FTC MAIL, INTERNET OR TELEPHONE ORDER MERCHANDISE RULE (“MAIL ORDER RULE”)

The FTC’s Mail, Internet or Telephone Order Merchandise Rule does not get a lot of attention.

It should.

While many still refer to it as the “Mail Order Rule,” the regulation has been updated to reflect consumers’ shift to digital shopping.

The Mail Order Rule generally requires a seller to possess a reasonable basis for any express and/or implied shipping-related representations that are made.  So, for example, if a seller represents that it can ship “next day,” there must be a good reason to believe that can be accomplished.

If no shipping-related representations are made, a seller must possess a reasonable basis to believe that it can ship within 30 days.  This is not typically a problem, however the COVID-19 pandemic certainly complicated things.

The Mail Order Rule also states that if a seller cannot ship within the required time period, it must notify the customer and obtain the customer’s consent to a delay in shipping or refund payment for the unshipped merchandise.  The Mail Order Rule sets forth exactly what needs to be included in the notice, including a disclosure that the customer has the right to cancel.  The Mail Order Rule also addresses what happens if a second delay is experienced, and what that notice must include.

If a customer asks to cancel, or if a seller decides to do it itself, a seller is required to promptly issue a refund.  A seller in this situation cannot just substitute merchandise.

A number of recent cases, including a $9.3M settlement involving violation of the Mail Order Rule, illustrate how relevant the FTC’s Mail, Internet or Telephone Order Merchandise Rule remains today.

What Does the FTC’s Mail, Internet or Telephone Order Merchandise Rule Cover?

The Mail Order Rule applies to most goods a customer orders from the seller by mail, telephone, fax, or on the Internet.  It does not matter how the merchandise is advertised, how the customer pays, or who initiates the contact.

How to Comply With the FTC’s Mail Order Rule

To comply with the FTC’s Mail, Internet or Telephone Order Merchandise Rule (“Mail Order Rule”), a seller must not, without limitation, solicit orders, unless at the time of the solicitation, it:

• Possesses a reasonable basis to expect they it will be able to ship; and
• Within the time it stated, or if no time is stated, within 30 days.

When shipments will be delayed, the Mail Order Rule lays out sequential “if-then” steps sellers must take to ensure consumers are not left hanging.

For example, if a seller cannot ship within the required time, the seller must send the buyer a shipping delay notice that offers the buyer “an option either to consent to a delay in shipping or to cancel the buyer’s order and receive a prompt refund.”

When a seller offers to sell merchandise, it must possess a "reasonable basis" for:

• Any express or implied shipment representation; or
• Believing it can ship within 30 days of receipt of an order - if a seller makes no shipment representation or if the shipment representation is not clear and conspicuous.

Whenever a seller changes the shipment date by providing a delay notice, it must have a "reasonable basis" for:

• The new shipment date; or
• Any representation that a seller do not know when it can ship the merchandise.

When a seller takes orders by telephone, or the Internet, it may choose to provide prospective customers with updated shipment information.  This may differ from what s seller represented or implied about the shipment time in advertising.  The updated shipment information provided on the telephone or the Internet supersedes any shipment representation made in advertising.  Sellers must also possess a reasonable basis for the updated shipment representation.

What Does “Reasonable Basis” Mean?

"Reasonable basis" means that the merchant has, at the time of making the representation, such information as would under the circumstances satisfy a reasonable and prudent businessperson, acting in good faith, that the representation is true.

The evidence a seller needs to demonstrate the reasonableness of its shipment representations varies with circumstances.

The following, however, are important criteria when assessing whether a “reasonable basis” exists:

• Anticipated demand.  Is the demand for each advertised item reasonably anticipated?
• Supply.  For each advertised item, is there a sufficient inventory on hand or adequate sources of supply to meet the anticipated demand for the product?
• Fulfillment system.  For all promotions in the relevant sales seasons, can the fulfillment system handle the cumulative anticipated demand for all products?
• Recordkeeping.  Are adequate records kept of the key events in each individual transaction to ensure that items can be shipped within the applicable time?

     Remember:

Whether a seller makes a shipment representation or relies on the 30-day rule, its advertising should be unambiguous about when it will ship.

What About Shipment Representations in Sales Involving Credit Applications?

 If customers apply to a merchant to establish an in-house new credit account or increase an existing credit line to pay for the merchandise they order, the Mail Order Rule provides the following:

• If no shipment representation is made when the order is solicited, the merchant is allowed 50 (instead of 30) days to ship the order.  If a seller wishes to use this provision of the Ma,il Order Rule, it must have a reasonable basis to believe it can ship in 50 days.
• If no shipment representation when the order is solicited, the merchant must possess a  reasonable basis for being able to ship in that time, regardless of whether the order is accompanied by an application for credit or extension of a credit line.
• A merchant is presumed to have factored in the time needed to process the credit application or to have qualified any shipment representation appropriately.

