Protecting Consumers from Themselves: The Role of State Attorneys General in
Protecting Consumers from the Impulse Purchase of Extended Warranties
LaRue Robinson
Table of Contents
I.
Introduction……………………………………………………………...3
II.
Description of Extended Warranties………………………………......4
III.
Business Reasoning for Extended Warranties………………………...6
IV.
Problems for Consumers………………………………………………..9
V.
United Kingdom Competition Commission Study……………..........14
VI.
Attorneys General Role in Preventing Deceptive Extended Warranty
Practices………………………………………………………………...18
VII.
Conclusion………………………………………………………………30
2
I.
Introduction
Everyday employees at America’s most profitable major retailers get hundreds
and thousands of worrisome, risk-adverse customers to pay up to 30% or 40% of the
price of a product for the added insurance of an extended warranty. Employees of these
mega-retailers, such as Best Buy, Circuit City, Wal-Mart and numerous car dealerships,
often overstate the importance of such warranties, which helps boost the company’s
sales and often, through commission, add dollars into the individual employees’ own
pockets. For the retailers it’s all about the bottom line. They know, unlike consumers,
that it is more likely than not that the warranty will never be used.
Retailers will argue that there is nothing wrong with this. They will argue that
they are just giving the consumer the option to buy insurance and it’s their choice
whether to take it or not. However, this argument blindly fails to realize the lack of
relevant information that the consumers have compared to the retailers. Consumers
often know and understand very little about the extended warranty besides that fact that
if their product does break they will receive some sort of reimbursement or replacement.
However, the limited nature of the warranties, the unlikelihood of use, the other outside
options for warranties, and the possible overlapping of basic manufacturers’ warranties
with extended warranties all are important factors that consumers often fail to consider
due to the lack of necessary information and knowledge.
3
Part Two of this paper will describe the background and continuous growth of
the sale of extended warranties over the past few decades. Part Three will discuss the
companies’ business justifications for such warranties. Part Four will describe the
reasons that these warranties are a problem for consumers. Part Six will take a look to
the United Kingdom’s Competition Commission Study on this very issue. Part Five
will analyze the Attorneys General role in addressing the issue of extended warranties.
Finally, Part Six will offer recommendations for state attorneys general on this issue.
II.
Description of Extended Warranties
Extended warranties are additional warranties that are often sold with the
purchase of consumer goods (such as appliances and motor vehicles) to cover repair
costs not otherwise covered by a manufacturer's standard warranty, by extending either
the standard-warranty coverage period or the range of defects covered.1 They were
introduced in retail stores in the late 1980s.2 They are typically sold only in conjunction
with expensive purchases such as cars, computers, and televisions. These warranties
may be sold by the manufacturer, the retailer, or a warranty administrator, but are
typically sold by the retailer. The warranties usually begin at the same time that the
manufacturer’s warranty ends, thus extending the warranty for longer than the
manufacturer designated and giving the consumer extra time of insurance.
1
Black’s Law Dictionary (8th ed. 2004).
Terence O’Hara, Unwarranted, Wash. Post, Oct. 1, 2006 at F01, available at
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/30/AR2006093000148.html.
2
4
Extended warranties that are sold by the manufacturer typically have the same
exact terms as the stock warranty by the manufacturer included in the product; while
extended warranties purchased from the retailer or a third party may come with slightly
different terms including such things as extra exclusions and more limited coverage.
Extended warranties that are purchased from the retailer may be preferred by consumers
because the manufacturer, as opposed to a third party warranty administrator, knows the
product best and thus is more likely to be able to repair the product and bring it back to
its original condition.3 Extended warranties from the manufacturer, the retailer or third
party typically only cover electrical or mechanical failure and not any other possible
reason for malfunction.4
Extended warranties can cost anywhere from 1.2% up to around 43% of the total
cost of the product purchased depending on the product, the retailer and the length of
the warranty.5 Also, if a product is being shipped to a customer, the warranty price may
be affected by the weight of the product.6 Large discount retailers such as Wal-Mart
and Target, who have both very recently entered the extended warranty market, often
have among the lowest prices available.7
3
Connie Walker, What is an Extended Warranty?, Nov. 12, 2002,
http://www.cbc.ca/consumers/market/files/money/extended_warranties/what_is.html.
