US FTC Announces First Right-to-Repair Cases Under Chair Lina Khan

The upshot, for busy people:

• The Federal Trade Commission (FTC) has been focused for several years on consumers’ “Right to Repair.” A July 2019 workshop and May 2021 report to Congress culminated in a July 2021 policy statement explaining that the FTC intended to prioritize enforcement against practices that it believes unlawfully restrict consumers from repairing goods themselves or through independent repair shops. Among other things, the policy statement previewed that the FTC would take an “interdisciplinary approach” to enforcement—meaning that the agency would rely on expertise in the consumer protection and competition bureaus cooperatively—presumably to incorporate novel competition theories into its consumer protection work.
• On June 23, 2022, the FTC announced its first Right-to-Repair enforcement actions under the 2021 policy statement. The two separate enforcement actions—against a major motorcycle manufacturer and a company that sold generators—alleged that it was unlawful for the companies to include in their customer agreements terms voiding warranties if customers used independent dealers for parts or repairs. The complaints alleged that the companies violated the Magnuson-Moss Warranty Act’s Tying Prohibition and also engaged in deceptive practices by including these void terms in their warranties.
• The FTC clearly is committed to enforcing its view on the Right to Repair, and companies should consider reviewing the repair and maintenance information that they share with customers and/or independent repair shops, as well as their consumer warranties, for language indicating that warranties may or will be void if consumers use unauthorized parts or service entities. Still, given that the claims thus far were tied exclusively to the wording of the respective warranty agreements, it’s not clear how far the FTC intends to push its enforcement beyond the four-corners of the warranty agreement.

Background. Although companies have latitude to condition warranties for consumer goods in a number of ways, Congress imposed certain restrictions on consumer warranties in 1975’s Magnuson-Moss Warranty Act. Relevant here, Section 102(c) of the act provides that companies cannot condition warranties of consumer products “on the consumer’s using, in connection with such product, any article or service (other than an article or service provided without charge under the terms of the warranty) which is identified by brand, trade, or corporate name” unless the company applies for and receives a waiver from the FTC. This provision is often referred to as the “Tying Prohibition.” The FTC, which has enforcement authority under this provision, has sent warning letters and settled complaints against major companies in the automotive and electronics industries, among others. (See the May 2021 Report for FTC Enforcement Actions.) The FTC also has at its disposal Section 5 of the FTC Act, which prohibits unfair and deceptive acts and practices and which the agency employs flexibly across its docket.

Notably, violations of the Magnuson-Moss Act do not allow the FTC to obtain money penalties; the agency is limited to injunctive relief or cease-and-desist orders. The FTC previously could obtain money penalties for first-time violations of Section 5 of the FTC Act until the Supreme Court stopped that practice in April 2021. However, the FTC has been exploring the boundaries of its lesser-used authorities and has still been collecting money penalties for first-time Section 5 violations in settlements. (In particular, the agency has been relying on a theory that Section 19(a)(2) of the FTC Act would allow the agency to collect money penalties following a successful administrative proceeding by showing in a follow-on federal court case that the conduct in question was such that “a reasonable man would have known under the circumstances was dishonest or fraudulent.”) The agency also can collect civil penalties for violations of cease-and-desist orders.

These cases. On June 23, the FTC announced suits against a seller of power equipment, including generators, and a manufacturer of motorcycles. The FTC’s allegations against the two companies differed slightly but were based exclusively on the terms of their warranties rather than on any other business conduct.

Power Equipment Seller. The FTC alleged that the company included as an “exclusion” “generators that utilize non-[company] replacement parts” and “products that are altered or modified in a manner not authorized in writing by [the company].” Relying on these contract terms, the FTC alleged two counts. The first was a straightforward violation of the Magnuson-Moss Act’s Tying Prohibition. The second repackaged those same facts as a deception claim under Section 5, alleging that the warranty exclusion was a misrepresentation regarding the nature of the warranty coverage because the exclusion was unlawful.

Motorcycle Manufacturer. The FTC brought the same two claims against this second company exclusively on the express terms of the warranty. (The FTC also alleged a technical violation of the FTC Disclosure Rule, 16 C.F. R. § 701.3(a)(2), because the company did not present a list of relevant parts on a single document.) The notable factual difference was that the company’s warranty language did not expressly disclaim liability for the use of non-approved parts but, rather, only implied this was the case. For example, the FTC pointed to the following warranty language as violating both the Tying Prohibition and Section 5:

• “These modifications may void all or parts of your new motorcycle limited warranty.”
• “Use of aftermarket performance parts may void all or parts of your limited warranty.”

The Orders. The orders for both the power equipment seller and the motorcycle manufacturer contained similar remedial provisions.

• Sin-no-more. Both orders prohibited the companies from violating the Tying Prohibition and the Magnuson-Moss Act generally and from marketing the same alleged misrepresentations in their warranties.
• Negotiated Carve-outs. Both orders included certain carve-outs from the Tying Prohibition. For example, the order against the motorcycle manufacturer allowed the company to exclude from coverage the use of unauthorized parts in connection with racing and for other unauthorized uses such as being used as a trailer hitch.
• Customer Notification. Consistent with other recent deception cases, both companies also were required to notify customers and authorized dealers of the orders.
• Compliance Monitoring and Recordkeeping. The orders also included the FTC’s standard provisions requiring the companies to provide a compliance report in one year. Thereafter, the companies are required to create these records for the next five years (and to retain them for an additional five years): revenue records, personnel records of employees with managerial responsibilities, consumer complaints relating to warranties, documents summarizing warranties, and records demonstrating compliance with the order. The orders also provide that the FTC can request further information from the companies to monitor compliance.
• Penalties for Violations. Violating the orders can result in civil money penalties under Section 5(m) of the FTC Act, which currently run more than $46,000 per violation.

What does this mean? In light of this and other Right to Repair efforts, companies should evaluate their diagnosis, repair and maintenance practices, especially vis-a-vis independent repair shops. This should include a careful review of language in consumer warranties. For instance, the complaint against the motorcycle manufacturer shows that even using equivocal language like “may”—i.e., using unapproved parts “may” void your warranty—will not avoid liability, at least under the FTC’s view. For now, it seems that warranty contracts themselves are the FTC’s principal concern, as neither complaint referenced other business practices or representations. That is not to say, however, that the FTC will not in the future focus on other practices that implicate the Right to Repair.

Finally, as an FTC practice point, companies should note that these cases appear to have progressed very quickly, with the case against the power equipment seller apparently lasting under six months from investigation to complaint. This is incredibly fast for the FTC and indicates that this area may be a high priority for the agency.