Warranty Servicing Legislation
Journal of Legislation
Volume 6 | Issue 1
Article 5
1-1-1979
Warranty Servicing Legislation
J. Edward Day
Laura Glassman
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Day, J. Edward and Glassman, Laura (1979) "Warranty Servicing Legislation," Journal of Legislation: Vol. 6: Iss. 1, Article 5.
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WARRANTY SERVICING LEGISLATION
J. Edward Day*
and Laura Glassman* *
Over the past several years, a number of state legislatures have considered
bills that would establish by legislation the compensation that manufacturers
must pay to independent servicers for repair work performed under a
manufacturer's warranty.' Such provisions usually form part of a larger scheme
of warranty regulation which has its roots in the recent trend for consumer
protection laws.
2
For example, on the federal level, the Magnuson-Moss Warranty Act
enumerates federal minimum standards for consumer product warranties and
for their disclosure to consumers. The Act broadly defines "consumer product"
to mean "any tangible personal property which is distributed in commerce and
which is normally used for personal, family or household purposes ' 3 in order
to provide the widest protection. In the state arena, the California Song-Beverly
Consumer Warranty Act 4 is probably the progenitor of some features of both
the federal law and of consumer warranty legislation in other states. The
California Act creates for retail sales of consumer goods special implied
warranties of merchantability and fitness for a particular purpose, 5 as well as
stating strict requirements as to the contents of express warranties and the
manufacturer's 'duty to service nonconforming goods.
Legislation setting required levels of payment by manufacturers to servicers
for warranty repair work, however, is not in the same category as consumer
protectionism. It is based on the erroneous presumption that manufacturers in
general have underpaid independent servicers for doing warranty service work.
In fact, such legislation regulating reimbursement for in-warranty servicing
represents an intrusion into what has usually been an area regulated by privately
negotiated agreements between two types of businesses, manufacturers and
Partner, Squire, Sanders & Dempsey, Washington, D.C., A.B., University of Chicago, 1935; LL.B.,
Harvard Law School, 1938; LL.D., Illinois College, 1962; LL.D., University of Nevada, 1962.
•* Associate, Squire, Sanders & Dempsey, Washington, D.C., B.A., Bryn Mawr College, 1970; M.A.,
Middlebury College, 1972; J.D., Georgetown University Law Center, 1977.
1.
2.
3.
4.
5.
E.g., Cal. Civil Code § 1793 (West Supp. 1978); Minn. Stat. Ann. § 325.953 Subd. 3 (West Supp.
1978); R.I. Gen. Laws § 6A-2-329 (1977). See also N.J. Stat. Ann. § 56.10-13 to -15 (West Supp.
1978-79); 1977 Conn. Pub. Acts No. 77-493; Va. Code § 46.1-547.1 (Supp. 1978).
15 U.S.C. §§ 2301-2312 (1976).
Id. § 3201 (1).
Cal. Civil Code §§ 1790-1795.7 (West 1973 & Supp. 1978).
These implied warranties are quite similar to the implied warranties of the California Commercial
Code, compare Cal. Civil Code §§ 1792, 1792.1, 1792.2 with Cal. Comm. Code §§ 2314 & 2315,
except that a maximum period of duration is set for the consumer warranties and the consumer
warranties may only be waived in the manner expressly provided. Cal. Civil Code §§ 1792.3 & 1792.4.
Where the provisions of the Commercial Code conflict with the rights guaranteed to buyers of consumer
goods, the latter shall prevail. Cal. Civil Code § 1790.3. This type of modification of the so-called
Uniform Commercial Code as exemplified by the California and Rhode Island legislation discussed
here seems to work contrary to the intent of a Uniform Code and make compliance by businesses
that are national in scope especially difficult.
19791
Warranty Servicing Legislation
servicers, and it may actually work to the detriment of consumers by creating
higher in-warranty repair costs which will eventually be reflected in product
prices. It is the purpose of this article to examine this legislation with a view
to explaining how and why it is neither in the best interests of such servicers
as support it nor of the consumers.
