Among these factors are the historical practices of failing to compete vigorously through guarantees and servicing practices. There are legal and practical difficulties facing an industry in trying to effect an element of the total value represented to the consumer, i.e., the guarantee and service protection. Then too the proliferation of new appliances and new types of appliances available to the consumer, coupled with heightened consumer expectations created by advertisements, also compound the problem. These factors viewed against the lack of effective sanctions under existing law against the manufacturer who would refuse to perform obligations implied in the giving of his guarantee strongly suggest the need for some Government response. The task force has recognized that many warranties are not adequate to advise the consumer of what he is purchasing. Consumer complaints of failure to perform warranties adequately or equitably still crowd into Government agency files. The task force believes that these existing marketing practices connected with the sale of consumer durables and performance of guarantees also inhibit effective competition in the marketplace.

The task force believes that informative, accurate, clear and fairly written guarantees, backed up by guarantors who deliver what they promise, are essential to our free market economy.

There are three applicable points in time where these objectives must be accomplished: (1) fair presentation of the guarantee prior to sale in advertising; (2) fair presentation and definition of the guarantee at the point of sale; and (3) full performance of guarantee obligations after the sale. Achieving these objectives should facilitate value comparisons by consumers and promote competition in marketing and servicing. In the view of the task force these advantages are attainable without destroying the fruits of the competitive system that has provided the technological advances that have so changed and improved the consumer's life today. However, some governmental action does seem appropriate, since the above-referenced problems are not easily susceptible to joint corrective action by all manufacturers of a given product.

The task force came to the conclusion that warranty legislation. should accomplish the following objectives:

Greater protection against deception in describing the characteristics of consumer goods, and in the marketing of warranties and guarantees; Much more disclosure to consumers of exactly what their warranties cover, and what they do not cover, with clear FTC authority to require this disclosure.

Assurance that there will be at least a minimum meaning to the terms "warranty" and "guarantee" on which consumers can relyfitness for ordinary use.

More assistance to consumers in obtaining performance of the obligation to make guaranteed products fit for ordinary use.

Continuing efforts in this area, we do not think work on warranty problems should end when this bill is passed. We believe Congress should mandate a continuing inquiry in this area, and a repor when we have more experience with this bill.

The task force believes that the specific legislative proposal that has been drafted will accomplish these objectives and Mr. McLaren will

go into some detail in describing the approach the task forcce recommends.

Thank you.

Senator Moss. Well, thank you, Mrs. Knauer, for that very fine statement and your point by point description of what should be accomplished by warranty legislation gives us a measurement by which to judge the bill, S. 3074.

Of course we will hear further from Mr. McLaren and Mr. Lynn and perhaps we can postpone any questions we have until that time. But I do appreciate your statement.

Mr. McLaren, next we will have you, sir.

STATEMENT OF RICHARD W. McLAREN, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

Mr. McLAREN. Thank you very much, Mr. Chairman.

I appreciate the opportunity to come before you again on this general subject.

As Mrs. Knauer has described, we have substantially ready a bill which I would like to outline for you.

First, if I may

Senator Moss. May I interrupt there?

By "substantially ready," can you tell me when it will be ready and up here?

Mr. McLAREN. In the next few days. This week certainly.
Senator Moss. Definitely this week?

Mr. McLAREN. Yes, sir.

Senator Moss. All right.

Mr. McLAREN. I would like, if I may, to discuss some of the considerations which have shaped the proposal which we are making.

As Mrs. Knauer has pointed out, meaningful and satisfactory warranty practices require both full and accurate information on consumer products and warranty coverages before and at the time of sale; and effective performance of warranty obligations. One can attempt to improve warranty practices by taking measures to improve the performance of the free market, by exerting direct legislative or administrative control over the market, or by lending the courts' assistance to consumers in requiring that guarantors or warrantors make good on their obligations.

