California Defendants to Provide Redress for Charging Consumers a "Cancellation" Fee for Delayed Shipments

The Federal Trade Commission today announced a consent decree with a California-based aftermarket automobile accessories seller resolving charges of violating the FTC's Mail or Telephone Order Merchandise Rule by making unsubstantiated shipment representations and failing to provide consumers with timely and complete delay notices. The Commission also alleged that the defendants violated the Rule by substituting merchandise that was materially different from what consumers ordered without the consumers' prior consent, and by charging consumers a 20 percent "cancellation" fee when consumers cancelled because of delayed shipment.

Under the terms of the consent decree, filed by the Department of Justice (DOJ) on the FTC's behalf, the defendants, Charles Smith, Damian Smith, and Kymberli Smith, doing business as Salesco, will pay a $15,000 civil penalty, will provide redress to consumers whose refunds were discounted in violation of the Rule, and will be required to comply with the Rule in the future.

"The Mail or Telephone Order Merchandise Rule guarantees that consumers get what they ordered -- and get it when it was promised," said FTC's Bureau of Consumer Protection Director Howard Beales. "The FTC expects catalog, telephone, and Internet retailers to deliver the goods as required by law, not only because it's good business, but because it enhances consumer confidence."

An unincorporated business based in San Dimas, California, since 1995, Salesco has sold automobile accessories including audio equipment, seat belt extensions, canopies, chrome plated wheels, dashboards, seats, carpet kits, and car covers to consumers throughout the United States via mail order, telephone, and the Internet. The FTC's Mail or Telephone Order Merchandise Rule covers - in addition to orders by mail - orders by any "direct or indirect" use of the telephone, including orders by Facsimile or the Internet.

The Commission's Complaint

According to the Commission's complaint, the defendants violated the FTC's Mail or Telephone Order Merchandise Rule over a two-and-a-half year period in numerous transactions by making unsubstantiated shipment representations and failing to provide timely and complete delay notices to consumers. The defendants allegedly failed to keep records demonstrating Rule compliance, including inventory records and records relating to shipment. When shipment delays occurred, they often failed to notify consumers of the delay. In the instances in which they did notify consumers of delays, the FTC alleges, the notices failed to include a revised shipment date or the statement that the consumers could cancel and obtain prompt, full refunds, as required by the Rule.

The FTC's complaint alleged that when consumers contacted the company in response to Salesco's Internet advertising, the defendants allegedly told them that the advertised merchandise was "in stock" and would ship within a certain time. In fact, the complaint alleged, the merchandise was often not in stock. On such occasions, defendants would, without the consumers' prior consent, ship items that were materially different from what they had ordered. Consumers dissatisfied with these substitutions had to pay to return them.

On other occasions, the defendants charged consumers who cancelled because shipment had been delayed beyond the promised shipment time a 20 percent "cancellation" fee. The complaint alleges that the practice of unilaterally substituting merchandise that is materially different from the merchandise ordered by consumers by mail or telephone, and the practice of failing to provide full refunds when consumers cancel their mail or telephone orders because of delayed shipment, both violate the FTC's Mail or Telephone Order Merchandise Rule.

The Consent Decree

The settlement includes a $200,000 civil penalty against the defendants, all but $15,000 of which will be suspended due to their financial situation. In addition, the defendants will be required to compile (from their business records and other information) a list of consumers whose refunds were discounted and to provide them with full refunds. These redress activities must subsequently be reported to Commission staff.

The settlement enjoins the defendants from failing to comply with the Rule in the future, including failing to: 1) have a reasonable basis for their shipment representations; 2) provide timely and compliant notification of delays; and 3) provide full and prompt refunds in all situations in which the Rule requires a refund. It also enjoins the defendants from substituting materially different mail or telephone order merchandise without the consumer's prior express consent. In situations in which consumers authorize the defendants to ship materially different merchandise, the defendants will be required to offer them the right to return the merchandise within a reasonable time at the defendants' expense.

The consent decree requires the defendants to keep specific detailed records of their systems and procedures for complying with the Mail or Telephone Order Rule. Finally, the consent contains other recordkeeping, reporting and compliance requirements to which the defendants must adhere.

The Commission vote to forward the complaint and consent decree to the Department of Justice for filing was 5-0. It was filed in the Federal District Court for the Central District of California. FTC staff was assisted in its investigation by the Better Business Bureau of the Southland.

NOTE: The Commission authorizes the filing of a complaint when it has "reason to believe" that the law has or is being violated, and it appears to the Commission that a proceeding is in the public interest. A complaint is not a finding or ruling that the defendants have actually violated the law. This consent decree is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent decrees have the force of law when signed by the judge.

Copies of the complaint and consent decree are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. 002-3163; Civil Action No. 01-10962NM(pjwx))