CURRENT WARRANTY SERVICING
As most consumers are aware, contracts for the sale of appliances and
other household products ordinarily contain an express written warranty provision. 6 On items such as household products, both parts and labor are generally
covered by the warranty, although not necessarily for the same period of
time. 7 Under all federal and state warranty laws, it is the manufacturer, as
express warrantor of the product, who is responsible to the consumer for
warranty service. 8 In order to provide an effective means for the consumer to
take advantage of the contract's warranty provisions, and as sometimes required
by state law,9 the manufacturer will either provide his own service personnel
or will designate specified independent servicers as his service representatives.
No independent servicer is under compulsion to provide warranty service unless
he has entered into a bona fide contract with the manufacturer to do so.
Consequently, no servicer is compelled to provide warranty service at prices
he finds unsatisfactory. In a bargained-for contract, the manufacturer and the
servicer will agree upon terms for reimbursement, parts distribution, training
and other necessary elements. The Magnuson-Moss Warranty Act § 10710
specifically recognized this normal warranty pattern between manufacturers
and servicers for in-warranty servicing:
Nothing in this chapter shall be construed to prevent any warrantor from
designating representatives to perform duties under the written or implied
warranty: Provided, That such warrantor shall make arrangements for
compensation of such designated representatives, but no such designation shall
relieve the warrantor of his direct responsibilities to the consumer or make
the representative a cowarrantor.
6.
7.
8.
9.
10.
The contents of the express warranty may be regulated by applicable federal and state laws, as briefly
indicated above.
For example, the manufacturer may pay for labor charges for repairs necessary within 90 days of
purchase but replace defective parts for one year. After the 90-day labor warranty period expires,
labor charges for installing replacement parts are the consumer's responsibility.
The retailer or distributor may also be liable for any express warranties he makes as part of a
consumer sale. E.g., Minn. Stat. Ann. § 325.953 Subd. 2.
The Song-Beverly Consumer Warranty Act provides that every manufacturer of consumer goods sold
in the state for which the manufacturer has made an express warranty shall maintain or cause to be
maintained, in the state, sufficient service and repair facilities to carry out the terms of such warranties
or be subject to provisions making him liable to a retailer who performs service or incurs obligations
in giving effect to such warranties. A manufacturer making express warranties is also permitted to
designate an independent repair or service facility as an authorized service and repair facility reasonably
close to all areas where the manufacturer's consumer goods are sold. Cal. Civil Code § 1793.2(a) (1)
(West Supp. 1978). Other less restrictive provisions, such as that in the Rhode Island law, require
that "[elvery manufacturer, whether domestic or foreign, who makes an express warranty pursuant to
a consumer sale shall designate a representative within the state to provide services or repairs under
the terms of the express warranty." R.I. Gen. Laws § 6A-2-329.3(c) (1977) (emphasis added). It is
particularly difficult for small manufacturing companies to comply with these requirements for
maintaining a large number of service facilities or representatives in numerous locations, especially if
they attempt to carry on a nationwide business and must comply with similar, but probably somewhat
different, legislative requirements in other states.
15 U.S.C. § 2307.
Journal of Legislation
[Vol. 6: 58
In the absence of state legislation, reimbursement rates for warranty work
on items such as household appliances are freely negotiated between manufacturers
and independent servicers. Currently, the majority of the dollar volume of
warranty work is done at such negotiated warranty reimbursement rates. Such
contracts are expected to include a reasonable profit to the servicer. It is good
business practice from the manufacturer's point of view to pay an equitable
reimbursement rate to his authorized independent servicers because, first, the
manufacturer needs the servicer to stay in business, and second, the manufacturer
wants his service work to get priority so that the customers are satisfied. It
is neither logical nor reasonable for manufacturers, legislators, or the public
to expect that servicers will agree to contracts which are economically
disadvantageous to them. Servicers, in fact, compete for warranty repair work
contracts because they are valuable to the servicer for a variety of reasons.