We believe that there is very substantial value in maintaining markets are free and as diverse as is feasible. We therefore tend to stress measures to improve markets, and to help consumers get relief when the market fails them, in preference to extensive administrative control of the market.

Taking these considerations into account, our proposal will attempt to improve the quality of market transactions in three major ways.

First, we will recommend a broad prohibition of false or deceptive statements relating to consumer products. This prohibition would be applicable whether those statements are intentionally deceptive or not. It would be applicable whether they are deceptive because affirmative misrepresentations or because of failures to provide information necessary to prevent deception.

Second, we would spell out for the Federal Trade Commission very broad rulemaking authority to require affirmative disclosure of the

terms and conditions of warranties and guarantees, including disclosures as to any exclusions of coverage and disclaimers of obligations. These rules would have the force of law.

Third, we would recommend the enactment of a new Federal implied warranty of fitness for ordinary use with respect to products covered by our bill. This warranty could be disclaimed if the disclaimer were clear and accurate. But the warranty could not be disclaimed if the supplier were to use the terms warranty or guarantee. The effect of this would be to give a minimum content to any warranty of guarantee an implied warranty of fitness for the ordinary uses for which the product is sold.

We expect that these measures would substantially enhance the quality of information available to consumers, and the quality of many warranties and guarantees. But this, alone, would deal with only part of the problem. Consumers are also entitled to enhanced protection from the failure to meet basic warranty obligations.

Our proposal will address this need in the same fashion that our Consumer Protection Act addresses the need for enhanced consumer protectin in the economy at large. That is, we will propose that the Justice Department and the Federal Trade Commission be authorized to bring suit against both the deceptive acts proscribed by this warranty legislation, and failures to perform the fitness-for-use warranty obligations. And we would make it possible for consumers to bring suit in the State or Federal courts after a successful government action, for deceptive acts, for failures of companies to meet the FTC's disclosure requirements, and for failures to meet warranty obligations.

Both the Justice Department and the Federal Trade Commission would be authorized to obtain preliminary injunctions with respect to violations of this act, as is the case with the Consumer Protection Act. This legislation would require annual reports from the Attorney General, as would the Consumer Protection Act. In addition, the administration proposal would require the Federal Trade Commission to make further inquiry into consumer warranty problems and to report to the Congress in greater detail on those problems, and on the effects of the legislation we recommend, within a period of 2 years after the date of enactment of the legislation.

Now let me discuss some of the similarities and differences between our proposal and S. 3074.

The administration's proposal would define a somewhat different field of coverage. Instead of dealing only with products with electrical, mechanical, or thermal components, it would deal with all consumer goods having a value of $25 or more. Thus, we would propose to cover a broad range of consumer products, but to deal primarily with the larger and more substantial purchases.

Senate bill 3074 would require that a supplier be required to make good all costs involved in the correction of any deviation from affirmations of fact or promises made by the seller to the buyer. Although we understand the basic intention of this proposal is to assure honesty in the market, as is the intent of our proposal, we think this formulation might restrict to some extent desirable freedom in the marketplace. We think there should be a degree of flexibility in the extent to which postsale performance is or is not completely underwritten-so long as the buyer is fully informed-and that there should be a good deal

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of flexibility allowed in the quantity and quality of postsale service which sellers will offer. Consumers should, in our view, have an opportunity to buy cheap goods as well as expensive goods, and to buy a wide range of postsale service obligations."

We do believe, however, that if the terms warranty and guaranty are used, they should have a minimum commercial content, and that commercial content should be very similar to what is provided in section 12 of S. 3074. In our view, the minimum commercial content should be fitness for ordinary use.

There are several reasons for enacting a Federal implied warranty of fitness for ordinary use, and not allowing it to be disclaimed when a seller uses the terms warranty or guaranty.

