Kolev v. Euromotors West/ the Auto Gallery

• Decision Date: 20 September 2011
• Docket Number: No. 09–55963.,09–55963.
• Citation: 2011 Trade Cases P 77676,658 F.3d 1024,11 Cal. Daily Op. Serv. 12003,2011 Daily Journal D.A.R. 14278
• Parties: Diana KOLEV, Plaintiff–Appellant,v.EUROMOTORS WEST/THE AUTO GALLERY; Motorcars West LLC; H M Gray Family II Inc.; Gray Family II LLC; Bennett Automotive I Inc.; Bennett Automotive II Inc., Defendants–Appellees,andPorsche Cars North America, Inc., Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

658 F.3d 1024

2011-2 Trade Cases P 77,676

11 Cal. Daily Op. Serv. 12,003

2011 Daily Journal D.A.R. 14,278

Diana KOLEV, Plaintiff–Appellant,

v.EUROMOTORS WEST/THE AUTO GALLERY; Motorcars West LLC; H M Gray Family II Inc.; Gray Family II LLC; Bennett Automotive I Inc.; Bennett Automotive II Inc., Defendants–Appellees,andPorsche Cars North America, Inc., Defendant.

No. 09–55963.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 7, 2011.Filed Sept. 20, 2011.

Martin W. Anderson and Jeffrey Kane, Santa Ana, CA, for the plaintiff-appellant.Arent Fox, Aaron H. Jacoby, John D. Bronstein, and Melanie S. Joo, Los Angeles, CA, for the defendants-appellees.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.Before: D.W. NELSON, STEPHEN REINHARDT, and N. RANDY SMITH, Circuit Judges.Opinion by Judge REINHARDT; Dissent by Judge N.R. SMITH.

OPINION

REINHARDT, Circuit Judge:

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).

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, 104 S.Ct. 2778, 81 L.Ed.2d 694 (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, 104 S.Ct. 2778. 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, 104 S.Ct. 2778. 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, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001), then we must defer to the agency's reasonable construction of the ambiguous statutory provision.¹

“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, 104 S.Ct. 2778, whether the MMWA bars warranty provisions that mandate pre-dispute binding arbitration of warranty claims.

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, 104 S.Ct. 2778. 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 4 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.

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.

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.”).

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, 94 S.Ct. 1757, 40 L.Ed.2d 134 (1974), because “agency interpretations that are of long...