FTC's Chances Of Fixing A Broken Repairs Market Look Slim

By Katie Funk
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Law360 (June 8, 2021, 6:09 PM EDT) --
Katie Funk
Katie Funk
Prompted by stories of ventilators that could not be repaired because of manufacturer restrictions[1] and the lack of local repair options for consumer devices[2] that had become critical during the stay-at-home months of the pandemic, Congress directed the Federal Trade Commission to report on the anti-competitive practices related to repair markets.

It asked the FTC to include recommendations for addressing practices that increase costs, limit choice and affect consumer rights under the Magnuson-Moss Warranty Act.[3]

As a result, the FTC recently issued the unanimous, bipartisan report: "Nixing the Fix: An FTC Report to Congress on Repair Restrictions."[4]

The report synthesizes the commission's findings from its July 2019 workshop on the topic and its independent research.

The report concludes that many repair restrictions imposed by manufacturers harm consumer welfare by limiting choices and increasing costs, and that justifications offered by manufacturers in support of restricting consumer repair options are not supported by the evidence.[5]

The FTC offers several approaches to address those practices that cause harm to consumers, including industry self-regulation[6] and legislative options — both state and federal.

With respect to the role the FTC can play, the report includes a discussion of the FTC's litigation enforcement and rulemaking options, suggesting an intention to consider reinvigorated regulatory options.

Acknowledging that while any rulemaking concerning a wide variety of practices used by multiple industries would necessarily require a complex assessment, given the "breadth of concern about and potential harm to consumers and markets from widespread repair restrictions and the inefficiency of ex post enforcement, the Commission may decide it is worth the investment of its energy and attention to pursue a rulemaking in this area."[7]

The report comes just a few weeks after the U.S. Senate Committee on Commerce, Science and Transportation oversight hearing during which Sen. Jon Tester, D-Mont., expressed his concerns about the impact repair restrictions are having on rural Americans in particular[8] and asked what the commission has been doing since he raised the topic in an August 2020, hearing.[9]

Commissioner Rohit Chopra suggested that the FTC would step up its enforcement of the MMWA, but also said the commission needs to address the repair restrictions that MMWA does not cover.

Commissioner Christine Wilson agreed, adding that the FTC should use both its consumer protection and antitrust enforcement authority to address the issues,[10] saying:
 
I believe that too frequently we have competition issues, efforts by manufacturers to limit downstream competition for repair of vehicles and electronics and those are dressed up as consumer protection issues. We need to pierce that veil and move forward with enforcement on the antitrust side and the consumer protection side.[11]

This article considers the outlook for using the FTC's Section 5 unfair methods of competition law enforcement rulemaking[12] authority to address the competition concerns outlined in the FTC report.

The FTC's Interest in Aftermarket Repairs

The FTC report,[13] hosted by the Bureau of Consumer Protection, explored whether and how manufacturers of consumer products limit repairs by consumers and repair shops, and whether those limitations affect consumer protection, including consumer rights under the MMWA.[14]

The workshop on which the report was based included live testimony from independent repair shop owners, consumers, state legislators and manufacturer representatives. In addition, the FTC solicited empirical research and public comments through its website.

Generally, the MMWA requires manufacturers that offer warranties on consumer products disclose in simple and understandable language the terms of the warranty and mandates the inclusion of certain information.

Pursuant to the authority delegated by Congress, the FTC prescribes rules requiring that warranty terms for consumer products be made available to consumers and how and in what form warranty information is presented to consumers. In addition to those rules regarding disclosure, the MMWA at Section 102(c) makes it unlawful to tie the warranty for a product to the use by the consumer of any other product or service unless the manufacturer provides that product or service without charge.[15]

The tying prohibition can be waived if the manufacturer is able to show the FTC that the tie is necessary to the functioning of the product and the FTC agrees that the waiver is in the public interest. Since 1975, the FTC has received just three waiver requests and has denied all of them.[16] Penalties for MMWA violations are limited to injunctive relief.

During the workshop, the FTC heard from consumer advocates that original equipment manufacturers, or OEMs, have undertaken a variety of actions to limit repair options and make those that are available more expensive.

Examples of actions that witnesses say impede competition in the repair market include intentional product design to complicate repairs, limiting the availability of parts, and including software locks to restrict access to equipment diagnostic information.

