MEMORANDUM

TO:NEW JERSEY LAW REVISION COMMISSION

FROM:STAFF

RE:UCITA; MAGNUSON-MOSS WARRANTY-FEDERAL TRADE

COMMISSION IMPROVEMENT ACT (15 U.S.C.A. §§ 2301 et seq.)

DATED:FEBRUARY 14, 2000

This memorandum discusses the Magnuson-Moss Warranty–Federal Trade Commission Improvement Act (15 U.S.C.A. §§ 2301 et seq.) and its application to transactions covered under the Uniform Computer Information Transactions Act (UCITA).

The Magnuson-Moss Warranty Act

In response to widespread misuse by merchants of express warranties and disclaimers, Congress enacted the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975 (hereafter MMWA). The law is aimed at written warranties and service contracts made in connection with the sale of “consumer products.” The purposes of the MMWA are to: improve the adequacy of information available to consumers, prevent deception and improve competition in the marketing of consumer products. Walsh v. Ford Motor Co., 6 Fed. R. Serv. 3d (Callaghan) 536 (D.C. Cir. 1986). The Federal Trade commission has promulgated regulations to implement the Act. 16 C.F.R. 700.1 through 16 C.F.R. 703.8.

The MMWA applies only to “consumer products” costing the consumer more than $15 where a warrantor uses a written warranty. The Act does not require that a seller give a warranty on a consumer product, but if a warranty is given, it must comply with the terms of the Act. The Act creates minimum disclosure standards for written consumer product warranties and defines minimum content standards for such warranties. Where written warranties are given, the MMWA invalidates attempts to disclaim implied warranties. 15 U.S.C.S. 2398(a). Any written warranty shall fully and conspicuously disclose in simple and readily understood language the terms and conditions of the warranty. 15 U.S.C.S. 2302(a). The MMWA requires that warranty information be available to consumers prior to sale. 15 U.S.C.S. 2302(b)(1)(A).

The MMWA provides for public and private enforcement of the Act. The Attorney General or the Federal Trade Commission may institute injunction proceedings. 15 U.S.C.S.2310(c). Injured consumers may bring class actions if jurisdictional requirements are met. 15 U.S.C.S. 2310(e). Individual consumers may bring civil actions for damages and recover attorney’s fees. 15 U.S.C.S. 2310(d). Recovery is limited to economic loss and the MMWA does not create a private cause of action for personal injury. Boelens v. Redman Homes Inc., 748 F.2d 1058 (5th Cir. 1984). Punitive damages are recoverable under the MMWA for breach of warranty only if they may be recovered in a breach of warranty action brought under the governing state law. Saval v. BL Ltd., 710 F.2d 1027, 1032-33 (4th Cir. 1983).

Informal dispute settlement mechanisms are encouraged. 15 U.S.C.S. 2310. The FTC has promulgated regulations determining standards governing the establishment and operation of informal dispute settlement procedures. 16 C.F.R. 703.3 through 703.8. If a warrantor establishes a bona fide mechanism, and if the written warranty refers to the mechanism, then the consumer may not commence a civil action (other than a class action) until he exhausts his remedies under the mechanism. 15 U.S.C.S. 2310(a)(3)(C).

The MMWA does not restrict or invalidate any right or remedy of any consumer under State law or other Federal law. 15 U.S.C.S. 2311(b)(1). However, state requirements are not applicable if they are within the scope of, or not identical to, the content, designation and federal minimum standards of written warranties. In addition, state warranty laws dealing with labeling or disclosure with respect to written warranties or performance are pre-empted. The MMWA is intended to complement, not displace, state warranty law.

Scope

The term “consumer product” means “any tangible personal property which is distributed in commerce and which is normally used for personal, family, or household purposes (including any such property intended to be attached to or installed in any real property without regard to whether it is so attached or installed.).” 15 U.S.C.S. 2301(1).

The Federal Trade Commission (hereafter FTC) has promulgated two regulations to define the term more precisely. 16 C.F.R. 700.1(a) provides:

“The Act applies to written warranties on tangible personal property which is normally used for personal, family, or household purposes. This definition includes property which is intended to be attached to or installed in any real property without regard to whether it is so attached or installed. This means that a product is a “consumer product” if the use of that type of product is not uncommon. The percentage of sales or the use to which a product is put by any individual buyer is not determinative. For example, products such as automobiles and typewriters which are used for both personal and commercial purposes come within the definition of consumer product. Where it is unclear whether a particular product is covered under the definition of consumer product, any ambiguity will be resolved in favor of coverage.”

