Service Contract Sold Separately (batteries not included)

Many consumers purchase cars, household appliances, or electronics subject to a warranty guaranteeing the product’s condition.  The Magnuson Moss Warranty Act (“MMWA”) governs the terms of these warranties.  Consumers seeking additional protection may also purchase an “Extended Warranty” or “Protection Plan” at some additional cost.  Although vendors sell these agreements alongside the product, and although consumers may believe they are purchasing a “warranty,” courts continue to recognize that these agreements are not “warranties” under the MMWA.  While courts agree that separate formation is a key distinguishing factor, vendors may also be able to distinguish Protection Plans on the basis of their substantive terms.

Ware v. Samsung

Most recently, on January 31, 2019, the U.S. District Court for the Northern District of Illinois dismissed claims that Best Buy’s “Geek Squad Protection Plan” (“GSPP”) was a warranty in violation of the MMWA.  Ware v. Samsung Elecs. Am., Inc, 18-CV-886, 2019 U.S. Dist. LEXIS 15361 (N.D.Ill. Jan. 31, 2019).  The Ware court found that the GSPP was a “service contract,” and not a “warranty,” under the MMWA because: (1) the GSPP was not formed as part of the “basis of the bargain” for the product; and (2) the GSPP’s terms related to the maintenance or repair of the product, as opposed to its material or workmanship.

In Ware, Plaintiffs purchased a television from Best Buy, along with a five-year GSPP as part of a discounted “bundle.”  Id. at *2-3, 7.  Plaintiffs alleged that Best Buy represented the GSPP as a “warranty.” Class Action Complaint at ¶¶65, 67, 108-09, 131-32, Ware v. Samsung, 18-CV-886, (N.D.Ill. Feb. 2, 2018).  Plaintiffs also alleged that the GSPP functioned as a warranty by providing “seamless and almost identical coverage as the manufacturer warranty.”  Id. at ¶¶107, 130.  About four years after Plaintiffs’ purchase, the television failed and was unable to be repaired.  Ware, 2019 U.S. Dist. LEXIS 15361 at *3.  Plaintiffs claimed the GSPP was a warranty in violation of the MMWA because it allowed Best Buy to offer a less than adequate remedy—namely, a voucher for less than the full purchase price, as opposed to a full refund.  Class Action Complaint at ¶¶63, 69, 114, 137, Ware v. Samsung, 18-CV-886, (N.D.Ill. Feb. 2, 2018).  Plaintiffs also claimed that the GSPP improperly shifted remedy-election from the consumer to the vendor.  Id. ¶¶62, 68, 115, 138.

The court dismissed the complaint, finding that the GSPP was a “service contract,” and not a “warranty,” under the MMWA.  The court described two key differences.  Ware, 2019 U.S. Dist. LEXIS 15361 at *5.

First, a warranty is formed as “part of the basis of the bargain between the seller and buyer of the underlying product.”  Id.  Under the relevant regulations, a written warranty “must be conveyed at the time of sale of the consumer product,” 16 C.F.R. §700.11(b), whereas a service contract “is entered into at some date after the purchase of the consumer product to which it applies.”  16 C.F.R. §700.11(c) (emphasis added).  Also, a written warranty is not given for “any consideration beyond the purchase price of the consumer product,” 16 C.F.R. 700.11(b), whereas a service contract “calls for some consideration in addition to the purchase price of the consumer product.”  16 C.F.R. §700.11(c) (emphasis added).

Second, the terms of a warranty relate to a product’s materials and workmanship.  Ware, 2019 U.S. Dist. LEXIS 15361 at *8, citing 15 U.S.C. §2301(6).  In contrast, a service contract relates to the “maintenance or repair (or both) of a consumer product.”  Id., citing 15 U.S.C. §2301(8).

Considering both the formation and substantive terms of the agreement, the court concluded: “On these facts, it is clear that [the GSPP] constituted a service contract and not a warranty.”  Id. at *6.

As to formation, the court ruled that the GSPP was not a “part of the basis of the bargain” because Best Buy sold the GSPP at added cost to the television, listed it as a separate item from the television set on its website and on Plaintiffs’ receipt, and did not require Plaintiffs to purchase the GSPP as part of the sale.  Id. at *5-6.  Furthermore, although Best Buy sold the television and GSPP as a “bundle,” the GSPP was not “part of the basis of the bargain” because Plaintiffs clearly paid separate amounts for each, albeit at a discounted price.  Id. at *7.