When Do Fulfillment or Other Obligations Begin?

The Mail Order Rule provides that the "clock" on a merchant’s obligation to ship or take other action begins as soon as a "properly completed" order is received.  An order is properly completed when the correct full or partial (in whatever form you accept) payment is received, accompanied by all the information needed to fill the order.

Payment may be by cash, check, money order the customer’s authorization to charge an existing account (including one created for the customer), the customer’s application for credit to pay for the order, or any other method.  The Mail Order Rule provides that it is irrelevant when payment is posted or deposited, when checks clear, or when a merchant's bank credits its account.  The  clock begins to run when a properly completed order is received.

     Note:

If a customer’s check is returned or a customer is refused credit, the FTC Mail Order Rule stops the shipment clock.  It is reset at day one when the customer provides cash, the customer’s check is honored, or the merchant receives notice that the customer qualifies for credit.  At this point, a merchant may take the amount of time it originally stated to fulfill the order.

What Must a Merchant Do Upon Learning that it Cannot Ship on Time?

When a merchant learns that it cannot ship on time, it must decide whether it will ever be able to ship the order.  If not, the merchant must promptly cancel the order and make a full refund.  If a merchant decides that it can ship the order later, it must seek the customer’s consent to the delay.

A merchant may use whatever means it wishes to do this - such as the telephone, fax, mail, or email - as long as it notify the customer of the delay reasonably quickly.  The customer must have sufficient advance notification to make a meaningful decision to consent to the delay or cancel the order.

Some businesses adopt internal deadlines that are earlier than those set by the Mail Order Rule to ensure that their delay notices give all customers a meaningful opportunity to consent to the delay.  If businesses fail to ship or give delay notifications by their internal deadlines, they automatically cancel the orders and make refunds.

In any event, no notification to the customer can take longer than the time a seller originally promised or, if no time was promised, 30 days.  If a seller cannot ship the order or provide the notice within this time, it must cancel the order and make a prompt refund.

What Must the First Delay Option Notice Say?

In seeking a customer’s consent to delay, the first delay notice a merchant provides to the customer (the "delay option" notice) must include:

• A definite revised shipment date or, if unknown, a statement that the merchant is unable to provide a revised shipment date;
• A statement that, if the customer chooses not to wait, the customer can cancel the order and obtain a full and prompt refund; and
• Some means for the customer to choose to cancel at the merchant’s expense (e.g., by providing a postage prepaid reply card, toll-free telephone number, or website).

• The following information when a merchant cannot provide a revised shipping date: the reason for the delay; and a statement that, if the customer agrees to the indefinite delay, the customer may cancel the order any time until the merchandise is shipped.

If a merchant’s first delay option notice provides a definite revised shipping date of 30 days or less, the merchant must inform customers that their non-response will be treated as a consent to the delay.

     Example:

“We will be unable to ship the merchandise listed above until [date 30 days or less later than original promised time]. If you do not wish to wait, you may cancel your order and receive a prompt refund by calling our toll-free customer service number, (800) 555-1234. If we do not hear from you before we ship the merchandise to you, we will assume that you have agreed to this shipment delay. ”

*According to the FTC, many merchants add clarifying language such as "Remember, if you want the merchandise, don’t call."

If a merchant’s first delay option notice provides a definite revised shipping date of more than 30 days or states that it does not know when it will be able to ship, the merchant must tell customers that if they do not respond, the order will be cancelled automatically within the originally promised time plus 30 days.

     Example:

Suppose a merchant has a reasonable basis for being able to ship in 30 days and has chosen to make no shipment representation in advertising.  Within the 30 day period after the merchant receives the customer’s properly completed order the merchant learns that it cannot ship in time and, although the merchant believes it will be able to ship at some point, the merchant does not know when.  The merchant’s delay option notice to the customer might look something like this:

Because [explanation of backorder problem], we are unable to ship the merchandise listed above. We don’t know when we will be able to ship it.  If you don’t want to wait, you may cancel your order and receive a prompt refund by calling our toll-free customer service number, (800) 555-1234. If we do not hear from you and we have not shipped by [date 30 days later than original promised shipment time -- in this example, 60 days after receipt of the properly completed order], your order will be cancelled automatically and your money will be refunded.

If you do not want your order automatically cancelled on [date 30 days later than original promised shipment time], you may request that we keep your order and fill it later. If you do request that we keep your order and fill it later, you still have the right to cancel the order at any time before we ship it to you. You may use our toll-free number, (800) 555-1234, either to request that we fill your order later or to cancel it.

     Remember:

A merchant is required to explain the nature of the backorder problem only if it provides an indefinite revised shipment date.  This explanation should be detailed enough to permit the customer to judge what the possible length of the delay might be.