4
Connie Walker, Should You Buy an Extended Warranty?, Nov. 12, 2002,
http://www.cbc.ca/consumers/market/files/money/extended_warranties/why_buy.html.
5
Extended Warranty Pricing, Warranty Week, Oct. 24, 2006,
http://www.warrantyweek.com/archive/ww20061024.html.
6
Id.
7
Id.
5
Extended warranties are often confused with service plans however there are
very meaningful differences between the two. Service plans are contracts that
consumers pay for that cover repairs for purchased products.8 They are often more
comprehensive than extended warranties because they cover failures of a product that
go beyond simply mechanical and electrical failures.9 Service plans may also come
with such extra features as food loss protection for kitchen appliances, annual
maintenance checks, and a no-lemon policy (a product is replaced if it fails a certain
number of times over a given time period).10
Also, service plans, unlike extended warranties are active immediately from the
date of purchase. Thus, allowing the service plans to run concurrently with the
manufacturer’s warranty. Service plans are typically offered directly from the retailers
where the products are purchased and not from the manufacturer or a third party
administrator.
III.
Business Reasoning for Extended Warranties
There are a number of reasons why companies sell extended warranties. The
first, and most obvious, reason is increased revenues. As the competition in the
8
See Sears, Meeting You Protection Agreement Needs
http://www.sears.com/sr/home_services/service_agreements_information.jsp?BV_SessionID=@@@@1
829969038.1199431757@@@@&BV_EngineID=cccdaddmmgflihdcefecemldffidfgi.0&vertical=HS#fo
ur.
9
Id.
10
Id.
6
electronics market stiffens, the prices go down, thus driving down the profits a retailer
receives from selling such products.11 Therefore, extended warranties help to make the
products more profitable. Also, extended warranties are specifically designed to make
money. Retailers typically calculate the average maintenance and repair cost of an item
over the duration of its warranty and then add an amount for profit to that figure to
determine the price of the extended warranty.12 Retailers can often make more money
on the warranty than they can on the product itself.13 The extended warranty industry,
which has only been in business for about twenty years, is already fifteen billion dollar
business.14
Additionally, another reason that companies sell extended warranties is that the
warranties often are not used, thus creating pure revenue for the company. Of the
fifteen billion made in the extended warranty industry, half of it goes straight back into
the pockets of the retailers and of the remaining half only three million is paid in claims
by the insurance companies that back the plans.15 In the auto industry, a study found
that the US auto industry only paid out sixty six dollars for every one hundred dollars in
premiums.16
11
Connie Walker, Why Do Manufacturers/Retailers Offer Extended Warranties?, Nov. 12, 2002
http://www.cbc.ca/consumers/market/files/money/extended_warranties/why_offer.html.
12
Id.
13
Id.
14
O’Hara, supra note 2.
15
Id.
16
Id.
7
Furthermore, extended warranty sales are often a significant proportion of a
company’s total revenue. Some analysts estimate extended warranty sales can account
for anywhere from 50 to 100 percent of the profits of retailers such as Circuit City and
Best Buy.17 The chart below shows the gravity to which many extended warranty
administrators rely on the warranties to meet their bottom line
Extended Warranty Administrators
Estimated Revenue & Market Shares, 200418
Extended Warranty
Estimated 2004
Estimated
Administrator
Revenue ($M)
Market Share
Ford/APC
$1,200
16%
Dell
$1,100
15%
Assurant/GE
$750
10%
Aon Warranty Group
$700
9.3%
American Home Shield
$475
6.3%
GMAC/Universal
$400
5.3%
JM Family/JM&A Group
$385
5.1%
17
Id.
Extended Warranty Administrators, Warranty Week, Jan. 19, 2005,
http://www.warrantyweek.com/archive/ww20050119.html.
18
8
Eastman Kodak
$377
5.0%
CNA Financial
$310
4.1%
Cross Country Group
$300
4.0%
NEW Customer Service
$275
3.7%
Gateway
$134
1.8%
Warrantech
$120
1.6%
First American
$100
1.3%
Toyota Motor
$80
1.1%
INDS/Warranty Direct
$80
1.1%
VAC Service
$65
0.9%
Service Net
$60
0.8%
American Standard
$55
0.7%
Apple Computer
$50
0.7%
Hewlett-Packard
$50
0.7%
Warranty Corp. of America
$50
0.7%
Other
$355
4.7%
Total
$7,500
100%
Part of the reason that warranty sellers make so much money off of the product
and the warranties go unused is because of their limited coverage. Extended warranties
typically do not cover any accidental damage, or even anything that looks like it may
9
have occurred due to any neglect or fault on the consumer’s part.19 Since the terms of
the warranties are limited they are used much less often, thus creating even more profit
for the retailer or administrator of the warranty.