BENEFITS ACCOMPANYING WARRANTY SERVICE WORK
Let us examine the practical realities of the warranty repair contract
situation. Although the agreed upon price for servicer reimbursement may be
less than the going rate charged for comparable out-of-warranty work, this
may be a result of the fact that there are benefits other than mere payment
for service work that accrue to the servicer from a warranty service agreement
with a manufacturer. These benefits are quite properly taken into account in
setting the rate of compensation for the servicer. Such benefits can be substantial.
For example, the servicer need not seek out warranty customers or spend
money on advertising to secure their. business. In fact, in many cases the
manufacturer directs the warranty customer, through toll-free numbers, listings
in the Yellow Pages, or other means, to a particular servicer. Moreover,
warranty customers are highly likely to continue to patronize the servicer after
expiration of the warranty. Along these same lines, it must be noted that
listing as an "authorized servicer" of a nationally recognized manufacturer is
a prestige-plus and influences nonwarranty customers to patronize a servicer.
There is no credit risk to the servicer for in-warranty work; he will
be paid by the manufacturer for service performed that is covered by the
1
warranty.
Also, manufacturers frequently provide, at little or no cost, technical
assistance, literature, and training to service contractors. Furthermore, the
I1. It should be noted that many servicers complain about not being reimbursed for "instructional" or
"nuisance" service calls. These are service calls from consumers who believe their product is malfunctioning
or defective, but who in reality have not been properly instructed by the dealer, have not bothered
to read instructions for operation, or have expectations exceeding the service possible to obtain from
the product. Because warranty service is "free" to the consumer, he calls the servicer. The servicer
arrives and finds that nothing for which he will be reimbursed under the terms of the warranty service
contract with the manufacturer need be done. Since, at the least, his time spent on the service call
would be charged to a retail customer, the servicer believes he loses money on nuisance calls for
which the manufacturer should compensate him. In part it is to ameliorate this situation that servicers
have called for legislation setting warranty reimbursement rates at a rate equal to rates charged for
like service to retail customers for nonwarranty service. The resolution to this problem, however, does
not lie in warranty servicing legislation. Rather, the consumer should be better educated through sales
information; the dealer, if responsible, should bear the burden of "instructional" calls; and the servicer
should make adequate inquiry to ascertain that he is not answering a "nuisance" call and warn the
customer that he may have to pay for service not covered by the warranty. In addition, the servicer
must include in his costs of doing business, and thus build into his negotiated reimbursement rates,
the loss caused him by such service calls.
1979]
Warranty Servicing Legislation
servicer enjoys a close working relationship with the manufacturer in terms
of parts procurement and- other aspects of the servicer's business dependent
upon the manufacturer which can result in a considerable savings of time and
expense for the servicer. The manufacturer, who is ultimately liable for
complaints arising under the product warranty, shares with the servicer the
responsibility for customer complaints and must aid in resolving them.
Finally, training and experience gained by the servicer from warranty work
on new products prepares the servicer to perform better out-of-warranty work
at lower costs to the out-of-warranty consumer.
For these reasons, freely negotiated contracts for warranty repair work
encourage competition among both servicers and manufacturers. The former
may agree to lower reimbursement rates; the latter may compete for a lower
dollar cost for in-warranty work by offering more in terms of support such
as technical assistance and training.
Moreover, it is likely that the primary impetus for servicers to encourage
legislation which would tie warranty reimbursement rates paid to them to
out-of-warranty service charges is not underpayment but rather a generally
decreased volume of repair work which has resulted in decreased income for
servicers. Legislation seeking to regulate warranty repair rates is really an
attempt to counteract free market forces which are now working against
servicers. Increased prices are, after all, a classic means of attempting to
compensate for decreased volume.
