U.S. Appeals Court Backtracks on Car Arbitration

Car owners with warranty claims faced a setback on Wednesday when a federal appeals court withdrew a controversial ruling that had struck down a requirement for arbitration, saying it would now wait for the California Supreme Court to decide on a similar issue.

The 9th U.S. Circuit Court of Appeals, which dealt a blow last year to dealers who prefer to resolve disputes out of court, said it would issue a replacement opinion only after the higher court makes its ruling.

The 9th Circuit – which covers nine western U.S. states – had sided with a Porsche 911 Turbo owner who claimed that her sales contract requiring her to submit warranty claims to mandatory arbitration violated a federal law. The Magnuson-Moss Warranty Act governs consumer product warranties.

The ruling in September was at odds with those by two other federal appeals courts that upheld similar arbitration clauses.

An attorney for plaintiff Diane Kolev could not immediately be reached on Wednesday, nor could a representative for Porsche Cars North America Inc, a unit of Germany’s Porsche AG.

Aaron Jacoby, an attorney for defendant car dealer The Auto Gallery, called the withdrawal a “positive development,” even though it does not necessarily mean his side will ultimately prevail.

“The basic debate here is pretty simple: are we going to have consumer arbitration, or are we not?” Jacoby said.

Supporters of arbitration say the process is a more efficient way to resolve disputes, while critics claim the panels are too business friendly.

In a separate case, a California appellate court had found that a Mercedes-Benz dealer’s mandatory arbitration clause was “unconscionable.”

However, the California Supreme Court decided to review that ruling – after the 9th Circuit panel had already ruled in the Porsche case.

Porsche and the dealership argued that its mandatory arbitration clause should stand, partly because of a recent U.S. Supreme Court ruling upholding individual arbitration clauses in phone contracts that prohibit class action lawsuits.

The case in the 9th Circuit is Diana Kolev v. Porsche Cars North America, 09-55963.