Another business reason for companies to sell extended warranties is that it
reduces their costs in the case that a repair is actually needed under the warranty. Since
they are receiving money up front from the consumer for whatever possible repair
might be needed, the company can use that money to help subsidize their costs for a
repair. This allows the company to benefit in two ways. One, they benefit when the
warranty is not used due to the pure profit they gain from the cost of the warranty and
secondly, they benefit if the product does actually break (and fall within the limits of the
terms) because they have the warranty profits to subsidize the cost of repair.
Another reason that companies sell extended warranties to consumer is because
many feel as if they are helping the customer by giving them extra options. A
spokesman for Circuit City has said, “It’s an individual customer decision. It’s
something we offer customers in the same way we offer any product.”20 The companies
do not believe at all that they are misleading consumers. Also, companies believe they
19
Connie Walker, Extended Warranties: A Deal or Dud?, Nov. 12, 2002,
http://www.cbc.ca/consumers/market/files/money/extended_warranties/index.html.
20
O’Hara, supra note 2.
10
are providing a needed service to consumers and there is evidence to back up their
belief. A UK Study found that extended warranties were desired by some customers.21
IV.
Problems for Consumers
Extended warranties create a number of problems for consumers. First, there is
an extreme lack of information on the consumer’s side when purchasing warranties.
Unlike retailers or manufacturers, consumers lack the knowledge of information about
the product and its possibility of malfunctioning. It is not possible for consumers to
make educated decisions about the purchase of warranties without knowing the
possibility that their product will malfunction. Without such information, retailers can
simply prey off the fear of a possible malfunction and profit from it. [Retailers] know
how long the product will last, what the rate of breakdown is, things like that so…they
can control how much they’ll charge for [the extended warranty] so they’ll make money
from it.22
Also, sometimes retailers misrepresent the extended warranties as being much
more comprehensive then they actually are. For instance, some consumers are led to
believe that their product will be covered if anything at all happens to it.23 The truth is
that most warranties cover a very limited category of repairs. For instance, a
21
Extended Warranties in the UK, Warranty Week, Jan. 20, 2004,
http://www.warrantyweek.com/archive/ww20040120.html
22
Walker, supra note 11.
23
Walker, supra note 19.
11
RepairMaster two year extended warranty for a laptop or notebook covers only
mechanical and electrical failures.24 It excludes likely reasons for repair such as
environmental or weather conditions.25 It also does not cover any repairs or
modifications caused by abuse, neglect or misuse, which are so broad that many
different problems with the item can be made to fit under them.26
Also, extended warranties may overlap with manufacturer’s warranties and the
seller may not tell you this information, thus causing you to pay for an unnecessary
extra year of coverage.27 Furthermore, some extended warranties may require you to
pay deductible fees every single time a product is serviced.28 Sellers also fail to
mention this possible impediment.
Moreover, sellers of warranties often fail to mention that a customer may have
to return much more than just the original product to get it repaired. One may even be
required to bring such things as the original box, manual and cables or a payment may
be required as a penalty.29 Furthermore, there is the simple issue that if a customer
loses a warranty it can instantly become a waste of money because there is no proof left
24
RepairMaster, 2 year Laptop/Notebook Extension (2007).
Id.
26
Id.
27
Walker, supra note 4.
28
Id.
29
Robert L. Mitchell, Was Extended Warranty Worth It? You Decide, Nov. 20, 2006,
http://blogs.computerworld.com/node/4007.
25
12
that it was ever purchased.30 Sometimes consumers may even forget that they ever
purchased a warranty which again renders the extended warranty useless.