Over the past decade, technological advances in appliance industries have
resulted in far more reliable products. At the same time, prices of many
appliances have also decreased. 12 As a consequence, the number of repairs has
been decreasing steadily with a corresponding decrease in overall volume of
servicing business. A consumer may prefer to purchase a new, late-model
automatic dishwasher, for example, rather than pay for any major, expensive
repairs on an old product.
In addition, warranties for labor have been reduced in many cases from
one year to ninety days, which also reduces in-warranty business. Servicers
who have traditionally done a high ratio of in-warranty business, as compared
to out-of-warranty business, now find themselves having business troubles. They
can no longer rely exclusively on in-warranty work.
Another major area of concern to manufacturers is that as household
products become more technologically advanced, servicers may no longer be
qualified as technicians to repair them. The rapid changes in the state of the
art, such as sophisticated microwave ovens or electronic touch controls for
washing machines, make products more complex. While this may put certain
unsophisticated independent servicers out of business, technological advances
at the same time create a growing market for qualified technicians.
This problem, however, has not been caused by the prices paid by
manufacturers for in-warranty repair work. It is a problem caused by the
action'of market forces and it is a problem that will be resolved by market
forces and not by "corrective" legislation of the type discussed in this article.
12.
A dramatic example is the television- set, which has decreased on the Consumer Price Index from
159.7 in 1950 to 101.7 in 1977.
Jourhial of Legislation
[Vol. 6: 58
WARRANTY SERVICING LEGISLATION
Let us now examine some of the legislation with which a few states have
attempted to deal with this servicer problem. The bills that have been enacted
generally require that the manufacturer reimburse the servicer for in-warranty
service work at the same rate as the servicer charges for out-of-warranty work
that is comparable. For example, a recently enacted amendment to the Rhode
Island Uniform Commercial Code provides in pertinent part:
Every manufacturer who makes an express warranty pursuant to a consumer
sale, who designates a representative within this state to provide sale and
service under the terms of the express warranty shall be liable to said
representative in the amount equal to that which is charged by said representative
for like service and repairs rendered to retail consumers who are not entitled
to warranty protection. This equality of charges shall apply both to labor
13
and parts used.
Minnesota's Manufactures and Sales law regarding express warranties similarly
provides:
Every manufacturer who makes an express warranty pursuant to a consumer
sale, who authorizes a retail seller within this state to perform services or
repairs under the terms of the express warranty shall be liable to the retail
seller in an amount equal to that which is charged by the retail seller for
like service or repairs rendered to retail consumers who are not entitled to
warranty protection.14
California provides the following alternatives:
As a means of complying with [service and repair facilities requirements] of
this subdivision, a manufacturer shall be permitted to enter into warranty
service contracts with independent service and repair facilities. The warranty
service contracts may provide for a fixed schedule of rates to be charged for
warranty service or warranty repair work, however, the rates fixed by such
contracts shall be in conformity with the requirements of Section 1793.3(c).
The rates established pursuant to Section 1793.3(c), between the manufacturer
and the independent service and repair facility, shall not preclude a good
faith discount which is reasonably related to reduced credit and general
overhead cost factors arising from the manufacturer's payment of warranty
charges direct to the independent. The warranty service contracts authorized
by this paragraph shall not be executed to cover a period of time in excess
15
of one year.
Section 1793.3(c) provides in part:
It shall be a rebuttable presumption affecting the burden of producing evidence
that the reasonable cost of service or repair is an amount equal to that which
is charged by the independent serviceman for like services or repairs rendered
to service or repair customers who are not entitled to warranty protection.
13.
14.
15.
R.I. Gen. Laws § 6A-2-329.3(d) (1977) (emphasis added).
Minn. Stat. Ann. § 325.953 Subd. 3 (West Supp. 1978) (emphasis added).
Cal. Civil Code § 1793.2(a) (1) (West Supp. 1978) (emphasis added).
