When the FTC comes calling, retailers have to be aware of more than just shipping rules
By Gonzalo E. Mon
At the beginning of the 2002 holiday shopping season, the Federal Trade Commission sent letters to more than 50 Internet retailers who advertised rebates, product warranties or quick shipment offers. Each of these promotions, the letters warned, is subject to regulations that are actively enforced by the FTC. Failure to comply with these regulations can result in costly civil penalties, increased FTC scrutiny, and a loss of customer confidence. It is therefore essential that any retailer doing business on the Internet be familiar with these regulations and how the FTC enforces them.
The retailing industry became quite aware of the FTC’s rules regarding shipping promises after the FTC levied fines amounting to $1.5 million against seven web-based retail operations that failed to meet shipping promises during the 1999 holiday shopping season. But there are other rules that apply to online retailing that the FTC is eager to enforce.
Rebate offers
Some of the FTC letters reminded e-retailers that they are required to clearly and conspicuously disclose the terms of rebate offers advertised on their sites. Over the past few years, the FTC has brought actions against a number of online retailers for failing to inform customers of the before-rebate prices of certain goods. For example, in 2000, the FTC brought actions against Buy.com Inc., Value America Inc., and Office Depot Inc. for failing to adequately disclose the terms of rebate offers.
The FTC generally alleged that the companies did not adequately disclose the amount of money that customers were required to pay at the time of purchase. Instead, many of the ads only provided the after-rebate price. Other ads provided the before-rebate price, but did so in fine print disclosures that were difficult to read. The FTC also alleged that some of the ads did not adequately disclose that customers had to sign up for Internet service or that other costs, such as long-distance charges or cancellation fees, could apply.
Before advertising a manufacturer’s rebate on a web site, retailers must make sure that the manufacturer has provided all of the terms and conditions of the rebate offer. When advertising the rebate, retailers should clearly disclose the material terms of the rebate in close proximity to the offer. For example, you may be required to disclose:
— The total amount of money that customers are required to pay at the time of sale,
— What customers must do in order to receive the rebate,
— Whether any other charges may apply,
— Whether there are any restrictions or penalties.
Each of these disclosures must be “clear and conspicuous.” If you choose to include the disclosures on the same page as the offer, make sure that they appear in close proximity to the offer and that they are clearly readable. In some cases, you may be able to link to disclosures on another page. If you choose to link to the disclosures, make sure the link is obvious and that it clearly states the nature of the information you are linking to. A link that reads “details” may not be sufficient. Instead, consider a more descriptive link, such as: “Click here for rebate details.”
The Pre-Sale Availability Rule
The FTC sent letters to 14 e-retailers who advertised that certain products on their web sites were covered by warranties. The letters warned the e-retailers that they had failed to provide adequate information about these warranties as required by the FTC’s Pre-Sale Availability Rule. The Pre-Sale Availability Rule generally requires warrantors of consumer products costing more than $15 to provide retailers with copies of these warranties. Retailers, in turn, are required to make the warranties available to their customers in certain circumstances.
Earlier this year, the FTC brought an action against PeoplePC Inc. for violations of the Pre-Sale Availability Rule, as well as violations of the Mail Order Rule. This marked the second time the FTC has enforced the Pre-Sale Availability Rule in the online context, although it has enforced it with brick-and-mortar and mail order retailers. The FTC alleged that PeoplePC advertised that its computers were covered by warranties, but did not make these warranties available to customers prior to purchase. As part of the settlement with the FTC, PeoplePC paid a $100,000 civil penalty.
Retailers who advertise that a product is covered by a warranty must either provide the full text of the warranty on the web site or tell customers how they can acquire the warranty free of charge. If you sell goods from many manufacturers, the first option may not be practical. Instead, you can place a prominent hyperlink near the product description that leads customers to instructions for obtaining these warranties. The link can lead to a page that reads, for example: “If you would like to obtain warranty information for a particular product, send an e-mail to warranties@companyname.com. Please specify the product number, as well as the mailing address to which the warranty should be sent.”
The Mail Order Rule
The FTC’s 2002 holiday shopping warning also reminded many retailers that their shipping representations are subject to the Mail Order Rule. The rule generally requires that companies have a reasonable basis for their shipping representations and that they notify customers of delays and allow them to cancel delayed orders. The FTC typically steps up its enforcement of the rule during the holidays. Most retailers are well aware that in 2000, the FTC initiated actions against seven e-retailers, such as Macys.com and CDNow.com who had failed to meet shipping promises during the previous holiday season. The consent decrees called for civil penalties ranging from $45,000 to $350,000.
To comply with the Mail Order Rule, a retailer must have a reasonable basis for its shipping representations. In order to satisfy this requirement, there are a number of questions you should ask:
— Have you taken adequate steps to anticipate demand?
— Do you have a sufficient supply of goods?
— Is your fulfillment system capable of handling the demand?
Despite your best efforts to promptly fulfill orders, there may be instance in which you are unable to ship on time. As soon as you learn that there will be a delay, you must promptly notify all customers who will be affected.
Although the FTC does not require retailers to keep records pertaining to the Mail Order Rule, it certainly makes sense to do so. In fact, the Rule provides that in an investigation by the FTC, a retailer’s failure to keep records that demonstrate compliance will create a “rebuttable presumption” of a violation, that is, the FTC will presume that a retailer is guilty of a breach of the rule, but the retailer can present evidence to the contrary. As a result, many retailers commission legal audits to make sure that their records reflect the information the FTC will look for in an investigation. Your records should reflect, among other things:
— How you anticipate the demand for each product. Past demand for similar products or offers can often serve as a good guide.
— How you monitor inventory. If inventory begins to fall short, consider ordering more products or modifying your shipping representations.
— How your fulfillment system is designed to comply with the Rule. You should have a mechanism to ensure that delay notices and refunds are mailed promptly.
You should also keep copies of the notices your company sends to customers so that you can demonstrate the notices contained the information required by the Rule. Because the statute of limitations for the FTC to enforce the Rule is five years for civil penalties, it is prudent to keep your records for at least that amount of time.
Other rules apply
Complying with FTC regulations is a good first step when structuring or advertising any promotion. It shouldn’t be the only step, though. You should be aware that many states have statutes that may restrict your promotion. For example, states such as California, Connecticut, and New York regulate the information that needs to be included in advertisements for rebates. It is important to consult all applicable laws before you advertise a promotion on your web site.
Gonzalo E. Mon is an attorney in the Advertising and Marketing and Intellectual Property practice groups at Collier Shannon Scott PLLC in Washington, DC. You can reach him at GMon@colliershannon.com.