Additionally, another problem with extended warranties is the way that they are
sold. Since these warranties are typically sold as, or right before, a customer is about to
go to a register to buy their product problems arise. The biggest problem here is the fact
that this process severely limits a customer’s options in choosing a warranty. When
deciding whether to buy an extended warranty, it is nearly impossible to comparison
shop from the checkout counter.31 It allows the customer only the option of the
extended warranties that the particular retail store has and does not allow the customer
the opportunity to shop around for better deals. Also, because the insurance and service
companies are invisible at the time of sale, consumers can not accurately judge the
reliability or financial health of the companies.32
Another problem with extended warranties many consumers fail to realize is the
unlikelihood that a consumer will ever use the warranty. One major reason retailers are
so quick to sell extended warranties is because they are rarely used, thus they create
pure profit for the retailer.33 This creates a serious problem for consumers who may be
misled to believe differently. The chart below shows the likelihood of certain electronic
products needing to be repaired within three years of purchase.
30
Walker, supra note 4.
O’Hara, supra note 2.
32
Id.
33
Stacey L. Bradford, Extended Warranty Rip-Offs, July 7, 2005,
http://www.smartmoney.com/consumer/index.cfm?story=20050707.
31
13
Odds of Needing Repairs within First Three Years:34
Based on the chart it is easy to see that the likelihood of needing a repair is much less
likely than many would believe.
Furthermore, even if the products do break the cost of the extended warranty is
often greater than the cost of the repair.35 The cost of repairing a defective product
34
ConsumerReports.org, Odds of Needing a Repair within the First Three Years,
http://www.consumerreports.org/cro/money/shopping/shopping-tips/extended-warranties-905/productrepair-rates/ (last visited Jan. 2, 2008).
35
ConsumersUnion.org, Consumer Reports Holiday Survival Guide Eight Tips For Savvy Shopping, Nov.
5, 2007, http://www.consumersunion.org/pub/core_financial_services/005282.html.
14
tends to cost far less than the cost of an extended warranty.36 With new technology
being invented every day, most products will be improved and cost less in two years.37
Therefore, for all products, except the most fragile and novel, it seems that consumers
should save their money so they have it to spend on the off chance that their product
does actually break.
Also, the fact that associates selling extended warranties receive commission on
their sales exacerbates the problem. Many associates receive commission on their sales
of extended warranties which gives them incentive to mislead customers. Workers at
these retail stores readily admit to such practices. A former associate of one large retail
store stated that “you were encouraging a person to buy the warranty because… it’s
beneficial to your job.”38 This causes serious problems for consumers because they
may be persuaded to buy extended warranties based off of the information they receive
from the associate in the store who can gain financially from the sale.
Selling extended warranties to consumers may be considered to be stealing from
consumers. This is because a company should be selling products that do not break and
even if they do the companies should immediately fix them with the next set that goes
to production. Extended warranties discourage companies from fixing their products.
36
Walker, supra note 4.
Id.
38
Connie Walker, Slim Profits Margins Drive Warranty Programs, Nov. 12, 2002,
http://www.cbc.ca/consumers/market/files/money/extended_warranties/index2.html.
37
15
The heavy reliance on extended warranties as a significant source of short-term profit
can have the perverse effect of rewarding quality lapses.39
Finally, another problem with extended warranties is that even if you have made
it past the fine print on the contract and the warranty administrator decides to take your
product back from repair it might be weeks or months until it is returned. The product
may take so long that a consumer will decide to buy a replacement product at full price,
consequently making any money spent of an extended warranty a waste of money.40
This is a much different result then what is often promised to consumers by salesmen or
saleswomen at the individual retail stores.41
V.
United Kingdom Competition Commission Study
The United Kingdom Competition Commission, an independent commission
that helps ensure healthy competition between companies in the UK, commissioned a
study in 2003 that examined extended warranties for electronic goods. The study is the
most comprehensive study in the world that has been undertaken on the issue of
extended warranties. The Competition Commission was asked to do the study after the
United Kingdom Office of Fair Trading investigated and hypothesized that there is
insufficient competition and information to ensure that consumers get good value, and
39
O’Hara, supra note 2.
Bradford, supra note 33.
41
Walker, supra note 38.
40
16
that many electrical retailers may make considerable profits on the sale of extended
warranties.42
The results of the Competition Commission study can be very useful to our
nation’s analysis of this issue because there was an international comparative study
included as part of the report that showed that the United Kingdom and the United
States have very similar extended warranty markets.43 In both nations extended
warranties are widely available, they own a similarly large share of the market, there is
a similar lack on information about the products is available, and the typical
manufacturer’s warranty is 1 year.44 The similarities go well beyond these few things
and reach into such areas as marketing of extended warranties and pricing schemes.
