act provides that if a warrantor establishes an informal dispute settlement mechanism that complies with Rule 703 and incorporates that informal dispute settlement mechanism in its written consumer product warranty, then "(t)he consumer may not commence a civil action (other than a class action) . . . unless he initially resorts to such procedure." This language clearly implies that a mechanism's decision cannot be legally binding, because if it were, it would bar later court action. The House Report supports this interpretation by stating that "(a)n ...

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