The Act applies to “separate items of equipment attached to real property, such as air conditioners, furnaces, and water heaters,” as well as “appliances other thermal, mechanical and electrical equipment.” 16 C.F.R. 700.1(c)&(d). The Act excludes certain agricultural products and building materials integrated into the structure of the building at the time of sale. 16 C.F.R. 700.1(b)&(e). The second regulation covering the definition of “consumer product repeats the statutory definition. 16 C.F.R. 702.1(b).

The term consumer means:

“a buyer (other than for purposes of resale) of any consumer product, any person to whom such product is transferred during the duration of an implied or written warranty (or service contract) applicable to the product, and any other person who is entitled by the terms of such warranty (or service contract) or under applicable State law to enforce against the warrantor (or service contractor) the obligations of the warranty (or service contract).” 15 U.S.C.S. 2301(3).

However, the FTC has ruled that warranties may be limited to first purchasers provided explicit limiting language is used. Noteworthy is the fact that the term “consumer”extends to commercial parties purchasing consumer products.

The term “written warranty” is a fact or promise relating to the nature of the material or workmanship and affirming that the material or workmanship is defect free or meets a certain level of performance over a specified period of time.[1] Or, a written warranty is a written undertaking relating to refund, repair replacement or remedial action in the event the consumer product fails to meet the specifications of the undertaking. In each case, the promise or undertaking must be part of the basis of the bargain. 15 U.S.C.S. 2301(6).

The term “written warranty” means:

(A)any written affirmation of fact or written promise made in connection with the sale of a consumer product by a supplier to a buyer which relates to the nature of the nature of the material or workmanship and affirms or promises that such material or workmanship is defect free or will meet a specified level of performance over a specified period of time, or

(B)any undertaking in writing in connection with the sale or by a supplier of a consumer product to refund, repair, replace, or take other remedial action with respect to such product in the event that such product fails to meet the specifications set forth in the undertaking,which written affirmation, promise, or undertaking becomes part of the basis of the bargain between a supplier and a buyer for purposes other than resale of such product.”

Information disclosure is not ipso facto a written warranty. The FTC has provided that “a product information disclosure without a specified time period to which the disclosure relates is not a written warranty.” 16 C.F.R. 700.3(a). For example, energy efficiency ratings for electrical appliances, care labeling of wearing apparel and other product information disclosures are not MMWA warranties. Id. Likewise, terms giving the consumer the absolute right to revoke acceptance within thirty days or returning the product for any reason for credit toward another purchase are not written warranties. Furthermore, the Act does not apply to warranties given by a component supplier to a manufacturer of consumer products or to written warranties required by federal law. In sum, to raise a claim under the MMWA, a party must demonstrate that the product covered is a “consumer product” and that the warrantor made a “written warranty.”

If any written warranty is given, the MMWA does not allow merchants to disclaim implied warranties. 15 U.S.C.S. 2308(a). The term “implied warranty” means any implied warranty arising under State law in connection with the sale by a supplier of a consumer product.” 15 U.S.C.S. 2301(7). But implied warranties may be limited in duration, “if such limitation is conscionable and is set forth in clear and unmistakable language and prominently displayed on the face of the warranty.” 15 U.S.C.S. 2308(b).

The MMWA and UCITA

UCITA applies to computer information transactions. Section 103(a). A “computer information transaction” means an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information.” Section 102(a)(11). “Computer information” means “information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer.” Section 102(a)(10). The term includes “a copy of the information any documentation or packaging associated with a copy.” Id. The term “informational rights” means all rights in information created under laws governing patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that gives a person, independently of contract, a right to control or preclude another person’s use of or access to the information on the basis of the right holder’s interest in the information.” Section 102(a)(38).

The question arises whether the MMWA governs warranties under UCITA. Is a “computer information transaction” the equivalent of “tangible personal property”? Neither the MMWA nor the Federal Trade Commission regulations directly refer to software programs and information products. The language of the statute and regulations is the language of hard goods. Research has indicated that this question has not been the subject of a reported decision. The decisions on software development contracts are roughly equally divided in holding that the transaction involves goods or services. Intuitively, digital information is not “tangible personal property;” it is an intangible. Under this view, most computer information transactions would not constitute “consumer products” under the MMWA. However, the policy of the MMWA is to resolve any ambiguity about coverage in favor of application of the MMWA. Under this view, the MMWAwould includes digital information products.

Assuming the MMWA Applies to UCITA

Violations of the MMWA center around the failure of warrantors to comply with the Act’s technical provisions. 16 C.F.R. 701.3 specifies nine disclosure requirements for written warranties. 16 C.F.R. 701.4 governs the use of “owner registration cards.” 16 C.F.R. 702.3 specifies the requirements for pre-sale availability of written warranty terms.In addition, a written warranty must be designated as either a “Full Warranty” or “Limited Warranty.” 15 U.S.C.S. 2303(a). Designating a warranty as a “Full Warranty” requires the warrantor to meet the federal minimum standards for warranties set forth in 15 U.S.C.S. 2304 that include duties to remedy defects, guaranty the implied warranty and provide for refunds and repairs. A “Limited Warranty” is one that does not meet the federal minimum standards for warranties. The terms of any warranty must meet the statutory and regulatory requirements for disclosure and must satisfy the pre-sale availability rule.