A merchant also has the option of seeking a customer’s affirmative agreement to the delay.  In any event, a merchant must indicate what will happen if the customer does not respond.

What Later Notices Must Say

If a merchant cannot ship the merchandise by the definite revised shipment date included in its most recent delay option notice, before that date the merchant must seek the consent of the  customers to any further delay.  A merchant must do this by providing customers a "renewed" delay option notice.  A renewed delay option notice is similar in many ways to the first delay option notice.

     One important difference:

The customer’s silence may not be treated as a consent to delay.

A renewed delay option notice must include:

• A new definite revised shipment date or, if unknown, a statement that a merchant is  unable to provide any date;
• A statement that, if the customer chooses not to wait, the customer can cancel the order immediately and obtain a full and prompt refund;
• A statement that, unless a merchant receives notice that the customer agrees to wait beyond the most recent definite revised shipment date and the merchant has not shipped by then, the customer’s order automatically will be cancelled and a prompt refund will be provided; and
• Some means for the customer to inform a merchant at the merchant’s expense (e.g., by providing a postage prepaid reply card, toll-free telephone number, or website) whether the customer agrees to the delay or is canceling the order.

• The following information when a merchant cannot provide a new definite revised shipping date: the reason for the delay; and a statement that, if the customer agrees to the indefinite delay, the customer may cancel the order any time until the merchant ships.

If a merchant has provided an appropriate and timely delay option notice and the customer agrees to an indefinite revised shipment date, no additional delay notices are required.

When You May Cancel an Order

Instead of seeking the customer’s consent to delay, a merchant can always cancel the order and send a refund.  In that case, a merchant must notify the customer and send the refund within the time the merchant would have sent any delay notice required by the Mail Order Rule.

When You Must Cancel an Order

A merchant must cancel an order and provide a prompt refund when:

• The customer exercises any option to cancel before a merchant ships the merchandise;
• The customer does not respond to a merchant’s first notice of a definite revised shipment date of 30 days or less, and the merchant has not shipped the merchandise or received the customer’s consent to a further delay by the definite revised shipment date;
• The customer does not respond to a merchant’s notice of a definite revised shipment date of more than 30 days (or a merchant’s notice that it is unable to provide a definite revised shipment date) and the merchant has not shipped the merchandise within 30 days of the original shipment date;
• The customer consents to a definite delay and a merchant has not shipped or obtained the customer’s consent to any additional delay by the shipment time the customer consented to;
• A merchant has not shipped or provided the required delay or renewed option notices on time; or
• A merchant determines that it will never be able to ship the merchandise.

     Example of a Delayed Order Scenario:

A merchant has a reasonable basis to be able to ship the merchandise in 30 days.  That being the case, the merchant makes no shipment representation in advertising.  When the prospective customer calls to place the order on July 1, nothing has happened to change the merchant’s belief that it can ship in 30 days, so in accepting the order the merchant provides no updated shipment information.  The merchant plans to ship the order by July 31.

On July 10, the merchant realizes it cannot ship by July 31.  Within a few days (reasonably quickly so the customer has time to make a decision), the merchant sends a delay notice with a revised shipment date.  Based on information such as customer demand for the merchandise and information the merchant recently received from its suppliers, the merchant reasonably believes that it will be able to ship 30 days from the original shipment date.  The revised shipping date the merchant provides in the delay notice is August 30, i.e., 30 days from July 31.  The merchant’s  delay notice explains that, unless the customer tells it otherwise, the merchant will assume that the customer is willing to wait for the merchandise until then.

Having heard nothing from the customer, on August 10, the merchant realizes that it will not be able to ship by August 30, so reasonably promptly the merchant sends a second delay option notice saying when the merchant now reasonably believes it will be able to ship.  The notice tells the customer that the order will be cancelled automatically on August 30 unless the merchant has already shipped by then or the customer expressly tells the merchant not to cancel.

How Fast Must a Refund be Made?

When a merchant must make a Mail Order Rule-required refund, the following applies:

• If the customer paid by cash, check, money order, or by credit where a third party is the creditor, or by any other method except credit where a merchant is a creditor, a merchant must refund the correct amount within seven working days after the order is cancelled.
• If the customer paid by credit where a merchant is the creditor, a merchant must credit the customer's account or notify the customer that the account will not be charged within one billing cycle after the order is cancelled.

How Much Must a Merchant Refund?

If a merchant cannot ship any of the merchandise ordered by the customer, a merchant must refund the entire amount the customer "tendered," including any shipping, handling, insurance, or other costs.  If a merchant ships some, but not all, of the merchandise ordered, a merchant  must refund the difference between the total amount paid and the amount the customer would have paid, according to the ordering instructions, for the shipped items only.