Thus, all these similarities create an environment in which the study results can be
readily applied to our nation’s extended warranty issues as well.
The Competition Commission identified a complex monopoly situation. For
there to be a complex monopoly situation, which is very similar to an oligopoly, there
needs to be two or more firms that together account for at least one quarter of the
market conducting their respective affairs in a way that prevents, restricts or distorts
42
1 United Kingdom Competition Commission, Extended Warranties on Domestic Electric Goods 3
(2003), available at http://www.competitioncommission.org.uk/rep_pub/reports/2003/fulltext/485c01.pdf.
43
Michael Gorham et al., Market Review Report-Stage 1, 4-39-4-45 (2003), available at
http://www.competition-commission.org.uk/inquiries/completed/2003/warranty/PA_Report_Stage_1.pdf.
44
Id.
17
competition.45 There were four different characteristics of the extended warranty
market that were found that could restrict or distort competition:
(1) Almost all extended warranties are purchased at the time of sale; few
consumers seek information on extended warranties prior to their
purchase; and consumers have little opportunity to consider alternatives to
the extended warranty on offer at that point of sale.46
(2) Extended warranties offered at the point of sale are nearly always all
from one provider, usually the retailer (or a third party which is the sole
supplier to the retailer).47
(3) There is generally no information available at the point of sale on prices,
or terms and conditions, of extended warranties available from alternative
providers (such as manufacturers, insurers, credit card companies or
others).48
(4) There is generally no information available on the electronic good’s
reliability, likely repair costs, or the probability of theft or accidental
damage.49
The Commission also found that many practices mentioned above operated
against the public interest. The commission found that the practices resulted in lack of
45
UK Competition Commission, supra note 42, at 6.
Id.
47
Id.
48
Id.
49
Id.
46
18
choice, excessive prices, insufficient information, insufficient competition at point of
sale, limited but not insignificant sales pressure, some terms which could be
disadvantageous, and lack of information about the scope of protection under servicebacked schemes.50
The Commission recommended two different courses of action. The first
package was founded on the idea that the consumers need to know the warranty prices
at the time of the purchase, they need to have time to compare prices and they need to
have better information when deciding.51 Provisions in the first package included:
(1) a requirement that the warranty price be displayed along with the product
and in advertisements and publicity,
(2) cancellation and termination rights with refund,
(3) requirement of written quotation that remain available for thirty days and
(4) the requirement to make available leaflets with information about the
consumers’ rights and information on extended warranties.52
The second package is founded on the belief that the retailer’s advantage is so
strong that the consumer must be given time to decide before they purchase an extended
warranty longer than one year. One year warranty purchases, on the other hand, may be
made with the purchase of the product.53 Package two is comprised of:
50
Id at 7.
Id at 7-8.
52
Id at 7-8.
53
Id at 8.
51
19
(1) a thirty day period after purchase in which a retailer cannot sell a warranty
that covers more than a year,
(2) a requirement of a display of an applicable extended warranty price (the oneyear extended warranty) alongside the display of the price of the product,
(3) the same cancellation rights as package one, and
(4) the same requirement for a standard information leaflet as in package one.54
While all believed both packages would aid in reducing the retailer’s advantage,
four out of the five members on the commission agreed that package one was the
preferred choice because package two was excessively restrictive.55
VI.
Attorneys General Role in Preventing Deceptive Extended Warranty
Practices
State attorneys general can take a very prominent role in preventing deceptive
extended warranty practices. The attorneys general role is fairly broad including such
important functions as providing informal legal advice and formal legal opinions to the
governor and other state officials and agencies and sometimes the legislature,
representing the state, state agencies, and state officers in litigation; enforcing state,
civil and criminal law; supervising local prosecutors in some states; and public
advocacy roles in such critical areas as antitrust enforcement, consumer protection and
54
55
Id.
Id at 9.
20
environmental protection.56 Many of these different roles can be used to prevent
deceptive extended warranty practices.
It is clear from the aforementioned paragraph that there are many different roles
that the state attorney general plays, however this does not exactly indicate why the
attorney general should be involved. As a protector of the people, the state attorney
general is perfectly suited to deal with the specific problem at hand. While the governor
and other public figures may also be able to deal with such issues the state attorney
general is particularly suited to find a solution because protecting the public interest,
specifically protecting consumers, is one of a state attorneys general main roles. The
asymmetrical amount of information between buyers and sellers exacerbates the
necessity of state attorneys general to take the lead on this issue. If the attorneys
general do not act on the issue then there would be no easy way for consumers to bridge
this informational gap.
