Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

It's amazing the lengths some courts will go to get around U.S. Supreme Court decisions holding that the Federal Arbitration Act preempts laws that seek to place conditions on or otherwise thwart agreements to arbitrate consumer contracts.

Recently, the Ninth Circuit held that actions of the Federal Trade Commission taken under power delegated to it by the Magnuson-Moss Warranty Act effectively preclude the use of pre-suit binding arbitration with consumer products that have written warranties to which the MMWA applies.  See Kolev v. Euromotors West/The Auto Gallery, No. 09-55963, Slip op. (9th Cir. Sept. 20, 2011).  In Kolev, the plaintiff bought a used Porsche that allegedly developed serious mechanical problems during the warranty period.  The plaintiff sued for breach of express and implied warranties, as well as breach of contract.  The defendant pointed to the mandatory arbitration provision in the sales contract, and the District Court granted a motion to compel arbitration.  It later confirmed the arbitrator's award.

A split panel of the Ninth Circuit reversed.  It expressly acknowledged that the text of the MMWA does not specifically prohibit binding arbitration clauses.  The FTC, however, had issued a rule providing that the decisions of any pre-suit informal settlement procedure would not be legally binding on any person.  The majority gave this rule Chevron deference, stating that it was consistent with congressional intent, the purpose of the statute (in protecting consumers from being forced into contracts of adhesion), and had been the FTC's interpretation of the statute for more than 35 years.

The majority noted that both the Eleventh and Fifth Circuits have reached a different conclusion, holding that the FTC's construction of the MMWA is unreasonable in light of the Supreme Court's repeated holdings that Congress created a liberal federal policy favoring arbitration when it enacted the FAA in 1924, more than 50 years before Congress enacted the MMWA in 1975.  Slip op. at 17801-17802 (citing cases).  The Ninth Circuit majority rejected these holdings because: (1) it viewed the prior statute, the FAA, as "less specific" than the later MMWA, (2) it found the FTC's interpretation "reasonable," and (3) the MMWA differs in certain respects from other statutes that the Supreme Court has found to be trumped by the FAA.  Slip op. at 17804.

Judge N. Randy Smith dissented vociferously.  First, he argued that the majority got it wrong in interpreting the FTC's regulation.  Binding arbitration is not an "informal dispute settlement procedure" to which the FTC's rule even applies, and it does not meet the FTC's extensive regulations for IDSMs.  (The FTC has a number of requirements for pre-suit informal dispute settlement mechanisms.  Where a manufacturer establishes such a mechanism, the buyer must engage in the mechanism as a prerequisite to filing suit.  Interestingly, the same panel of Ninth Circuit judges issued a split opinion on the same day as Kolev, addressing whether that prerequisite goes to the court's subject matter jurisdiction.  See Maronyan v. Toyota Motor Sales, Inc., No. 09-56949, Slip op. (9th Cir. Sept. 20, 2011).)

Rather than being a pre-suit settlement mechanism, the sales contract at issue in Kolev made arbitration a binding alternative to litigation, not some sort of prerequisite to suit.  Slip op. at 17809 (Smith, J., dissenting).  And even the FTC has acknowledged that "nothing in the Rule precludes the parties from agreeing to the use of some avenue of redress other than the [IDSM] if they feel it is more appropriate.  Thus, Judge Smith argues, "If we truly must afford Chevron deference to the FTC's interpretation of the MMWA . . . the Majority's determination that all ADR procedures are 'Mechanisms' plainly contradicts the FTC's view of the statute."  Slip. op. at 17810-11. 

Judge Smith argues that the FTC's interpretation is not due Chevron deference because Congress did not authorize the FTC to regulate non-judicial remedies outside of the informal dispute settlement procedures now known as "Mechanisms."  Thus, the FTC's opinions about binding arbitration as an alternative dispute resolution procedure is beyond the scope of the FTC's authority.  But even more important, under the MMWA, federal courts -- not the FTC -- are the entities charged with Congress of deciding enforcement issues under the MMWA.  Slip op. 17813-14.

