KNAPP SHOES, INC. vs. SYLVANIA SHOE MANUFACTURING CORPORATION.

GREANEY, J. A judge of the United States District Court for the District of Massachusetts has certified two questions to this court pursuant to S.J.C. Rule 1:03, as appearing in 382 Mass. 700 (1981). The questions, concerning the application of a regulation promulgated by the Attorney General under G. L. c. 93A, Section 2 (c) (1992 ed.), to a business dispute, are as follows:

"Do the provisions of 940 [Code Mass. Regs. Section 3.08 (2)] apply to a simple breach of warranty in the circumstances described [in this order], that is, during the

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course of fulfilling a requirements contract entered into by persons engaged in the conduct of trade and commerce having equal bargaining power and business acumen, during which the breach consisted simply of the delivery of a minute portion of non-conforming goods?"

"If so, is that regulation consistent with the legislative mandate set forth in [G. L.] c. 93A, Section 2(c) that such regulations promulgated by the Attorney General `. . .shall not be inconsistent with the rules, regulations and decisions of the Federal Trade Commission and the Federal Courts interpreting the provisions of 15 U.S.C. []Section 45(a) (1) (The Federal Trade Commission Act), as from time to time amended.'?"

We answer the first question, "no," and, consequently, do not reach the second question.

The certified questions relate to an action brought in the United States District Court by the plaintiff, Knapp Shoes, Inc. (Knapp), against the defendant, Sylvania Shoe Manufacturing Corporation (Sylvania). In the memorandum of certification, and a memorandum and order prepared at the conclusion of the liability phase of the case (which was tried to the judge without a jury by consent of the parties), the judge found and concluded as follows. [Note 1]

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Sylvania and Knapp were found by the judge to be "persons of equal bargaining power, equal sophistication, and equal business acumen." Sylvania had agreed to manufacture shoes meeting certain specifications for Knapp pursuant to purchase orders, so that Knapp might resell them. The judge found that, "[d]uring the course of the dealings between the parties, sole adhesion defects appeared with some degree of frequency. Eventually, Knapp terminated its relationship with Sylvania, and instituted [the United States District Court] action."

According to Knapp, there was evidence at trial that a defect rate of one percent is acceptable in the shoe manufacturing industry. The judge found that three percent of the shoes manufactured for Knapp by Sylvania were defective. He further found that the defect in the shoes was due to a problem "not reasonably foreseen by any of the parties to the relationship," and that Sylvania, "in an attempt to fulfill its part of the bargain, acted tirelessly and in the utmost good faith to correct the perceived sole adhesion defects." The judge also concluded that Sylvania did not act "in an `unfair' manner -- no matter what interpretation might be given to the word, `unfair.'" On this basis, Knapp's claims of fraud, misrepresentation and for multiple damages pursuant to G. L. c.

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93A were rejected. [Note 2] Based on the defect rate of three percent, however, the judge concluded that "Sylvania did breach implied warranties." [Note 3]

We next set out the statutory provisions and regulations involved in this dispute. General Laws c. 93A, Section 2 (a) (1992 ed.), makes unlawful "[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." The legislation contains no definition of unfair or deceptive acts or practices. By language in Section 2 (c) of G. L. c. 93A, the Attorney General is authorized to make rules and regulations "identify[ing] particular business practices as falling within [the scope of Section 2 (a)]." Purity Supreme, Inc. v. Attorney Gen., 380 Mass. 762, 771 (1980).

In 1971, the year before Section 11 [Note 4] was added to G. L. c. 93A by St. 1971, c. 14, Section 2, the Attorney General promulgated

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regulations pursuant to G. L. c. 93A, Section 2 (c), including the regulation now codified at 940 Code Mass. Regs. Section 3.08. Appearing under the general heading of "Repairs and Services Including Warranties and Service Contracts," that lengthy regulation provides, in full, as follows:

"(1) Repairs and Services. It shall be an unfair and deceptive act or practice to:

(a) Fail to provide in advance to a customer upon request a written estimate of the cost to the customer of the anticipated repairs, or the basis upon which the charge to the customer will be made and the reasonably expected time to accomplish such repairs, including any charge for reassembly of any part disassembled for inspection or any service charge to be imposed; (b) Make or charge for repairs which have not been authorized by the customer; (c) Fail to disclose, in the case of an in-home service call where the consumer has initially contacted the repairman, that a service charge will be imposed even though no repairs are effected, before the repairman goes to the consumer's home; (d) Represent that repairs are indicated to be necessary when such is not a fact; (e) Represent that repairs have been made when such is not a fact; (f) Represent that the goods being inspected or diagnosed are in a dangerous condition or that the customer's continued use of them may be harmful to him when such is not a fact;

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(g) Materially understate or misstate the estimated cost of repair services. (h) Fail to provide the customer with an itemized list of repairs performed and the reason for such repairs including:

1. A list of parts and statement of whether they are new, used, or rebuilt and the cost thereof to the customer; and 2. The number of hours of labor charged and the name of the mechanic performing the service; provided, however, that the requirements of 940 CMR 3.08(1)(h) shall be satisfied by the statement of a flat rate price if such repairs are customarily done and billed on a flat rate price basis.