19791
Warranty Servicing Legislation
Some states have limited regulations of warranty work rates to services
performed by a motor vehicle dealer for the manufacturer. Virginia has enacted
strict compensation requirements as follows:
Each motor vehicle manufacturer, factory branch distributor or distributor
branch, shall specify in writing to each of its motor vehicle dealers licensed
in this State the dealer's obligations for preparation, delivery and warranty
service on its products, shall compensate the dealer for warranty service
required of the dealer by the manufacturer, and shall provide the dealer the
schedule of compensation to be paid such dealers for parts, work and service
in connection with warranty service, and the time allowances for the performance
of such work and service. In no event shall such schedule of compensation
fail to include reasonable compensation for diagnostic work as well as repair
service and labor. Time allowances for the diagnosis and performance of
warranty work and service shall be reasonable and adequate for the work to
be performed. In the determination of what constitutes reasonable compensation
under this section, the principal factors to be given consideration shall be
the prevailing wage rates being paid by the dealer, and the prevailing labor
rate being charged by the dealer, in the community in which the dealer is
doing business, and in no event shall such compensation of a dealer for
warranty service be less than the rates charged by such dealerfor like service
to retail customers for non-warranty service and repairs.16
In New Jersey, legislation with respect to services or parts provided in
satisfaction of a warranty issued by the motor vehicle franchisor provides in
pertinent part:
The motor vehicle franchisor shall reimburse each motor vehicle franchisee
for such services as are rendered and for such parts as are supplied, in an
amount equal to the prevailing retail price charged by such motor vehicle
franchisee for such services and parts in circumstances where such services
are rendered or such parts supplied other than pursuant to warranty; provided
that such motor vehicle franchisee's prevailing retail price is not unreasonable
when compared with that of the holders of motor vehicle franchises from the
same motor vehicle franchisor for identical merchandise or services in the
geographic area in which the motor vehicle franchisee is engaged in
business. 17
Connecticut has enacted similar legislation to regulate petroleum product
franchisors:
Every franchisor shall reimburse its franchisee at the prevailing retail price
for any services rendered or parts supplied by such franchisee in satisfaction
of any warranty issued by such franchisor, and no franchisor shall restrict a
franchisee from rendering services or providing parts in accordance with
standards of good workmanship in satisfaction of any such warranty. 18
The desired benefits of this type of legislation are twofold. First, legislators
hope to protect servicers by providing them with an "adequate" profit on
warranty servicing work. Second, legislators believe that these benefits will be
passed on to the consumers of out-of-warranty repair work as cost savings
16.
17.
18.
Va. Code § 46.1-547.1(a) (Supp. 1978) (emphasis added).
N.J. Stat. Ann. § 56.10-15a (West Supp. 1978-79) (emphasis added).
1977 Conn. Pub. Acts No. 77-493 § 3(i) (emphasis added).
Journal of Legislation
[Vol. 6: 58
because servicers will not find it necessary to raise retail customer prices to
compensate for so-called economically disadvantageous warranty contract work.
There are, however, basic fallacies underlying the assumption that "servicing
of warranties" legislation provides a means of reaching these goals. It is of
vital public concern that legislation of this sort not be considered and passed
by state legislators without their having a full understanding of the facts
surrounding warranty repairs.
In the previous section, we have pointed out and discussed the factors to
be used in deciding whether servicers are receiving an "equitable" rate of
reimbursement on warranty repair work. It is clear that the determination
cannot be made without considering all of the other benefits that may accrue
to a servicer from a warranty repair contract. It is also true that servicers
who are not making an "adequate" profit may be the victims of market forces
for which this type of legislation is not a remedy. Legislation such as that
set out above would in effect subsidize noncompetitive servicers and manufacturers
at the expense of competitive servicers, manufacturers, and the general public.