Judge Smith also cast himself squarely with the 11th and 5th Circuits, reasoning that Congress's adoption of the FAA established a federal policy favoring arbitration, and that agreements to arbitrate should be vigorously enforced.  He noted that "in every case raising a statutory right that does not explicitly preclude arbitration, the Supreme Court has enforced the presumption of arbitrability under the Arbitration Act."  Slip op. at 17817.

It remains to be seen whether the Kolev opinion will prompt Supreme Court review of an obvious circuit split.  Given the Court's recent Concepcion decision, which broadly asserted the supremacy of the FAA and its presumption favoring the parties' agreement to arbitrate, one could have reasonable grounds for believing that review would be forthcoming.

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US District Judge Dickinson Debevoise recently wrote an opinion that is a good reminder of the scope and breadth of warranty law.  See Alban v. BMW of North Am., L.L.C., 2011 WL 900114 (D.N.J. Mar. 15, 2011).  In Alban, plaintiff alleged that his car developed a "burnt crayon" smell outside of the warranty period.  He pointed to two of BMW's own internal Technical Service Bulletins ("TSBs") that acknowledged the potential for the condition to occur and attributed the smell to degradation of either the rear parcel shelf insulation or the sound insulating mat under the rear parcel shelf.  Both TSBs noted that replacement of the relevant part would be covered under the terms of the BMW New Vehicle Limited Warranty.

The limited warranty ran for 48 months or 50,000 miles, whichever occurs first.  It also provided that "THE DURATION OF ANY IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY, IS LIMITED TO THE DURATION OF THE EXPRESS WARRANTIES HEREIN."

BMW refused to fix plaintiff's auto, so naturally he brought a class action, asserting claims of breach of express and implied warranties, breach of the Magnuson-Moss Warranty Act, breach of the covenant of good faith and fair dealing, breach of New Jersey's Consumer Fraud Act, and unjust enrichment.  Last Fall, the court issued an opinion dismissing plaintiff's unjust enrichment claim with prejudice and the rest of the claims without prejudice.  The court noted that the warranty and MMWA claims were barred by the statute of limitations, and instructed plaintiff that if he was going to plead unconscionability of the warranty limitations or fraud, he needed to plead with particularity what BMW knew and when it knew it, so that he could prove that all cars of his model were defective, that the company knew the parts were certain to fail, and that the limitation in the warranty was an intentional effort to avoid the cost of repairing the defect.  Id. at *5.

Plaintiff filed another complaint asserting the same causes of action, and in support thereof pled that BMW had knowledge of the potential for the smell to develop (relying on certain documents), it knew the smell would not develop until after the warranty period had passed, it concealed that information and thus prevented plaintiff from bargaining for a warranty that would cover the defect, and there was a disparity of bargaining power between plaintiff and BMW.  Id. at 6.

Judge Debevoise's opinion reminds us that a limited warranty is just that -- limited -- and you are not entitled to expect a product to function without problem or defect outside of the warranty period:

However, in its prior opinion, the Court rejected the argument that, even though a defect does not manifest until after the expiration of a warranty agreement, a plaintiff can nonetheless maintain breach of warranty claims by alleging that the manufacturer knew about the defect at the time of purchase.  Indeed, the Court found that "the general rule, stated in Duesquesne, prohibiting breach of warranty actions premised on defects that did not arise until after the warranty expired applies to Plaintiff's claims regardless of his assertion that BMW knew that his vehicle was defective before the time-limit took effect.  Therefore, by extension, Mr. Alban's allegations that BMW knew that the sound insulation in his vehicle would fail after the expiration of the warranty agreement do not indicate that the time and mileage limitation clause was unconscionable.

Moreover, Mr. Alban's bare-bones allegations that he had "no meaningful choice in determining" the time and mileage limitation, and that "a gross disparity in bargaining power existed between" him and BMW, are "no more than conclusions [that] are not entitled to the assumption of truth."  Iqbal, 129 S. Ct. at 1950.

Id. at *9 (citations omitted).

The court also dismissed the NJCFA claim, observing that where an allegedly defective product was covered by a limited warranty and the alleged defect has manifested outside of the warranty period, the plaintiff must allege that the defendant knew with certainty that the product would fail outside the warranty period in order to maintain an NJCFA claim.  Plaintiff could not.  Id. at *10.