Before discussion of the merits and drawbacks of different ways of addressing
the problem, we must first look to the laws that the extended warranty sellers could be
in violation of. There are two possible ways that their actions could be found in
violation of the law. First, they could be found in violation of the Sherman Act.
Secondly, the sellers could be in violation of the unfair and deceptive acts laws that are
in place in the individual states.
56
Scott M. Matheson, Jr., The Constitutional Status and Role of the State Attorney General, 6 U.
Fla. J.L. & Pub. Pol'y 1, 3 (1993).
21
Attacking the warranty sellers under the Sherman Act by bringing a parens
patriae lawsuit would be similar to what was done in the United Kingdom when the
Competition Commission found that the sellers had a complex monopoly on the
market.57 However, there are critical factors that must be proven before extended
warranty sellers, particularly large retailers, could be found in violation of the Sherman
Act. The complex monopoly that exists under UK law does not exist under US law.
However, a complex monopoly is essentially an oligopoly because it is centered on the
fact that a small number of sellers are dominating the market. Thus, if it can, first, be
determined that the extended warranty sellers in the US create an oligopoly and then,
secondly, it can be determined that oligopolies can be punished under the Sherman Act,
this would be a viable method for state attorneys general to use.
It is extremely difficult to determine whether or not the extended warranty
market in the US is an oligopoly. In an oligopoly a small number of sellers control
most of the sales of a relevant market.58 One often used process for determining
whether an oligopoly exists in an industry is the four-firm concentration ratio. The
four-firm concentration ratio looks at the market share of the four largest firms in an
industry and the higher the percentage the more likely an oligopoly exists.59 A second
commonly used measure of market competition is the Herfindahl-Hirschman Index
57
UK Competition Commission, supra note 42.
Thomas A. Piraino, Jr., Regulating Oligopoly Conduct under the Antutrust Laws, 89 Minn. L. Rev. 9,
(2004).
59
Jacob E. Gersen, Markets and Discrimination, 82 N.Y.U. L. Rev. 689, 729 (2007).
58
22
(HHI). The HHI looks at the sum of the squares of each firm in the market.60 Under
this index when each of n firms has an equal share of the market the index is 1/n, while
if the industry is monopolistic the index is one.61 HHI is considered to be the better
measure.62
In general, measures of market competition are notoriously poor63 and specific
characteristics of the extended warranty industry make them even more difficult to use.
It is not that helpful to use market shares of extended warranty administrators (chart on
page 5-6) because many administrators contract with retailers to sell their extended
warranties, thus the statistics are not reliable when trying to discern the market share of
the large retailers. The market share of the large retailers is the most important because
the retail stores are the places where the consumers are at the most disadvantage when
buying extended warranties. Thus, without information about market shares of large
retailers it is difficult to say whether or not their market share meets the threshold for an
oligopoly using indexes, therefore further research into this area is needed.
One can look to the most significant characteristic of an oligopoly as an
indicator of whether an industry is an oligopoly. The structure of oligopoly markets
facilitates anticompetitive conduct which diverts wealth from consumers to producers.64
The method in which extended warranties are sold in large retail stores embodies this
60
Id.
Id.
62
Id at 730.
63
Id at 729.
64
Piraino, supra note 58, at 9-10.
61
23
characteristic. As mentioned earlier in this paper, consumers typically do not have the
time to shop around for other extended warranties before they have to decide on
whether to buy the one offered by the store, thus creating an anticompetitive atmosphere
in the extended warranty industry. However, simply because the extended warranty
industry has a characteristic that is necessary for an oligopoly to be in place does not
mean that the characteristic alone is sufficient.
Thus, it is clear that there it could go either way as to whether the industry is an
oligopoly; however assuming it is, the next step is to look at whether as an oligopoly the
large retailers in the industry are in violation of the Sherman Act. The debate centers on
whether tacit collusion is enough to violate the Section 1 of the Sherman Act which
prohibits competitors from entering into a “contract, combination . . . or conspiracy, in
restraint of trade.”65
The two different schools of thought can be seen by taking a look at the
diametrically opposed views of Professor Donald Turner and Judge Richard Posner.66
Turner believes “that oligopolists who take into account the probable reactions of
competitors in setting their basic prices, without more in the way of ‘agreement’ than is
found in ‘conscious parallelism,’ should not be held unlawful conspirators under the
Sherman Act…”67 Whereas, Posner believes such “conscious parallelism” should be
65
Id at 12.
