Marketing Add-on Warranty Products Draw FTC Scrutiny

In April, the Federal Trade Commission (FTC) sent warning letters to six major companies – including ASUS, HTC, Hyundai, Microsoft, Nintendo, and Sony – that market and sell motor vehicles, cellular devices, and video game systems.  According to the FTC, the six companies have potentially violated the FTC Act and the Magnuson-Moss Warranty Act (Warranty Act) through use of specific language on their websites.

The FTC Act requires that any representations made to consumers be truthful and non-misleading, while the Warranty Act governs consumer product warranties and establishes disclosure standards for written warranties.  Specifically, Warranty Act prohibits certain deceptive conduct and prevents warrantors of consumer products that cost more than $5 from conditioning written warranties on a consumer’s use of any article or service defined by brand, trade, or corporate name, unless provided to the consumer for free or the warrantor has received a waiver from the FTC.  Further, any warranty language that implies to a consumer that warranty coverage requires the consumer to purchase any article or service identified by brand, trade, or corporate name is also prohibited as deceptive.

In each of the letters, the FTC noted specific language from each company’s website that allegedly runs afoul of the FTC Act and the Warranty Act.  For example, the FTC called out specific language that conditioned the existence of any warranty or extended warranty on use of the company’s parts or replacement parts or prohibited consumers from having their products repaired by any entity other than the company itself.  The FTC also expressed concern about any additional representations that stated or implied that a company’s warranty coverage was conditioned upon a consumer’s purchase of an article or service separately identified.

The FTC gave each company 30 days to change its warranty representations but explicitly stated that enforcement action had not been ruled out.  By early May, most of the companies had updated the language on their websites.  In particular, Hyundai added language to the warranty terms on its website stating that use of Hyundai parts is not required for consumers to maintain their warranties, but any damage resulting from the use of non-Hyundai replacement parts could lead to a denial in warranty coverage and additional charges for related repairs.

These letters represent just the latest example of regulatory agencies’ concern over representations related to the marketing, sale, and use of add-on products.  In May 2015, the FTC announced a final consent order with National Payment Network, Inc. (NPN), to resolve claims that the company deceptively advertised its add-on biweekly auto payment plan.  According to the FTC, dealerships sold consumers a biweekly payment plan offered by NPN, claiming that the add-on product would help consumers pay off their loans faster and save money on interest payments, all without any upfront fees.

However, the marketing of the product and related disclosures created consumer confusion and deception, as consumers were not told that the add-on required an enrollment fee to NPN of $399, each payment required a processing fee of $2.99, and a cancellation fee of $25, even when a consumer completed paying off his or her vehicle.  On a 60-month loan, the fees exceeded $775, more than offsetting any money a consumer would save under the plan.  Under the terms of the settlement with the FTC, NPN provided consumers with almost $2.5 million in refunds and was prohibited from making deceptive representations about the add-on product in the future.

In July 2015, the FTC announced that Matt Blatt Inc. and Glassboro Imports, LLC, New Jersey-based dealerships, were penalized $184,000 for their involvement with the marketing and sale of the NPN add-on.  The FTC has prohibited the dealerships from misrepresenting that a payment program will save consumers money unless the savings exceeds the total amount of fees and costs charged in connection with the program.

So how can you protect your company from FTC scrutiny?  First, ensure that consumers are informed about all terms of any deal.  Payment information, any exclusions, limitations, or additional add-on products must be presented to consumers in clear and conspicuous fashion.  Add-on products can be especially tricky.  Take stock of your offerings – add-on products that truly add value to the deal are easier to describe, easier to disclose, and easier for consumers to understand.

Second, acknowledge that you cannot condition consumer warranties.  As other companies have seen, the FTC is on the lookout for any language that could represent to consumers that they are required to use certain parts or to purchase additional services to receive the full benefit of their warranty.  Scrub your website and any other written materials that include similar representations.

Finally, turn compliance challenges into an opportunity to show your company’s worth.  Proper presentation of add-on products and warranty terms creates an opportunity to forge a relationship, as consumers are more likely to become repeat customers when they feel that a company is willing to take the time to explain all of the aspects of a deal to them, with no hidden fees or exclusions.

Additional reporting by Virginia Bell Flynn, an associate at Troutman Sanders LLP and Brooke K. Conkle, an associate at Troutman Sanders LLP.