These activities do not violate the MMWA anti-tying provision but, according to right to repair proponents, nevertheless stifle competition in the repair market by steering consumers to manufacturer repair networks or increase costs because consumers have to replace products before the end of their useful life.[17]

The workshop also heard live testimony from OEM representatives. Several OEMs also made written submissions to the FTC. The submissions and testimony sought to explain why certain repair restrictions were necessary.

Generally, the OEM justifications fall into the following broad categories: protection of intellectual property, consumer safety (e.g., exploding batteries), cybersecurity concerns, liability and reputational harm, consumer demand for certain designs and quality of service.[18]

Addressing the Harm to Competition

The FTC report lays out the potential tools that the FTC might use to address the concerns identified in the report. These tools include additional MMWA rulemaking; litigation under the Sherman Act; and the FTC's Section 5 authority.

The report suggests that some of the alleged practices could violate the antitrust laws. It details the relevant jurisprudence, noting that under the applicable theories of harm, the rule of reason is the appropriate analytical framework for a tying claim under Section 1 or a monopolization claim under Section 2.

Under either scenario, a defendant would be allowed to assert and prove that the overall effect of the challenged conduct is procompetitive. In summary, the report explains that while there might be a specific instance where the FTC could address repair restrictions as a violation of antitrust laws in court, in many instances the restrictions likely would not be found unlawful under current antitrust precedent.[19]

Additional MMWA rulemaking to address some of the concerns might also be an option, explained the FTC. It is unclear, however, whether the FTC's MMWA rulemaking authority is expansive enough to address restrictions other than those that implicate the tying prohibition in Section 102(c) of the act.

Further, the FTC notes that updated rules would only apply to products on which manufacturers offer warranties. Consumers that own products that do not have warranties or products with expired warranties would not obtain any relief. And finally, a revised or updated interpretation of MMWA would not address repair restrictions imposed on owners of products that are not categorized as consumer products.[20]

In the absence of new federal legislation[21] designating certain practices unlawful,[22] the FTC's options to address the effects on downstream competition in repair markets seemingly resides in its unfair methods of competition authority under Section 5.

The concerns regarding the FTC's use of its Section 5 authority in litigation are well known and have been extensively discussed.[23] In any event, the report suggests that ex post facto, case by case enforcement may not be a particularly effective method of addressing the harms identified.

The report suggests that rulemaking pursuant to Section 5 is the best tool that the FTC currently has at its disposal to address the scope and breadth of the issues identified in the report.

While the report states that the rulemaking effort might be worth the investment given the potential harm, the commission does not specify whether the rulemaking would be unfair or deceptive acts or practices, or UDAP, or unfair methods of competition, or UMC. UDAP rulemaking that is organic, i.e., not done pursuant to a specific statutory delegation from Congress, is a lengthy and cumbersome process.[24]

UMC rulemaking, on the other hand, in the absence of any statutory directive, would be undertaken pursuant to the process set out in the Administrative Procedure Act.[25]

UMC rulemaking, however, which arguably resides in Section 6(g) of the Federal Trade Commission Act[26] is fraught with issues including whether the FTC has such authority.

UMC rulemaking will also carry many of the same burdens that accompany standalone Section 5 unfair method of competition litigation. For example, a rule that makes conduct unlawful under the broad language of Section 5 that might be considered lawful under the Sherman Act is likely to be received with skepticism[27] and will likely be challenged in court.

The further any rulemaking strays from the FTC's statutory authority the greater the risk, particularly in light of the U.S. Supreme Court's recent scrutiny of the nondelegation doctrine.[28]

For these reasons, a decision to engage in UMC rulemaking to address the concerns raised in the report is likely to be made very deliberately and only after the FTC has engaged in additional fact-finding.[29]

These additional steps will also provide an opportunity for stakeholders to participate in the process and to be on notice of what activities raise concerns.

Conclusion

There seems to be bipartisan agreement among the FTC commissioners that some OEM repair restrictions harm consumer welfare in the repair markets for a wide variety of goods across a huge swath of the economy — consumer electronics, household items, medical devices and even farm equipment; and congressional support for the FTC to take action.

What exactly can the FTC do with the tools that it has and the limits on its authority?

It seems doubtful that the repair markets will be fixed any time soon, at least on the federal level.

More likely will be a patchwork of laws that consumers and manufacturers will have to navigate.