"(2) Warranties: It shall be an unfair and deceptive act or practice to fail to perform or fulfill any promises or obligations arising under a warranty. The utilization of a deceptive warranty is unlawful. Language intended to limit or modify the warrantor's obligations under a warranty shall not operate to limit the warrantor's liability, notwithstanding the limiting language, if the warrantor fails to perform under the warranty, provided, however, that no language of limitation otherwise unenforceable by statute or regulation shall be enforceable. This regulation in no way limits, modified, or supersedes any other statutory or regulatory provisions dealing with warranties.

"(3) Service Contracts. It shall be an unfair and deceptive trade practice to fail to disclose in writing, fully and conspicuously, in simple and readily understandable language that a service contract charge will be imposed if the consumer wishes to insure that repairs will be made to a purchased product so that it will operate properly. It shall also be an unfair and deceptive trade practice to fail to disclose in writing, fully, clearly, and conspicuously, in simple and readily understandable

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language that a consumer is paying a lower price for goods or services in exchange for a waiver of his warranty rights."

Knapp, of course, relies on the first sentence of subsection (2) of the regulation, which addresses the failure to honor warranty obligations.

The first certified question requires us to consider whether subsection (2), which was promulgated at a time when G. L. c. 93A protected only consumers from unfair or deceptive trade practices, should be applied to every breach of warranty claim made by a person or entity engaged in trade or commerce in connection with an action brought under G. L. c. 93A, Section 11. [Note 5] We have not had occasion to consider this question directly, although we acknowledge that decisions of this court and the Appeals Court appear to have assumed that subsection (2) applies to every case alleging a breach of warranty brought under G. L. c. 93A, Section 11. See Linthicum v. Archambault, 379 Mass. 381, 387-388 (1979); Lynn v. Nashawaty, 12 Mass. App. Ct. 310, 312 (1981). For the reasons now explained, we conclude that the regulation was not intended to, and does not, apply to cases brought under Section 11, alleging a breach of warranty.

Knapp contends that the delegation of authority to the Attorney General by G. L. c. 93A, Section 2 (c), to develop regulations defining unfair and deceptive practices, considered with the plain language of subsection (2) (which refers to "any" promises or obligations arising under a warranty), and the fact that Section 11 "did not limit its incorporation of the Attorney General's rules and regulations to those issued after Section 11 came into effect," compels the conclusion that subsection (2)

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applies to Sylvania's performance under the contract. We reject the argument.

As has been previously noted, 940 Code Mass. Regs. Section 3.08 (2) was promulgated when G. L. c. 93A protected consumers, but not persons engaged in trade or commerce, from unfair or deceptive acts or practices. An examination of the entirety of Section 3.08 discloses that subsection (2) is one of three subsections addressing the obligations of a person engaged in trade to repair or service goods. Subsections (1) and (3), which address, respectively, repairs and services and service contracts, use the term "consumer" to denote the persons protected by their provisions, [Note 6] and concern matters generally involved in consumer transactions. (These matters include, for example, the obligations to provide the customer with a written and accurate estimate of the anticipated cost of repairs, and a prohibition on charging for repairs which the customer has not authorized, or representing, untruthfully, that the goods being inspected are in such a dangerous condition that they should not be used prior to repair.)

Subsection (2) addresses only the failure to comply with promises or obligations arising under a warranty, and contains no language denoting the persons protected thereunder. Language in a regulation, like language in a statute, see Purity Supreme, Inc. v. Attorney Gen., supra at 776; see also 1A Singer, Sutherland Statutory Construction Section 31.06 (5th ed. 1993), "must be considered in light of the other words surrounding [it]," Commonwealth v. Brooks, 366 Mass. 423, 428 (1974), and its scope and meaning must be determined by reference to context. See Commonwealth v. Kwiatkowski, ante 543, 548 n.6 (1994). See also Industrial Fin. Corp. v. State Tax Comm'n, 367 Mass. 360, 364 (1975), quoting Hanlon v. Rollins, 286 Mass. 444, 447 (1934) ("The general and familiar rule is that a [regulation] must be interpreted according to the intent of [the officer or agency responsible for its promulgation] ascertained from all its words construed

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by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated").