In the Matter of Gateway 2000, Inc., an FTC Decision and Order, the FTC found that Gateway had violated the MMWA by: (1) failing to tell consumers that some states do not allow for excluding liability for incidental or consequential damages, (2) failing to disclose that consumers may have legal rights in addition to the warranty, (3) disclaiming any implied warranty except as provided by the Act and (4) failing to make the text of the warranty available prior to sale.[2]

If the MMWA covers “computer information transactions,” consumers then have the following federal warranty rights: (1) the implied warranty cannot be excluded but only limited in duration; (2) the persnickety disclosure requirements may provide federal claims against careless warrantors and (3) warranties must be made available prior to sale.

UCITA Provisions Affected

UCITA contemplates federal pre-emption. Section 105 provides in part that “A provision of this Act which is pre-empted by federal law is unenforceable to the extent of the preemption. The MMWA preempts state warranty law on the content, designation and federal minimum warranty requirements and forbids warrantors from disclaiming implied warranties. For any written warranty covering these topics, therefore, the MMWA supplants UCITA terms to the contrary.

1. UCITA Section 406 permits a licensor to disclaim the warranty of merchantability. It provides:

(A)To disclaim or modify the implied warranty arising under Section 403, language must mention “merchantability” or “quality” or use words of similar import and, if in a record, must be conspicuous.

(B)To disclaim or modify the implied warranty arising under Section 404 , language in a record must mention “accuracy” or use words of similar import.

(2) Language to disclaim or modify the implied warranty under Section 405 must be in a record and be conspicuous. It is sufficient to state “There is no warranty that this information, our efforts, or the system will fulfill any of your particular purposes or needs”, or words of similar import.

(3) Language in a record is sufficient to disclaim all implied warranties if it individually disclaims each implied warranty or, except for the warranty in Section 401, if it is conspicuous and states “Except for express warranties stated in this contract , if any, this ‘information’, ‘computer program,’ is provided with all faults, and the entire risk as to satisfactory quality , performance, accuracy, and effort is with the user” or words of similar import.

(4) A disclaimer or modification sufficient under [Article 2 or 2A of the Uniform Commercial Code] to disclaim or modify an implied warranty of merchantability is sufficient to disclaim or modify the warranties under Sections 403 and 404. A disclaimer or modification sufficient under [Article 2 or 2A of the Uniform Commercial Code] to disclaim or modify an implied warranty of fitness for a particular purpose is sufficient to disclaim or modify the warranties under Section 405.

Section 406 contains four additional provisions providing methods to disclaim the implied warranty of merchantability. For example, Section 406(e) provides that implied warranties may be disclaimed by course of performance, course of dealing or usage.

For consumer products covered by a written warranty, the MMWA alters UCITA’s rules for disclaiming implied warranties. Simply put, federal law does not allow disclaimers of “any implied warranty” to a consumer with respect to any consumer product. 15 U.S.C.S. 2308(a). Because the term “consumer” includes a commercial party, the MMWA has a major impact on the effect of disclaiming implied warranties under UCITA.

2. Section 406(g) further provides that “Remedies for breach of warranty may be limited in accordance with this Act with respect to liquidation or limitation of damages and contractual modification of remedy.” The MMWA permits consumers to recover any legal or equitable relief plus attorney’s fees.

Conclusion

Whether the MMWA covers computer information transactions is unclear. If the MMWA is interpreted to cover these transactions, then if a written warranty is given, the warranty, whether full or limited, must comply with the Act’s disclosure requirements. Second, implied warranties cannot be disclaimed but limited in duration. Third, the MMWA provides a private cause of action for violation of the Act. Fourth, warranties must be made pre-sale available.UCITA’swarranty provisions to the contrary are unenforceable. UCITA governs any warranty falling outside the scope of the MMWA such as oral warranties and warranties given to non-consumers.

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[1]The MMWA also applies to “service contracts”; these are contracts in writing to perform, over a fixed period of time or for a specified duration, services relating to the maintenance repair (or both) of a consumer product.” 15 U.S.C.S. 2301(8).

[2]In response, Gateway has produced several limited written warranties specific to different products. Its current limited written warranty for Gateway Essential and other personal computers consists of 17 pages, 10 of which pertain to US sales; the remaining seven pages pertain to international sales. All Gateway warranties are available on-line. Every Gateway limited warranty excludes software.