Id.
67
Id at 70 n.15.
66
24
prohibited and has made that clear in his decisions.68 The federal courts have not been
able to come to a consensus on the issue either.69 Since there is no consensus the
outcome on this issue will be determined more on the skill of the litigator and the
precedent, or lack thereof, in the state if a state attorney general decides to litigate.
The next possible laws that extended warranty sellers could be subjected to are
the unfair and deceptive practice laws (UDAP). Nearly all fifty states have these laws
in place and they serve as excellent checks on the abuse and deception of consumers.
These laws are different in each state, thus an attorney general looking to prosecute
under these would have to look to the statute for their particular state. Some examples
of what is covered under these statutes include concealment or omission of any material
fact with intent to cause reliance,70 unconscionable acts,71 and any conduct likely to
create confusion or misunderstanding.72
In the past, state attorneys general have used such laws to go after big
corporations individually.73 One such instance occurred in 2007 when New York State
Attorney General Andrew Cuomo sued Dell for deceptive business practices, among
68
See In re High Fructose Corn Syrup Antitrust Litigation, 295 F.3d 651, 661-665 (7th Cir. 2002).
Piraino, supra note 58, at 12.
70
815 Ill. Comp. Stat. Ann. 505/2 (West, Westlaw through P.A. 95-702 of the 2007 Reg. Sess.).
71
Ky. Rev. Stat. Ann. § 367.170 (2) (West, Westlaw through 2007 legislation).
72
Me. Rev. Stat. Ann. 10 § 1212 (West, Westlaw through the 2007 First Regular Session of the 123rd
Legislature).
73
Cuomo Sues Dell for False Advertising, Failure to Provide Services, and Deceptive Business Practices,
http://www.oag.state.ny.us/press/2007/may/may16a_07.html (last visited December 29, 2007).
69
25
other things.74 Cuomo accuses Dell of many significant wrongdoings including issues
that directly relate to the extended warranty issue such as repeatedly failing to provide
timely onsite repair to consumers who purchased service contracts promising “onsite”
and expedited service and pressuring consumers, including those who purchased service
contracts promising “onsite” repair, to remove the external cover of their computer and
remove, reinstall, and manipulate hardware components.75 This case has yet to be
litigated or settled, however the New York Attorney General has taken the situation so
seriously that he has created a website that’s sole focus is the case.76 The website
allows for New York citizens to send in any complaints they may have about Dell or
Dell Financial Services.
Another significant case on the warranty issue was a case brought by former
Maine Attorney General James Tierney in 1985.77 It was the first case in the nation to
legally challenge service contracts.78 Tierney asserted that since the appliances were
already covered by warranties, thus consumers were essentially buying the warranties
twice.79 This is an argument that is very similar to the problems of extended warranties
listed above. Unfortunately, the pioneer case failed to make much of an impact as the
74
Id.
Id.
76
www.nyagdell.com
77
Sears Service Contracts face Court Suit by Maine, News Record (LA), May 6, 1985, at 6.
78
Id.
79
Id.
75
26
court dismissed the vast majority of the case.80 The case gives a clear lens into the way
a court may possibly view an extended warranty lawsuit and may make one ask why
litigation would have a chance of being successfully now. Litigation would have a
better chance of succeeding now for two main reasons. First, the problem has continued
to grow over the past two decades since this case was litigated and secondly, because
this case was a maine case based in case law, thus its reach is very limited.
We must next analyze the best way to go about enforcing these laws and
changing the current extended warranty situation. There are two different litigation
options. State attorneys general can either individually prosecute large retailers and
extended warranty sellers or ban together as attorneys general across the nation and sue
the corporations as a multi-state coalition. There are pros and cons to both. The
benefits of litigation done individually by attorneys general are that the lawsuits will
likely be more specialized, the lawsuits can deal specifically with issues particular to
that individual state, and the lawsuit will most likely receive less criticism because it is
within the boundaries of what is considered to be a more traditional role of the state
attorney general.81 On the other hand, the drawbacks of individual litigation include
fewer resources, less publicity of corporate malfeasance, and less effect, since the result
may only be felt in one state. While the benefits of multi-state litigation include bigger,
80
81
Sears is Cleared of Maine Charge, N.Y. Times, Aug. 30, 1985, at A14.