As to its substantive terms, the court also found that the GSPP did not relate to matters of materials or workmanship because it covered “wear and tear,” “environmental conditions,” and other issues requiring the performance of maintenance or repair services.  Id. at *8.  Plaintiffs’ allegations that Best Buy had repeatedly characterized the GSPP as a “warranty,” even if taken as true, were irrelevant to whether the GSPP met the express statutory definition of a warranty.  Id. at *6-7.

Touche v. Best Buy Stores, LP

The Ware court cited one other case discussing the MMWA: Touche v. Best Buy StoresId. at *7, citing Touche v. Best Buy Stores, LP, 1:17CV259-RH/GRJ, 2018 U.S. Dist. LEXIS 220687 (N.D. Fla., Feb. 13, 2018).  On almost identical facts, the Touche court dismissed claims that Best Buy’s GSPP was a warranty in violation of the MMWA.  Looking to UCC 2-313 and “basis of the bargain” analysis in related cases, the Touche court explained that a warranty, unlike a service contract, is part of the purchase agreement.  Thus, a warranty is transacted for at the same time and for the same consideration as the product.  Id. at *6.  Because Plaintiffs in Touche paid for the GSPP with separate consideration and could have purchased a television without the GSPP, the GSPP was a “service contract” and not a “warranty” under the MMWA.  Like the Ware court, the Touche court considered irrelevant whether Best Buy represented the GSPP as a warranty or whether Plaintiffs’ understood the GSPP to be a warranty; “[t]he issue is not what the term ‘warranty’ means to a layperson but whether the Service Package was a ‘warranty’ as defined in the [Magnuson Moss Warranty] Act.”  Id. at *7.  Yet, unlike the Ware court, the Touche court also considered irrelevant “whether the Service Package did the sorts of things a warranty would do.”  Id.  For the Touche court, only question was “whether those obligations flow from the purchase contract or a separate agreement.”  Id.

One Key Difference

Touche and Ware are mostly identical in both their facts and analyses.  Both the courts agree that where Protection Plan is paid for separately from the underlying product, the Protection Plan is a “service agreement” and not a “warranty” under the MMWA.[1]  Both also make clear that neither the vendor’s representations nor the consumer’s subjective understanding are relevant.

Yet Ware goes further than Touche and considers, in addition the agreement’s formation, the agreement’s substantive terms, i.e., whether it relates to “maintenance and repair” or “materials and workmanship.”  Consequently, Ware offers vendors an additional argument for differentiating their Protection Plans from the MMWA’s definition of a “warranty.”  Arguably, Ware’s analysis is on stronger ground because it relies on both the MMWA’s statutory language and relevant regulations, whereas Touche and other cases rely solely on the regulations.  At the same time, Ware’s discussion of the GSPP’s substantive terms could be dismissed as dicta, as the focus of Ware’s analysis is on the GSPP’s formation.  Touche’s analysis is also far more straightforward for courts to apply.  Rather than digging into a Protection Plan’s substantive terms, courts can simply look to whether the Protection Plan is sold separately from the underlying product.

Takeaways from Touche and Ware

Protection Plans are unlikely to go away.  Consumers continue to seek additional protection from repair and replacement costs; vendors continue to seek additional flexibility in customer service (especially regarding rapidly depreciating products like televisions, smartphones, and other electronics).  Furthermore, conflicting legal and marketing uses of terms like “extended warranty” and “service agreement” remain likely to cause confusion.  See Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 171 F.3d 818, 823, n.4 (3d. Cir. 1999) (noting “widespread confusion over [‘extended warranty’ and ‘service contract’] and how ‘extended warranty’ and ‘service contract’ are often used interchangeably.”).  Thus, we can expect to see the issues in Ware and Touche again in the future.

To avoid potential MMWA issues, companies should use a conservative approach when offering Protection Plans.  First, companies should separate the Protection Plan transaction from the underlying product sale by (1) listing the Protection Plan separately from the product on sales and marketing materials (such as store websites, advertisements, and sales receipts); (2) selling the Protection Plan at some additional price to the product; and (3) allowing customers to purchase the product without a Protection Plan.  Second, companies should tailor the Protection Plan’s language to emphasize coverage of maintenance and repairs, as opposed to materials and workmanship.  Finally, companies should avoid referring to Protection Plans as “extended warranties” in sales and marketing materials.

Our group will continue to monitor these cases and keep our readers informed of new developments.

[1] Some state courts have reached similar conclusions.  See, e.g., Johnson v. Earnhardt’s Gilbert Dodge, 212 Ariz. 381, 388 (2006) (“While the sale of the service contract to Johnson was ‘in conjunction with’ the sale of the vehicle to Johnson, it was not part of the basis of the bargain because Johnson paid separate consideration for the service contract.  Therefore, the service contract here is not a written warranty.”).