First, under existing legal practice the uniform commercial code implied warranty of fitness is often negated in consumer transactions, without consumer knowledge; second, we think it is entirely appropriate that the terms "warranty" and "guarantee" have as their minimum content assurance of fitness for ordinary use; third, giving these terms this minimum content is likely, in our view, to promote a higher standard of warranty protection, and promote comparability among warranty offers, without restricting the right of suppliers to offer lesser degress of backing for products, if they wish; fourth, the concept of fitness for ordinary use has evolved out of the comman law and the uniform commercial code-there should be no major difficulty in this application. It is a workable minimum standard, based on reasonableness; fifth, enacting this Federal right provides additional foundation for Federal Government action on behalf of consumers to require the performance of this warranty in cases where failures to make warranted goods fit for ordinary use is of sufficient general importance to require Government action.

The enforcement scheme provided by our proposal differs from that in S. 3074 in that it authorizes direct Government action instead of relying entirely upon private actions to remedy breaches of warranties, and it contains provisions to protect the Federal courts from a mass of small litigation for which they are not designed. We have previously explained the rationale for the so-called "triggering device" for consumer suits-that is, allowing consumer suits after the termination of a successful Government action. This is to prevent the use of the Federal district courts as small claims court, to avoid the possibility of harassing, strike suits on a nationwide basis, and to assure a public selection of cases of general public concern.

Finally, I want to emphasize that this legislation would in no way restrict any of the authorities which the FTC presently has, or any rights which consumers now have under any other applicable State or Federal law with respect to warranties, guarantees, or to deceptive acts and practices. This is protection additional and suplementary to that now provided for.

Nor would the proposed legislation prevent a supplier selling goods on an "as is" basis, selling service contracts, or otherwise tailoring his postsale obligations.

In summary, we think it is time to give more meaning to warranties, and better machinery for enforcement of the basic warranty obligations. We think this proposal will do these things, consistent with maintaining a free and diverse market in consumer goods.

The legislation is responsible, and it is workable. We hope you will give it your careful consideration.

Thank you, Mr. Chairman.

Senator Moss. Thank you, Mr. McLaren. I can assure you we will give the most careful consideration and scrutiny. We are very anxious to have the draft get up here so that we can consider it, lay it along side of S. 3074 and make decisions as to which parts of which ought to go into a bill that could be presented from this committee to the full committee, and then to the Senate, for consideration.

You do have a very excellent statement outlining what in general the proposal will contain. We want to see the specifics.

Now, we will hear from Mr. Lynn and then we may have some questions that we would like to ask. So, Mr. Lynn, General Counsel for the Department of Commerce.

STATEMENT OF JAMES T. LYNN, GENERAL COUNSEL, DEPARTMENT OF COMMERCE

Mr. LYNN. Thank you, Mr. Chairman. I appreciate the opportunity to appear again today before this committee on behalf of the Department of Commerce, to discuss the subject of warranties on consumer products.

Mrs. Knauer has outlined to you the report of the Task Force on Appliance Warranties and Service. Mr. McLaren has amplified the description of the legislation the administration will propose. The Department of Commerce report on S. 3074, to be filed shortly, will cover in more detail a comparison of the administration proposal with S. 3074.

Accordingly, I would like to limit my formal remarks to a restatement of some basic points which I hope will be of some utility to the committee in its evaluation of various alternative proposals directed at correction of abuses in the warranty area.

At the outset, it is of utmost importance that the various warranty problem areas be carefully distinguished one from the other. We analyze them to be as follows:

PROBLEM AREA 1-HOW IS THE WARRANTY PRESENTED?

The first problem is to present the warranty or guarantee in a way that gives the consumer a good understanding of what he is and is not getting by way of postsale protection. There is substantial evidence of room for considerable improvement in the presentation of many warranties. The administration proposal will afford a broad and flexible weapon against wrongdoing in this area.

PROBLEM AREA 2-IS THE WARRANTY ADEQUATE, AND WHERE SHOULD ADEQUACY BE DETERMINED?

By law, or in the marketplace, or by some combination of both? A separate problem from the presentation of the warranty is whether the protection given by the warranty meets some minimum standard which you and I as consumers would like to have available in the market.