Katherine I. Funk is a shareholder at Baker Donelson Bearman Caldwell & Berkowitz PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] https://www.thelancet.com/action/showPdf?pii=S0140-6736%2821%2900445-1; Sen. Ron Wyden and Rep. Yvette Clark introduced a bill in August 2020 that would require medical device manufacturers to make certain information and replacement parts more available https://www.wyden.senate.gov/imo/media/doc/Critical%20Medical%20Infrastructure%20Right%20to%20Repair%20Act%20of%202020%20Bill%20Text.pdf.

[2] https://www.nytimes.com/2020/10/23/climate/right-to-repair.html https://thecurrentga.org/2021/03/20/pandemic-drives-phone-computer-right-to-repair-bills/.

[3] H.R. Rep. No. 116-456 (available at https://www.congress.gov/116/crpt/hrpt456/CRPT-116hrpt456.pdf) that accompanied H.R. 7668, Financial Services and General Government Appropriations Bill.

[4] https://www.ftc.gov/system/files/documents/reports/nixing-fix-ftc-report-congress-repair-restrictions/nixing_the_fix_report_final_5521_630pm-508_002.pdf (Nixing the Fix Report).

[5] Id. at pgs. 6, 54.

[6] In response to the "Massachusetts Right to Repair" law of 2012 which requires automobile manufacturers to sell the same diagnostic and repair information to car owners and independent repair shops that they make available to their own dealers, manufacturer trade associations entered into a Memorandum of Understanding with trade associations representing independent repair shops to essentially extend the Massachusetts provisions to the entire United States. See Id. at pgs. 45-46; Massachusetts law available at  https://malegislature.gov/Laws/SessionLaws/Acts/2012/Chapter368 Note: Massachusetts voters ratified additional software disclosure and access requirements in November 2020. Those new requirements are currently being challenged in federal court by automotive manufacturers asserting that the new requirements are pre-empted by federal highway safety laws. The evidentiary hearing on the matter is scheduled to take place this month.

[7] Nixing the Fix Report, supra note 4 at 45.

[8] "If we want to have people live in rural America, we've got to stop crap like this or it's just going to further evacuate rural America."- Sen. John Tester.

[9] Strengthening the Federal Trade Commission's Authority to Protect Consumers, U.S. Senate Commerce Committee Hearing (Apr. 20, 2021) webcast recording available at https://www.commerce.senate.gov/2021/4/strengthening-the-federal-trade-commission-s-authority-to-protect-consumers (Sen. Tester questioning at 1:30:56 – 1:34:02).

[10] Cmm'r Wilson remarks available at https://www.ftc.gov/system/files/documents/public_statements/1579583/wilson_-_nix_the_fix_opening_statement_for_publication_july_2020.pdf.

[11] Id.

[12] Section 6(g) of the FTC Act (15 U.S.C. sec. 46(g) is identified by proponents as the source of authority for unfair method of competition rulemaking. It states that the Commission shall have the power to [f]rom time to time classify corporations and (except as provided insection 57a(a)(2) of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter." (emph. added) A comparison of the viewpoints on this authority can be found at Rohit Chopra and Lina M. Khan, The Case for Unfair Methods of Competition Rulemaking, 87 U. of Ch. L.Rev. 357 (2020) available at https://www.ftc.gov/system/files/documents/public_statements/1568663/rohit_chopra_and_lina_m_khan_the_case_for_unfair_methods_of_competition_rulemaking.pdf and Prepared Remarks of Commissioner Noah Joshua Phillips (Jan. 9, 2020) available at https://www.ftc.gov/system/files/documents/public_statements/1561697/phillips_-_remarks_at_ftc_nca_workshop_1-9-20.pdf.

[13] https://www.ftc.gov/news-events/events-calendar/nixing-fix-workshop-repair-restrictions.