Matheson, supra note 56.
27
better results, more resources, and more publicity of corporate malfeasance. Moreover,
the negatives of multi-state litigation include possible infringement on federalism and
the separation of powers,82 and a possibly long, drawn out process.
While there are valid arguments on both sides of the spectrum, multi-state
litigation seems to be the best remedy for this situation. Just as in the tobacco litigation
settlement, which was signed by forty-six state attorneys general,83 and the predatory
lending settlement,84 the extended warranty issue is one that affects Americans all
across the nation. Also, similar to those two issues it is one that would benefit greatly
from the extra attention and resources that extra states could offer.
Furthermore, multi-state litigation is suited better than any other type of
litigation to deal with new and complex problems affecting many states at once. Multistate litigation is a powerful tool for law enforcement that arose in response to the
evolving needs of state authorities […].85
Also, multi-state litigation can help to create extremely large settlements that
can be administered throughout the states to consumers who have been affected as was
done in the aforementioned settlements. Through settlement talks there are many
important gains that could be reached by attorneys general. They could achieves gains
82
Jason Lynch, Note, Federalism, Separation of Powers, and the Role of the State Attorneys General in
Multi-State Litigation, 101 Colum. L. Rev. 1998, 1999 (2001).
83
Master Settlement Agreement, available at http://ag.ca.gov/tobacco/pdf/1msa.pdf.
84
From Chicago: Household Settlement Release,
http://www.state.ia.us/government/ag/latest_news/releases/oct_2002/Household_Chicago.html (last
visited, Jan. 2, 2008).
85
Lynch, supra note 82, at 2032.
28
that increase the dissemination of information to the consumers, similar to what was
done in the UK study, such as requiring a leaflet of information to be handed to
customers or requiring the posting of a warranty price. Attorneys general could also
attempt to negotiate for the extended warranty industry to fund a commission similar to
what was completed in the United Kingdom.
Finally, there are non-litigation options that attorneys general could attempt to
choose as well. First, one simple non-litigation related remedy that all state attorneys
general can immediately do is place information about extended warranties on their
websites for residents of their states to read. New Hampshire is one great example of
how a state attorney general can place clear, readily accessible information about
extended warranties for customers on their websites.86
Another non-litigation option may be for the state attorneys general to persuade
the legislature to create harsher and more specific unfair and deceptive practices laws
on the extended warranty issue. Most of these laws are currently very broad, thus if the
attorneys general could get the legislature to create laws more specific to the extended
warranty issue, then the laws could act as a significant deterrent for companies to clean
up their acts. Thus, in turn, there would be much less of a need for litigation.
Another non-litigation option would be for the attorneys general to ban together
and reach out to the Federal Trade Commission to address the situation. The FTC is
86
Service Contracts and Extended Warranties, http://doj.nh.gov/consumer/sourcebook/service.html (last
visited December 30, 2007).
29
well suited to handle such issues since they deal specifically with consumer protection
issues in their principle mission. If the attorneys general place enough pressure on the
FTC and make them aware of this issue, then positive action may be taken.
VII.
Conclusion
The state attorney general, as the protector of the public interest, has a very
important and critical role in this fight to stop the deceptive practices of major retailers.
As each day passes more and more customers continue to waste billions of dollars on
warranties that will never be used while adding to the retailers’ profits. The state
attorneys general can play an important role in making sure that consumers are
informed prior to making such decisions because unlike federal or state lawmakers, the
state attorneys general are often not tied up from making change for political reasons.
The state attorneys general role is very comprehensive and they would be
serving their constituency well to fight the extended warranty crisis that is affecting
many consumers. If the state attorneys general ban together and go after retailers in
multi-state litigation to force changes in the current market condition, or choose one of
the non-litigation options, significant steps will undoubtedly be made in addressing this
problem. The extended warranty problem is one that will only get worse with time as
retailers continue to make more and more dollars off of playing with the fears of the
30
American public, thus the time to act is now. Indeed, to stay true to their mission and
historical purpose state attorneys general have no choice but to act now.
31