The court also had some useful instruction regarding TSBs:

Finally, as a practical matter, the Court is hesitant to view technical service bulletins, or similar advisories, as potential admissions of fraudulent concealment of a defect.  Such advisories are generally the result of consumer complaints that cause a manufacturer to investigate, diagnose, and remedy a defect in one of its products.  Accepting these advisories as a basis for consumer fraud claims may discourage manufacturers from responding to their customers in the first place.

Id. at *12.

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The Third Circuit recently affirmed dismissal of a putative nationwide class action in a textbook decision involving Samsung televisions with a limited capability to display high-quality video signals known as 1080p (or "HDMI") signals.  Cooper v. Samsung Elecs. Am. Inc., 2010 WL 1220946 (3rd Cir. Mar. 30, 2010).  Plaintiff alleged that he bought the 61" TV at an Arizona retailer to watch HDMI content from "native 1080p" devices, but only learned months later that the only 1080p device his television would work with was a computer -- not HD-DVD players.  Plaintiff failed to contact Samsung about his problem or give it any pre-suit notice of his claim.

Plaintiff ultimately brought a putative nationwide class action in New Jersey, asserting breach of express and implied warranties, violation of the Magnuson-Moss Warranty Act, violation of the New Jersey Consumer Fraud Act, fraudulent concealment, and unjust enrichment.  The District Court dismissed plaintiffs' claims -- although for plaintiff's consumer fraud claim, the court first determined that Arizona law would apply and thus applied the law of plaintiff's residence, rather than the law of the defendant's residence.  Plaintiff appealed.

The Third Circuit affirmed.  As for the express warranty claim, the court held that plaintiff failed to allege a breach of contract.  The warranty purported to cover "manufacturing defects in materials and workmanship," and required that "[t]o receive warranty service, a purchaser must contact SAMSUNG for a problem determination and service procedures."  The court held that plaintiff's warranty claim failed on two counts:  first, he failed to provide notice and ask for service.  And second, he alleged a product design problem, not a manufacturing defect that would be covered by the warranty.

The court affirmed dismissal of the federal Magnuson-Moss Warranty Act because it was based on state law; if the state law warranty claims failed, then the MMWA must as well.

The fraudulent concealment claim failed for failure to plead fraud with sufficient particularity under Rule 9(b).

Plaintiff had argued forcefully that the district court had erred in applying Arizona law -- rather than the law of Samsung's residence, New Jersey -- to the consumer fraud claim.  The Third Circuit analyzed the six elements of the fraud choice-of-law inquiry outlined in Restatement (Second) Conflict of Laws Section 148, and concluded that "[t]he transaction in question bears no relationship to New Jersey other than the location of Samsung's headquarters.  Cooper's claim bears the most significant relationship with Arizona, the state in which the television was marketed, purchased, and used."  Id. at *4.  Thus, the district court had properly applied the Arizona consumer fraud statute and concluded that plaintiff had failed to state a claim.  Accordingly, the court affirmed the judgment of the district court.

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It's not every day an MDL transferee dismisses the entire litigation on the pleadings.  Too often their job is viewed as assembling a document depository and presiding over copious amounts of discovery.  But some cases are just meant to die with the pleadings -- even where there are enough of the cases to warrant creating an MDL.

Judge Dickinson Debevoise has served in the District of New Jersey for nearly 30 years, and for almost half of that time he has been the court's senior member.  Thus, it should come as no surprise that he, as an MDL transferee judge, exhibited no reticence whatsoever in dismissing a consolidated class action complaint on the pleadings where the statements that formed the bedrock of the litigation were obvious puffery.

In In re Toshiba HD DVD Marketing and Sales Practices Litigation, 2009 WL 2940081 (D.N.J. Sept. 11, 2009), the plaintiffs alleged that Toshiba had misled customers by not disclosing that it was going to throw in the towel in the high-def DVD format war it was waging against Sony's Blu-ray technology.  They claimed that months, if not years, before the company's decision to discontinue making its HD DVD players, the company knew that most of the Hollywood studios had embraced Sony's technology and that it was just a matter of time before Toshiba would be forced to abandon the field to Blu-ray, much as Betamax abandoned the field to VHS.  Plaintiffs alleged that, had they known this fact, they would not have paid a premium price above ordinary DVD players to buy Toshiba's HD DVD players. They alleged 4 causes of action:  (1) violation of New Jersey's Consumer Fraud Act, (2) unjust enrichment, (3) breach of express and implied warranties, and (4) violation of the Magnuson-Moss Warranty Act.

