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Businesses can enforce agreements that require consumers to settle disputes over defective products through binding arbitration instead of going to court, the Texas Supreme Court ruled on June 7. In the unanimous decision, the court held that a 1975 federal law, the Magnuson-Moss Warranty Act, doesn’t prohibit binding arbitration to settle warranty claims despite arguments by the Federal Trade Commission that it does. The act sets out specific requirements regarding disclosures, duties and remedies associated with warranties on consumer products. Courts around the country have differed over whether the act prohibits a business from requiring the use of binding arbitration to resolve claims arising under written warranties for products. But In re American Homestar of Lancaster Inc. and Nationwide Housing Systems Inc. provided the Texas courts their first opportunity to address the issue. Interpretation of the federal law has been a hot potato in Alabama. In 1997, the U.S. District Court for the Middle District of Alabama decided in Wilson v. Waverlee Homes Inc. that the Magnuson-Moss law prohibits businesses from including binding arbitration clauses in written warranties on consumer products. The 11th U.S. Circuit Court of Appeals in Atlanta affirmed the ruling later the same year. In 1999, a divided Alabama Supreme Court held in Southern Energy Homes Inc. v. Lee that the general provisions of the Federal Arbitration Act, passed by Congress in 1925, are superseded by Magnuson-Moss, through which Congress prohibited the inclusion of binding arbitration clauses in written warranties. The following year, in Southern Energy Homes Inc. v. Ard, Alabama’s top state court overruled the majority opinion in Lee and adopted the dissenting opinion. The Texas Supreme Court also adopted the Alabama court’s dissenting opinion, holding that the Magnuson-Moss law doesn’t expressly prohibit binding arbitration. “In fact, the Magnuson-Moss Act does not mention arbitration,” Justice James A. Baker, author of the opinion, wrote. “Arbitration is an effective and efficient way to resolve disputes and can be beneficial for consumers,” says Jay Rutherford, an attorney representing American Homestar and Nationwide Housing Systems. Rutherford, a partner in the Fort Worth, Texas, office of Jackson Walker, says arbitration typically is cheaper and provides a resolution faster than can be brought about in a litigated contest. But others say the Texas Supreme Court’s ruling is a blow to consumers’ rights. “I would characterize this decision as a judicial Pearl Harbor for consumers,” says L. Scott Smith, a Corpus Christi lawyer who represents Robstown’s James and Clara Van Blarcum, who sought to have alleged defects fixed in their mobile home purchased in 1997 from Nationwide Housing System. As a result of the Supreme Court’s ruling, consumers effectively can be stripped of their rights to jury trials by signing contracts that are required by businesses, Smith says. “Many consumers don’t realize what they’re signing when they sign,” he says. If a car manufacturer and its dealer includes such a provision in the contract for the sale of a vehicle, a personal-injury or wrongful-death claim arising from an accident caused by a defective part in the vehicle would be subject to binding arbitration, Smith says. TIES THAT BIND According to the Supreme Court’s opinion, the alleged defects in the Blarcums’ home had not been repaired within nine months after they complained, despite assurances that the repairs would be made. In July 1998, the couple sued Nationwide; American Homestar, the home’s manufacturer; and Associates Housing Financing Services, the lender, the opinion said. The Blarcums alleged violations of the Magnuson-Moss law, Texas Deceptive Trade Practices Act and Texas Manufactured Housing Standards Act. They also alleged breach of express and implied warranties. American Homestar and Nationwide Housing moved to compel binding arbitration. In February 1999, Nueces County Court at Law No. 3 Judge Marisela Saldana ordered binding arbitration in the case. Corpus Christi’s 13th Court of Appeals, sitting en banc, conditionally granted a writ of mandamus sought by the Barclums in a split decision last year. The appeals court held that the binding arbitration provision in the contract the Blarcums signed violated the Magnuson-Moss law and thus was invalid and not enforceable. Justice Linda Yanez wrote the majority opinion; she was joined by Justices Bonner Dorsey and Federico Hinojosa. The dissenters were Justice Nelda Rodriguez and former Justice Melchor Chavez. The Supreme Court found that the Corpus Christi appeals court erred and directed the court to vacate its order. Cris Feldman, staff attorney for Texans for Public Justice, a government watchdog group, issued a written statement in which he contends that the court’s opinion is based on the presumption that consumers and major corporations are on an equal bargaining level. “Consumers throughout Texas took it on the chin today. This opinion robs consumers of their right to a jury trial by forcing them into secretive arbitration proceedings where no appeal is available,” Feldman says in the statement. Feldman alleges in the statement that the privately paid judges who conduct arbitration sometimes may be closely affiliated with the industries involved with disputes. Illustrating how important the case was to big business were the numerous amicus briefs filed in support of binding arbitration, Feldman alleges. The FTC also filed a brief with the Supreme Court and contended that the purportedly binding arbitration in the Barclums’ case was “impermissible” under the Magnuson-Moss law. But Baker said in the opinion that the FTC’s position about binding arbitration has been “less than consistent” and that the Texas Supreme Court “need not defer to the FTC’s current position” on the issue. Mitchell Katz, a press officer for the federal agency, declines comment about the court’s ruling. Smith says his clients have not decided what their next step will be but that filing a petition with the U.S. Supreme Court “certainly is an option.”

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