KB Home eliminates arbitration requirement

Wednesday, July 2, 2003 | 11:02 a.m.

SUN STAFF AND WIRE REPORTS

KB Home, the largest home builder in Las Vegas, has dropped a restriction in thousands of its home construction contracts and related warranties that forced home buyers to accept an arbitrator's decision in warranty disputes with the company.

The Los Angeles-based company, which built 25,000 homes last year, including 2,959 in the Las Vegas Valley, has begun sending letters to current policyholders in 10 states, telling them that their contracts' mandatory binding arbitration clause is no longer in effect, KB Home spokeswoman Debra Hotaling said Tuesday.

The policy update was a voluntary change, made to "reflect the way we conduct our business every day," Hotaling said.

"If we go to arbitration and a homeowner disagrees with the result, he can go to court," she said, adding that the company, however, will remain bound to the arbitrator's decisions.

Hotaling said the company had been discussing the policy change with the Federal Trade Commission, but stressed the change was voluntary, not compelled by the agency.

Las Vegas homeowner's lawyer Nancy Quon said the move by KB Home is good for Nevada KB Home owners.

"I used to tell people, if they buy a KB Home and have a problem, don't come to me, I can't help," Quon said.

Quon said she's always believed that having homeowners sign binding arbitration clauses was against public policy.

"For the state of Nevada, which has spent so many legislative sessions since 1995 on this issue, I certainly think that (Nevada law) should take precedence."

Some other home builders in Nevada, such as Pardee Homes, require buyers to sign arbitration clauses. Officials with Pardee Homes could not be reached for comment.

Attorney Alice Oliver-Parrott, who represents a homeowner in Laredo, Texas, who sued KB Home in federal court over the mandatory binding arbitration clause, said the company changed its policy to try to get out of a legal jam.

"They're hoping to avoid any scrutiny or accountability to the FTC or the federal court," she said.

Oliver-Parrott's client has asked the court to declare the binding arbitration provision in his warranty contracts illegal and unenforceable. The case is pending.

"What they're offering to do is better than nothing, but the fox wants to clean out the hen house, and I think someone other than the fox should do it," she said.

Warranties with clauses calling for binding arbitration are not uncommon in the home building industry, said David Jaffe, attorney with the National Association of Home Builders.

The courts encourage the use of arbitration as a way to avoid clogging the legal system with disputes. It works best when the parties agree to be bound by the arbitrator's decision in a given dispute, Jaffe said.

But the situation for KB Home is different.

In 1979, the company entered into a consent decree with the FTC that prohibited the company from including clauses in its warranty contracts requiring arbitration to be binding. The FTC and KB Home reaffirmed the decree 12 years later.

KB Home says its revised policy wasn't required by the FTC, but acknowledged that it has been in discussions with the agency about conflicting interpretations of the order. "Some of this was part of our conversation with them, but we decided to make the changes voluntarily," Hotaling said.

The FTC declined to comment on the KB move. However, Robert Frisby, an assistant director in the division of enforcement, said that the FTC informed the home builder in 1995 that binding arbitration "would not comply with the order."

The original 1979 order came after FTC regulators said the company was building faulty homes and offering inadequate warranties. It required the builder to provide construction warranties without binding arbitration. KB maintains that most home builders have adopted binding arbitration so that it should be allowed to do so as well. KB is the only home builder to be operating under an FTC consent agreement.

Under its new policy, KB Home will offer buyers who close on their homes after July 21 the option of a 10-year warranty without a binding arbitration provision, or a 12-year policy with the binding arbitration clause.

The states where KB Home sent letters to customers are California, Arizona, Nevada, Colorado, New Mexico, Texas, Florida, Georgia, North Carolina and Utah.