In deciding the Rule 12(b)(6) motion, the Court relied heavily on the Supreme Court's recent decision in Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), refusing to credit plaintiffs' legal conclusions or other "threadbare recitals of a cause of action."  Rather, it demanded factual allegations, and found the plaintiffs' complaint lacking.

In analyzing the New Jersey CFA, the court looked first to the affirmative acts that were pled, namely, "(1) representing that HD DVD offered the best of high-definition television and DVD; and (2) representing that HD DVD was a format for today, tomorrow, and beyond, and that Toshiba was committed to supporting the HD DVD format into the future."  Id. at *9.  The court held that these were not actionable misrepresentations of fact, but rather were mere puffery, i.e., subjective statements of opinion.  In so holding, the court was mindful of how widely publicized the war between the HD DVD and Blu Ray formats was:

It defies logic that a consumer would believe, based on the tag line "For Today, Tomorrow and Beyond" that Toshiba was committed to producing HD DVD Players indefinitely, particularly given the well-publicized format war with Blu-ray, wherein both Sony and Toshiba were trying to capture the next generation DVD market.

Id. at *10.  The court concluded that the complaint failed

"to allege sufficient facts to claim that an 'ordinary' consumer -- who they admit would have been aware of the format war between HD DVD and Blu-ray -- would have expected to remain in the market indefinitely regardless of the implications of doing so.  On the contrary, the numerous articles referenced in the [complaint] provide support for the notion that the struggle to capture the next generation DVD market was seen as a winner-take-all battle.

Id.

Plaintiffs also asserted two basic "omissions" that Toshiba failed to warn consumers about:  (1) that "major motion pictures would not be released on HD DVD," and (2) that Toshiba planned to withdraw its support from HD DVD technology by exiting the market.  The court once again relied upon the many articles describing the format war between Sony and Toshiba, which "was characterized as a battle which would result in only the 'winning' format continuing in the marketplace."  Id. at 12.  The court said that it "defies logic" that Toshiba's potential market withdrawal could have been concealed in the face of such articles.

Besides puffery, the court held that the New Jersey CFA claim failed because plaintiffs failed to allege sufficient facts under Rule 9(b) to establish an ascertainable loss and causation; they failed to plead where they bought the players, how much they paid, how much ordinary DVD players cost, and whether plaintiffs were ever exposed to the alleged misrepresentations and made their decision because of those misrepresentations.

With respect to the unjust enrichment count, the court held that plaintiffs failed to plead it adequately because they got exactly what they paid for:  a DVD player that played HD DVDs at a higher quality than ordinary DVDs.  The court noted that Toshiba did not control the fact that movie studios opted for Blu-ray technology, and it relied on the fact that the format war was well-publicized.

With respect to the express warranty claim, the court held that the statement "Today, Tomorrow and Beyond" did not create an express warranty and was, in fact, puffery.  Similarly, on the implied warranty claim, the court noted that for an implied warranty of merchantability to be breached, the product actually has to be defective or not be fit for the ordinary purpose for which it was intended.  The complaint does not allege that the players fail to work, but merely that third parties have stopped providing new DVDs in that format.  Thus, it does not allege a breach of implied warranty claim.

Finally, the court held that because there was no implied warranty claim under state law, there could be no Magnuson Moss claim under federal law.

Judge Debevoise's opinion is important not only for its recognition that the statements at issue were mere puffery, but also because it recognizes the context in which consumers were making their choices.  Where the format war was obvious and consumers could be expected to pay attention to it in making their selection, any basic statement in support of the superiority of that technology could not be actionable.  The court refused to impose on a company fighting for the survival of its product line a legal duty to broadcast to consumers (and competitors) that it was considering exiting the market in a period of months.

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