December 26, 2000, 9:55 AM

Yes, old-economy laws apply to new-economy retailers

Christmas 1999 is said to have been the shopping season that showed the retailing industry and the consuming public that web shopping is for real. It’s now also the shopping season that showed Internet retailers the rule book on fulfillment promises.

In July, seven Internet retailers agreed to pay the Federal Trade Commission $1.5 million in fines, ranging from $45,000 to $350,000, resulting from shipping delays during the holiday shopping season. The companies did not admit guilt as part of the agreement.

Although this was the first FTC project to target online retailing, the move was no sneak attack, says Heather Hippsley, FTC’s assistant director of the enforcement division and the attorney on the case against the retailers. In 1998 the commission noticed news stories regarding customers unhappy about late shipments from online orders. The FTC warned retailers that they would be held to account for any violations of mail-order rules. In 1999, when complaints persisted, the FTC examined the records of more than 24 companies that made quick-delivery claims.

For all seven companies, the FTC received complaints of failure to offer a timely option for buyers to either consent to shipping delays or cancel the order and get a prompt refund. According to the rule, a company failing to notify customers of delays must automatically cancel the order and notify the customer of that cancellation.

Six companies (excluding CDNow) were charged with failing to meet this requirement. In all six cases, the companies did not charge the credit cards, therefore no refund was due the customer. Four of the companies-KBkids.com, Macys.com Toysrus.com and Minidiscnow.com-were charged with taking orders without a reasonable basis for their shipping representation. “There was a big push by retailers to compete with quick-ship,” Hippsley says. “But they can’t do that unless they can actually ship in the vast majority of instances.”

The 25-year-old mail-order rule was amended in 1994 to include telephone and Internet orders. Since it was adopted in 1975, hundreds of enforcements have been rendered against catalog companies.

Lowering the boom

Hippsley says in the cases of Toysrus.com, KBkids.com and The Original Honey Baked Ham Co. the penalties were mitigated because those companies provided gift certificates to customers affected by the delivery problems. But that was not enough. “Although they settled with the customers, they still had violations of the mail-order ruler that were significant,” she says.

Hippsley says total sales for the violations for all seven companies exceeded $39 million affecting tens of thousands of customers.

Had the companies not settled and been found guilty of the violations, they would have faced a maximum fine of $11,000 per late shipment.

Part of the settlement calls for the seven companies to put into place systems to accommodate delivery claims. In addition, the companies are required to submit compliance reports. Those reports are not due until late November, after the start of the holiday shopping season.

Hit hard was Macys.com. In addition to the fine, Macys.com is required to conduct an Internet consumer education advertising campaign. The company will place banner ads on major search engines between Nov. 5 and Jan. 5, 2001. The ads will link to a page on Macy’s site that will explain the terms of and protection afforded under the mail-order rule. Hippsley says the FTC expects the ad campaign to reach several million consumers. Hippsley would not say why Macys was hit with the additional penalty.

Compassion

Getting off easy was CDNow. That company had $200,000 of its penalty waived-requiring it pay $100,000-because it was experiencing financial hardship. The agreement was signed in mid-June, and was not affected by the deal struck in mid-July between for Germany-based Bertelsmann AG to buy CDNow for $117 million ($3 per share).

CDNow-which says it was not aware of the mail-order rule as it applied to Internet retailing before the FTC dinged it-says it is satisfied with the settlement. The biggest change CDNow had to make was to clarify its backorder messages. Those changes were made before the agreement was reached and the company does not expect any problems this holiday season.

This settlement should send a clear message to all online retailers, Hippsley says. “If an online retailer promises a delivery by date-certain, they need a basis to ship and a process to notify customers of shipping delays,” Hippsley says.

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