[14] 15 U.S.C. §2301, et al. and found at sections 53-56 of the FTC Act. The full name of the statute is the Magnuson-Moss Warranty - Federal Trade Commission Improvement Act, Public Law 93-637 (Jan. 4, 1975). https://www.govinfo.gov/content/pkg/STATUTE-88/pdf/STATUTE-88-Pg2183.pdf Title 1 of the statute is the Magnuson-Moss Warranty Act which creates disclosure requirements when a manufacturer offers a warranty on a consumer product and also outlaws the tying of warranty coverage to the use of certain products and services unless the manufacturer meets one of the exceptions. Title II of the statute is the Federal Trade Commission Improvements Act. It removes UDAP rulemaking from Section 6(g) and creates a separate UDAP rulemaking procedure in sec. 18a (15 U.S.C. §57 and §57(a)). Up until then, the FTC relied on section 6(g) for its UMC and UDAP rulemaking authority, the latter of which was challenged and upheld in the D.C. Circuit's Opinion in National Petroleum Refiners Assn. v. FTC, 482 F.2d 672, 686 (D.C. Cir. 1973). With its newly enshrined UDAP authority, the FTC went on a rulemaking binge, culminating in being tagged "the National Nanny" and generating backlash. In response, Congress imposed additional hurdles into the FTC's "organic" (i.e., not otherwise authorized by a statute) UDAP rulemaking, the end result being a lengthy and cumbersome process. The Federal Trade Commission Improvements Act, Public Law 96-252 (May 28, 1980) Congress imposed These UDAP rulemaking provisions in Title II are (somewhat) confusingly referred to as "Mag-Moss rulemaking" although in actuality they are unrelated to the Title 1 Magnuson-Moss Warranty Act – the rulemaking for which is done pursuant to the APA. Notably, in both its 1975 and 1980 amendments, Congress left undisturbed the language in § 6(g) regarding unfair methods of competition rulemaking, stating in the 1975 Act that the amendments do not affect "any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition …"

[15] Id. at § 2302(c).

[16] Nixing the Fix Report at p. 7.

[17] Id at pgs. 17-24; 38-44.

[18] Id. at pgs. 24-38.

[19] Report at pgs. 11-16; see also DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS COMPETITION COMMITTEE Competition Issues in Aftermarkets - Note from the United States 21-23 June 2017 https://www.justice.gov/atr/case-document/file/979226/download.

[20] Nixing the Fix Report at pgs. 44-45.

[21] If there is federal legislation on these issues, it seems likely that the FTC will be delegated rulemaking authority. For example, section 6 of the Critical Medical Infrastructure Right to Repair Bill, supra note 1, designates violations as unfair and deceptive trade practices pursuant to FTC Act 18a and empowers the FTC to make rules.

[22] For example, the 2012 Massachusetts Right to Repair law discussed at note 6, supra, designated violations as both unfair and deceptive acts and practices and unfair methods of competition under Massachusetts law. See Nixing the Fix Report, supra note 4, at pg. 47-49 for an overview of state statutes and European Union regulations. In addition to those listed, France recently adopted requirements for OEMs to self-score on a scale of 1-10 the repairability of the product. According to reports, at least one manufacturer has changed its policies in order to obtain a higher score, indicating some degree of competitive pressure for products to be viewed by consumers as repairable. https://www.theverge.com/2021/2/26/22302664/apple-france-repairability-scores-index-law-right-to-repair The French system is similar to the suggestion made by Minnesota State Senator Dave Osmerk at the Nixing the Fix Workshop. Transcript of the workshop is available at https://www.ftc.gov/system/files/documents/public_events/1494445/nixing-fix-transcript.pdf at page 152.

[23] See Statement of Enforcement Principles Regarding 'Unfair Methods of Competition' Under Section 5 of the FTC Act (2015), available at https://www.ftc.gov/system/files/documents/public_statements/735201/150813section5enforcement.pdf; William E. Kovacic and Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 Antitrust L. J. 929 (2010); and Maureen Ohlhausen, Section 5 of the FTC Act: Principles of Navigation, 2 J. Antitrust Enforcement 1 (2013) can be accessed at https://academic.oup.com/antitrust/article/2/1/1/145233.

[24] See note 14, supra.

[25] 5 U.S.C.§ 553, et al; Chopra and Khan, supra, 87 U. Chi. L. R at 369-70.

[26] Id.; see Seila Law LLC v. Consumer Fin. Protection Bureau, 140 S.Ct. 2183, n. 10 (2020) (Kagan Dissent).

[27] In addition to the discussion at note 12, supra, see e.g., Deep Dive Episode 120- FTC Rulemaking: Underutilized Tool or National Nanny Renewed, Fourth Branch Podcast by the Regulatory Transparency Project, transcript at https://regproject.org/podcast/deep-dive-ep-120/.

[28] See Comm'r Phillips comments, supra note 12, at pgs. 5-7.

[29] See Kovacic and Winerman, supra, 76 Antitrust L. J. at 940-942, 950 (institutional competence).

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