E-Tail Failures Could Trigger FTC Sanctions

E-tailers who failed to deliver on time during the holiday season may face sanctions from the Federal Trade Commission and class-action lawsuits, government officials and legal experts said last week.

The FTC may take action because many Internet merchants appear to be in violation of the FTC’s Mail Order Rule, a 1975 measure that governs the performance of mail-order sales.

“We’ve been starting to get complaints here about problems with delivery. We’ve heard media reports about problems and we’ve been looking into the problem ourselves,” said Elaine Kolish, associate director of enforcement at the FTC.

The rule says that mail-order merchants must ship purchases within the time specified in their advertising, or if no shipment time is given, within 30 days of receiving a “properly completed order.” The rule requires merchants to have a reasonable basis for any representations they make regarding shipment time.

The rule also requires companies to notify consumers if an order cannot be shipped on time and requires them to notify customers of new shipping dates. The customer then must be given an opportunity to cancel the sale for full refunds – although the company can presume that the customer wants the order completed if he doesn’t respond to a first notice announcing delays of 30 days or less. If merchants cannot meet the new shipping dates, they must notify the customers again. Unless customers expressly consent to the second delay, merchants must cancel the orders and refund their money.

Merchants also must provide consumers whose orders are to be canceled with a prepaid means for doing so.

Companies that are subject to the rule include traditional direct mailers as well as companies that receive sales orders where “a computer, fax machine or some other similar means is used to transmit an order over telephone lines.”

Over the past few years, the FTC has imposed fines and sanctions on traditional mail order companies for violating the rule. However, the agency has not taken action against any e-commerce companies, said Kolish. And it is too early to say whether it will this year.

“People may complain that they didn’t get their products on time but not mention that they received a notice,” she said. “If they did, the company may be in compliance with the Rule.”

However, Kolish confirmed that sanctions may be made.

Kolish also said that in January of 1999, after the first round of holiday delivery problems began, the FTC started an education campaign about the Rule that included mailings to e-commerce companies that summarized the requirements. The FTC reissued the mailing in the fall.

But, the delivery problems continued. Most notably, Toys ‘R’ Us, Paramus, NJ, was unable to fulfill some orders placed on its Web site before Dec. 10, its deadline for Christmas delivery by standard shipping. As a result, it dished out $100 coupons to disappointed Internet shoppers who did not get their gifts in time for Christmas.

The Direct Marketing Association, Washington, DC, said some e-commerce companies are not complying with the Rule this year, and is hoping the FTC takes action so that others don’t follow suit.

“If e-commerce companies do not meet the expectations of customers-by not delivering items on time, fulfilling correctly, or notifying people correctly that they couldn’t fulfill-that hurts the potential growth of remote commerce,” said Jerry Cerasale, senior vice president, government affairs at the DMA.. “People don’t buy remotely in large part because of bad experiences or bad experiences that others have had that they’ve learned about.”

After an independent Web site search, Michael D. Scott, a partner with the law firm of Perkins Coie LLP, Santa Monica, CA, also concluded that many e-tailers have not followed the Rule

He believes the reason for this is that they are not aware of it, or that they are subject to it. Also, he said, their systems are not electronically set up to deliver the proper response to customers.

“E-tailers systems are often set up to trigger an e-mail based on an activity, such as letting customers know they have received their order, or they have shipped their order,” said Scott, who is also author of the Internet and Technology Law Desk Reference. “However, there is no automatic e-mail process that alerts customers to the fact that a company said it would ship a product in two days in its ad, and if it doesn’t ship in that time, it will ship at another time. That’s just not part of the process.”

Scott said that he hasn’t seen any Web sites that respond on non-shipments.

‘They may respond that they are indeed out of stock, or that it will take them an enormous amount of time to get something, ” said Scott. “But if it is a couple of days late because their processing is not fast enough, they don’t tell you, and they should. The Rule says they have to.”

Besides potential sanctions from the FTC, Scott said that e-tailers may also face class-action lawsuits by law firms interested in generating fees by settling suits before they reached court.

“The class-action attorneys may claim something like breach of contract by failing to deliver goods as promised and then try to recover damages for all of the consumers supposedly injured by the actions,” he said.

Shareholders, he added, may also sue if the e-tailer’s stock plummets after the company fails to meets its performance claims.

The companies being sued, he said, often decide to settle regardless of the suit’s merits because of the negative publicity generated by them.

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