California Defendants to Pay Redress for Charging Consumers "Restocking Fee" for Delayed or Unshipped Merchandise

The Federal Trade Commission today announced a proposed consent decree with Dynamic Wheels and Tires, Inc., a California-based seller of fancy automobile wheels, rims, and tires, and Gary Jerjerian, the company's owner and manager. The consent decree would resolve FTC allegations that Dynamic and Jerjerian violated the FTC's Mail or Telephone Order Merchandise Rule (Mail Order Rule) by charging consumers a 20 percent "restocking fee" after consumers cancelled their telephone orders because of delayed shipments, or after consumers refused to pay inflated prices for their completed orders and the company decided not to ship at all. The order requires Dynamic and Jerjerian to pay consumers the difference between what they paid and the amount that Dynamic already has refunded to them, and requires them to comply with the Rule in the future.

According to the complaint, Dynamic and Jerjerian violated the Mail Order Rule by making unsubstantiated shipment representations, failing to provide delay option notices in delayed shipment situations, and failing to make full refunds to consumers when the Rule so required.

"Merchants who fail to meet their shipping promises must offer their consumers a full refund," said FTC Bureau of Consumer Protection Director J. Howard Beales, III. "This case demonstrates that consumers who are looking for deals on wheels don't have to deal with inflated prices and a lot of hot air."

The Commission's Complaint

According to the FTC, Dynamic advertised fancy automobile wheels, rims, and tires in magazines and on the Internet, providing a phone number consumers could call to place their orders. Although Dynamic's advertising stated, "Prices subject to change without notice," and "All returns or cancellations are subject to a 20 percent restocking fee," Dynamic's representatives told consumers responding to the ads that the merchandise was in stock at stated prices and that the company would ship the orders in time for delivery within seven to 10 business days. In fact, the complaint alleges that they often did not have the goods in stock and when they made these representations, and so they lacked any reasonable basis for their shipment representations.

Moreover, the complaint alleges that when Dynamic failed to ship the merchandise in the promised time, it also failed to send the consumer a notice of delay containing a revised shipment date and the option to cancel the order and obtain a prompt and full refund, as the Rule requires. Having failed to provide the delay option notice in time, the Rule requires that the merchant automatically cancel the order and send the consumer a full and prompt refund. Instead, when consumers cancelled the unshipped orders because of the delay, the complaint alleges that the company refunded what the consumers paid less 20 percent of the sale price as a "restocking" fee.

In addition, the FTC alleged, in some cases, after accepting the consumers' properly completed orders, which included payment in the stated amounts, the company told the consumers that it would not ship the merchandise unless the consumers paid more than the stated amounts. The complaint alleges that when the consumers refused to pay more than they originally agreed to pay, the company cancelled their orders. Whenever a merchant decides not to ship a properly completed mail or telephone order, the Rule requires the merchant to cancel the order and make a full and prompt refund. Instead, Dynamic allegedly discounted their refunds 20 percent of the sale price as a "restocking" fee.

The Proposed Consent Decree

The consent settlement reached with the Commission and filed on its behalf by the DOJ today imposes a $200,000 civil penalty judgment on the defendants, which will be suspended due to their financial situation. In addition, the defendants are 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. The defendants subsequently must report their redress activities to Commission staff.

The settlement permanently 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 delay; and 3) provide full and prompt refunds in all situations in which the Rule requires a refund.

The Better Business Bureau of the Southland assisted the FTC staff in its investigation.

The Commission vote to forward the complaint and consent decree to the Department of Justice for filing on its behalf was 5-0. They were filed in U.S. District Court in the Central District of California on September 30, 2002.

(FTC Matter No. 012-3061; Civ. No. 02-7603)