     Example:

If a merchant charges a flat fee for shipping and handling regardless of the total number or cost of the items ordered, it need not refund any shipping and handling charges if the merchant  ships some items.  On the other hand, if the merchant’s shipping and handling charges are indexed to the number of items or the dollar amount of the order, it can keep only those shipping and handling charges that are appropriate to the number or dollar amount of the items actually shipped.

May a Merchant Substitute Credit When Making a Refund?

When making Mail Order Rule-required refunds, a merchant cannot substitute credit toward future purchases, credit vouchers, or script.  When the order is paid for in whole or in part by proofs of purchase, coupons, or other promotional devices, a merchant must provide "reasonable compensation" to the customer for the proofs of purchase plus any shipping, handling, or other charges the customer paid.  The circumstances of each promotion may affect what is deemed to be reasonable.

Maintain Records

Maintaining up-to-date recordkeeping system can help show that a merchant is complying with the Mail Order Rule.  This is especially important because, in any action to enforce the Mail Order Rule, if a merchant cannot document its use of systems and procedures for complying, the Mail Order Rule provides that the merchant bear the burden of proving compliance.

A merchant’s documentation should provide answers to the following questions.

• Substantiation for shipment representations.  How is demand anticipated?  How is inventory monitored?  How is inventory acquisition coordinated with customer demand and order cancellation?  How are demand needs communicated to and met by buyers/suppliers/drop shippers?
• Fulfillment system.  How is the fulfillment system designed to meet the requirements of the Rule?  Are the delay option notices in compliance?  Does the customer’s active or passive exercise of any cancellation option result in a prompt refund response?
• Recordkeeping.  Are adequate records kept for each individual order demonstrating the date orders were received; the contents of and date a merchant provided any delay option notice; the date a merchant received any exercise of a cancellation option; the date of any shipment and the merchandise shipped; the date of any refund and the merchandise for which the refund was made?

If a merchant provides delay option notices by telephone, it may want to keep accurate records of the scripts uses.  To help document compliance with the Mail Order Rule, a merchant may find it useful to maintain a chronological record of all calls made, including the number from which the call is made, the called number, the party contacted, and the duration of the contact.

Statute of Limitations

The statute of limitations on actions to enforce the Mail Order Rule is three years for consumer redress and five years for civil penalties.  State statutes of limitations for individual customer or state actions are sometimes longer.  Check the state laws where you plan to do business.

What the Rule Does Not Cover

The following sales are exempt from the Rule:

• Magazine subscriptions (and similar serial deliveries), except for the first shipment;
• Sales of seeds and growing plants;
• Orders made on a collect-on-delivery basis (C.O.D.); and
• Transactions covered by the FTC’s Negative Option Rule (such as book and music clubs).

The Rule also does not cover services, such as mail order photo-finishing and other circumstances.

Why Should You Comply with the Mail Order Rule?

The ailure to ship on time, or failure to notify customers promptly about delays and to obtain their consent to the delays, or failure to make full and prompt refunds when customers do not consent to delayed shipment, can adversely affect business by discouraging repeat purchases.

Accordingly, most businesses regard compliance with the Mail Order Rule as simply good business practice.

Additionally, merchants who violate the Rule can be sued by the FTC for injunctive relief, monetary civil penalties and consumer redress.  When the mails are involved, the Postal Service also has authority to take action for problems such as non-delivery. State law enforcement agencies can take action for violating state consumer protection laws.

A recent $9.3 million FTC settlement is illustrative and the largest ever in a case of its kind.

According to the FTC, despite the merchant’s use of phrases like “Fast Shipping,” “2-Day Shipping,” and “Expect Your Items Quick!,” the company often failed to meet its shipping promises to consumers, and failed to meet the Mail Order Rule’s requirement that consumers must be notified of shipping delays and given the chance to cancel orders and receive prompt refunds.

The FTC alleges that the company violated consumers’ legal right to decide for themselves.  In addition, the complaint alleges that the company failed to refund consumers for the items it did not ship.  Instead, according to the FTC, it was the company’s policy to issue gift cards, which are not considered refunds under the Mail Order Rule. The company also allegedly failed to cancel orders and provide refunds when it did not offer consumers delay option notices.

The record-setting $9.3 million financial remedy provided compensation to consumers who received gift cards from the company when they should have received refunds.  The order also imposes court-enforceable provisions to ensure future Mail Order Rule compliance.

In addition, the company has to make affirmative disclosures about shipping times, implement procedures to ensure it is easy for buyers to cancel delayed orders, and stop its alleged policy of offering gift cards rather than refunds for unshipped merchandise.

$9,3M reasons why legal compliance with the FTC's Mail, Internet, or Telephone Order Merchandise Rule is critically important.