When the fifth-largest home builder in the country changes its policy on warranties and binding arbitration, builders notice--especially when arbitration is being touted as a key solution to construction defect lawsuits.
But KB Home's decision to revise its warranty choices and allow past buyers to sue if they're unhappy with arbitration should not be taken by builders as a signal to quickly rewrite their own contracts.
That's because the warranty and arbitration rewrite is just the latest chapter in the Los Angeles based builder's ongoing story with the Federal Trade Commission (FTC) and a decades-old consent decree that doesn't appear to allow KB Home to use binding arbitration. "We're not commenting on the use of arbitration in any industry," says Jim Prunty, FTC staff attorney. "The 1979 administrative order applies only to KB Home."
KB's history with the FTC dates back to the 1970s, when FTC regulators charged the company (then Kaufman & Broad) with building flawed homes with poor warranties. As a result, the two entered into a 1979 consent decree, which dictated that KB must offer the Home Owners Warranty Corp. warranty, which called for nonbinding arbitration, or one "substantially identical."
(FTC consent decrees last for 20 years unless they are lifted earlier; KB is still under the decree, which was reaffirmed in 1991 with a $595,000 fine for the builder.)
Fast-forward to 2003, when KB's warranty policies and the terms of the consent decree are under scrutiny again, thanks to legal action by an unhappy buyer.
That buyer would be Timothy Pruitt, who in 2002 purchased a $120,000 Texas home from KB. This year, he sued the builder, asking a judge to set aside the KB contract's binding arbitration provisions, given its situation with the FTC. "This is not a test case for whether arbitration is appropriate in the home building industry," says Pruitt's lawyer, Alice Oliver-Parrott. "What this case is about is solely KB Home and its progeny and whether their dispute resolution practices are in violation of the FTC consent decree. Clearly [the builder] is in violation."
While KB's own letter to the FTC indicates it began using mandatory binding arbitration as early as 1996, the builder disagrees that it willfully violated the consent decree. After all, the original warranty provider (Home Owners Warranty Corp.) is long gone, and binding arbitration is now the method of choice for dealing with dissatisfied buyers, whether you're a builder or a third-party warranty company. "Lots of things have changed in the industry and the marketplace," says KB spokesperson Debra Hotaling. "We believed that our interpretation was in keeping with the spirit of what the FTC had asked us to do."
That said, the builder in June notified the FTC--and the district court judge handling the Pruitt case--that it was changing its policy. The builder said it would no longer enforce binding arbitration for those tens of thousands of KB homeowners whose houses were still under warranty. If these owners go through arbitration and are still unsatisfied, KB said, they were free to go to court. As for KB, it would abide by the arbitrator's decision, no matter what. Going forward, KB buyers can choose between either a 10-year warranty with nonbinding arbitration or a 12-year warranty with binding arbitration.
KB says these changes were not inspired by the Pruitt lawsuit, which the homeowner has asked to be certified as a class action. "We were talking about this way before Pruitt happened," Hotaling says.