Another cause of reimbursement rates which servicers may feel are not
"fair" is the need for better business management techniques in much of the
service industry. A servicer, in order to negotiate an adequate rate of compensation
with a manufacturer, must know what his costs are. For example, reimbursement
and handling of parts is part of the package negotiated between the manufacturer
and the servicer. Parts distribution under a warranty is generally handled in
one of the following two ways. One method involves two-step distribution. The
manufacturer distributes parts to a local distributor. Parts are thus locally
available and the distributor independently sets policy on matters such as credit
or freight payment for delivery to the servicer. The second method involves
direct parts distribution by the manufacturer. The manufacturer usually pays
for shipment of warranty parts. In the first case, the servicer must usually
maintain enough of a parts inventory to do normal in-warranty repairs; send
in the defective part for reimbursement; and pay for freight himself. In the
second case, the servicer gets a new part free but must usually order it and
make a return service call to install it. There is no billing for parts and thus
substantially less paper work for the servicer.
The independent servicer should take the total cost to him of the particular
parts distribution system offered into account when calculating the cost of an
in-warranty service call for purposes of negotiating a reimbursement rate with
a particular manufacturer. By the same token, all of the servicer's other costs
of doing business should be taken into consideration when he is negotiating
with a manufacturer. Legislation setting reimbursement rates is not required
if good management practices, such as better inventory control, will resolve
the problem.
Aside from the fact that reimbursement rate requirements such as those
in the above legislation fail to take into account the benefits that servicers
receive from a contractual association with a manufacturer for warranty repair
work, it is extremely doubtful whether the rates charged by servicers for
"comparable" work for non-warranty customers are an adequate yardstick for
"fair" in-warranty repair charges.
In many ways each problem and each repair is unique. Hence, there is
often no real correlation between repairs done under warranty and those done
out-of-warranty. Since the warranty repair is "free" to the consumer, the
19791
Warranty Servicing Legislation
customer requests service at the first sign of trouble. On the other hand, a
consumer with an appliance no longer under warranty will often "live with"
service problems until repair is absolutely necessary. This makes an out-of-warranty
repair more difficult and expensive. As can be expected, repair work on
out-of-warranty products is usually on older models and is dirtier and more
time-consuming than in-warranty work. Comparisons are not practical, therefore,
because products are dissimilar and repair jobs are distinct. Consumer organization
studies' 9 show that there is a wide range in charges by servicers even for
remedying the same fault in the same product.
Out-of-warranty repair charges are also not a fair basis for pricing
in-warranty work because retail customers are susceptible to overcharging.
Unlike a manufacturer bargaining with a servicer for an equitable repair
charge, an ordinary customer has no special knowledge of the nature or
difficulty of the problems involved. In fact, even a knowledgeable consumer
would find it almost impossible to challenge the hours and work claimed to
be necessary by a servicer. Thus, the servicer is free to set out-of-warranty
costs as high as possible and these sometimes excessive rates must be reflected,
if legislation so requiring is in effect, by in-warranty reimbursement rates, to
the detriment of all consumers. The manufacturer has much more experience
than the typical consumer for making cost comparisons and evaluating servicer
prices.
CONCLUSION
Instead of legislating prices pegged to out-of-warranty repair work, legislation
should permit freely negotiated contract rates. Under normal business practices
a reasonable profit to the servicer will be included in the rates, when the
value that the servicer receives from having a service contract with a manufacturer
is taken into account.
Consumer protection legislation should recognize that the basic meansofor
a manufacturer to provide for warranty service is either through its own service
employees or through formal contracts with independent servicers. Without
such a contract, an independent servicer would have no liability to the consumer
under a manufacturer's warranty and, therefore, the servicer would be free to
charge the consumer for any service he performs at his normal rates. Any
"remedial" legislation should be directed toward those manufacturers who do
not negotiate reimbursement rates with servicers and who will not provide
them with adequate back-up services.
19.
Federal Trade Commisision Staff, Regulation of the . . . Television Repair Industry in Louisiana and
California: A Case Study (1974).
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