It is reasonably clear that, in drafting the regulation, the Attorney General had in mind protection for consumers against unfair or deceptive acts or practices that had come to the attention of his office in connection with shoddy repairs, inadequate and misleading service contracts and the grant of worthless warranties. The regulation, read as a whole, is rooted in Section 9 of G. L. c. 93A. Where the bulk of the regulation applies only to consumers and their interests, and subsection (2) contains no language suggesting that it was meant to apply to a broader class of persons or interests, we conclude that the portion of subsection (2) at issue was not intended to encompass a contract dispute between businessmen based on a breach of the implied warranty of merchantability. [Note 7] We note, as well, that commentators have reached a similar conclusion. [Note 8]

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This interpretation of the regulation comports with its historical development, see Wilcox v. Riverside Park Enter., Inc., 399 Mass. 533, 535 (1987), and with Federal law in the area of unfair or deceptive acts or practices. As the judge has pointed out (and as Knapp concedes), "neither the Federal Trade Commission, nor any [F]ederal court interpreting [15 U.S.C.] Section 45 (a) (1) [1988,] has ever concluded a breach of warranty, as between persons engaged in trade within the meaning of G. L. c. 93A, Section 11, and as distinguished from consumers within the meaning of G. L. c. 93A, Section 9, constitutes a `deceptive' or `unfair' act or practice." [Note 9] While the Attorney General properly could define as "unfair" or "deceptive" acts or practices not prohibited by the Federal Trade Commission, he is directed to seek guidance from Federal law in determining what constitutes an unfair or deceptive act or practice. That the commission has distinguished between a consumer's and a businessman's breach of warranty claims is a further indication that the Attorney General likewise intended to do so. Because subsection (2), considered in the context of the entire regulation, is most plausibly read as protecting only consumers, there is no basis for presuming that the Legislature intended its incorporation when Section 11 was added to G. L. c. 93A.

While we conclude in this decision that the regulation does not afford a basis for imposing liability in a Section 11 case, we do not mean to suggest that the breach of an implied warranty,

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occurring in a commercial context, can never give rise to liability under G. L. c. 93A. Rather, the question of liability under G. L. c. 93A, Section 11, when a breach of warranty is alleged to be an unfair or deceptive act, must be resolved by reference to general principles of liability under Section 11, which are discussed in cases such as Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 474-476 (1991), Massachusetts Farm Bureau Fed'n, Inc. v. Blue Cross of Mass., Inc., 403 Mass. 722, 729 (1989), and PMP Assocs., Inc. v. Globe Newspaper Co., 366 Mass. 593, 595-598 (1975).

Accordingly, we answer the first certified question, "no," and seen no reason to answer the second question.

O'CONNOR, J. (concurring). The language of subsections (1) and (3) of 940 Code Mass. Regs. Section 3.08 makes clear that those subsections apply only to transactions between business persons or entities and consumers. Subsection (2), standing alone, is less clear, but it is fair to conclude, as the court does, that that subsection also should be construed as focusing only on transactions between business persons or entities and consumers. Therefore, I agree with the court that the correct answer to the first certified question is that 940 Code Mass. Regs. Section 3.08(2) does not apply to a breach of warranty in conjunction with a sale of goods by one business person or entity to another business person or entity.

I write separately only to express the view that the Attorney General would not exceed his authority under G. L. c. 93A, Section 2 (c), were he to promulgate a regulation declaring that a breach of warranty of merchantability in connection with a sale of goods by one business person or entity to another business person or entity, whether or not intentional or negligent, constitutes an unfair and deceptive act or practice entitling the buyer to the remedies provided by G. L. c. 93A, Section 11.

Merchantability, for warranty purposes, is defined by G. L. c. 106, Section 2-314. Goods, to be merchantable, must "(a) pass without objection in the trade under the contract

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description; and . . .(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved." G. L. c. 106, Section 1-205. Reading Sections 2-314 and 1-205 together, trade usage is a part of every agreement unless expressly excluded. Thus, "merchantability" takes into account allowances made by trade usage and custom for minimal variations in goods contracted for. In this case, the judge found that there had been a breach of warranty, that is, that there had been a failure to perform of sufficient magnitude to be unacceptable in the trade. A regulation that would declare to be unfair an unintentional and non-negligent failure of performance of sufficient magnitude to constitute a breach of warranty, thereby shifting the risk of such a failure, including liability for attorney's fees, to the party whose performance has failed to meet trade standards, would not be unreasonable nor beyond the pale of G. L. c. 93A.

Such a regulation would not be inconsistent with, that is, repugnant to or in contradiction of, the rules, regulations and decisions of the Federal Trade Commission and the Federal courts interpreting the provisions of 15 U.S.C. Section 45(a)(1) (1988). As we noted in Purity Supreme, Inc. v. Attorney Gen., 380 Mass. 762, 780 (1980), "States are not forbidden . . . from adopting rules more restrictive than those of the FTC." The fact that a regulation that would declare a breach of warranty an unfair act or practice, and therefore unlawful, in the circumstances set forth in the first certified question, finds no counterpart in the rules, regulations and decisions of the Federal Trade Commission and the Federal courts interpreting the Federal Trade Commission Act, does not lead to a conclusion that such a regulation would be inconsistent with that body of Federal law. The fact that there are no parallel provisions in Federal law would not establish repugnancy or contradiction. Such a regulation would be entirely consistent with the Federal Trade Commission Act and decisions interpreting it.