| MICHAEL R. STILES United States Attorney By: Assistant United States Attorney IN THE UNITED STATES DISTRICT COURT UNITED STATES OF AMERICA, Plaintiff v. CDnow, Inc., and CDnow Online, Inc. Defendants. Civil Action No. _______________
Plaintiff, the United States of America, acting upon notification and authorization to the Attorney General by the Federal Trade Commission ("Commission"), for its Complaint alleges that: 1. Plaintiff brings this action under Sections 5(a)(1), 5(m)(1)(A), 13(b) and 16(a) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 45(a)(1), 45(m)(1)(A), 53(b) and 56(a) to obtain monetary civil penalties and injunctive and other relief for defendants' violations of the Commission's Trade Regulation Rule Concerning the Sale of Mail or Telephone Order Merchandise (the "Mail Order Rule" or "Rule"), 16 C.F.R. Part 435. JURISDICTION AND VENUE 2. This Court has jurisdiction over this matter under 28 U.S.C. §§ 1331, 1337(a), 1345, and 1355, and under 15 U.S.C. §§ 45(m)(1)(A), 53(b) and 56(a). This action arises under 15 U.S.C. § 45(a)(1). 3. Venue in the Eastern District of Pennsylvania is proper under 15 U.S.C. § 53(b) and under 28 U.S.C. §§ 1391(b-c) and 1395(a). DEFENDANTS 4. Defendant CDnow, Inc. is a Pennsylvania corporation with its principal place of business located within the Eastern District of Pennsylvania at 1005 Virginia Drive, Fort Washington, PA 19034. Defendant CDnow, Inc. transacts business in the Eastern District of Pennsylvania. 5. Defendant CDnow Online, Inc. is a Pennsylvania corporation with its principal place of business located within the Eastern District of Pennsylvania at 1005 Virginia Drive, Fort Washington, PA 19034. CDnow Online, Inc. is a wholly-owned subsidiary of CDnow, Inc. and is CDnow, Inc.'s sole operating entity. CDnow Online, Inc. transacts business in the Eastern District of Pennsylvania. DEFENDANTS' COURSE OF CONDUCT 6. CDnow, Inc. was incorporated in 1994. CDnow, Inc., through CDnow Online, Inc., has engaged in the offer and sale of compact discs ("CD's"), cassettes, vinyl albums, music videos, movies, and other music-related items via an Internet website found at www.cdnow.com. (Hereafter, the defendants shall collectively be referred to as "CDnow"). Customers who access the website are able to, inter alia, search for products by artist, record title, or movie producer, and to browse by various music and performance categories. Customers who want to place orders select a particular product and place it into a "shopping cart." 7. At the time of order placement, CDnow informs its customers by a notation in their personal Shopping Cart that an item is either in stock or backordered. CDnow states that, except in rare instances, an item noted as in stock will ship immediately. For backordered items, CDnow sometimes gives a particular time frame for shipment, e.g., "backorder, usually ships in 2-3 days." At other times, CDnow simply states that an item is on "backorder" and refers the customer to a standard backorder shipment representation of 1-4 weeks for domestic items, and 2-4 weeks for foreign items. 8. CDnow issues order confirmations to customers within minutes of a customer having completed an order. These order confirmations reflect the same item availability status that was indicated on a customer's shopping cart page. Within 2-3 days of order completion, CDnow informs customers by e-mail if an in stock item they ordered turns out to be on backorder. Otherwise, customers will only receive notification from CDnow regarding backorder status at 30 days after order completion. CDnow customers are informed that they may check the status of an order at any time by visiting the customer's personal online Order History page. 9. In numerous instances, defendants failed to ship merchandise within the stated time period, failed to send customers notifications about delays in a timely fashion, and sent notices that did not properly inform customers about their rights. 10. In numerous instances, defendants failed to ship delayed merchandise within the new time period that was provided, failed to send new notifications in a timely manner, and sent new notifications that did not properly inform customers about their rights. 11. For customers who paid by check or money order and who canceled their delayed orders, CDnow provided a credit towards their next order. If customers preferred to receive a refund check, they had to request one by accessing the Contact CDnow web page after the credit had been placed in the customer's account. THE MAIL ORDER RULE 12. The Mail Order Rule was promulgated by the Commission on October 22, 1975, under the FTC Act, 15 U.S.C. § 41 et seq., and became effective February 2, 1976. The Commission amended the Rule on September 21, 1993, under Section 18 of the FTC Act, 15 U.S.C. § 57a, and these amendments became effective on March 1, 1994. The Rule applies to orders placed by telephone, facsimile transmission, or on the Internet. VIOLATIONS OF THE MAIL ORDER RULE 13. Beginning in 1994, defendants have engaged in the mail order sale and telephone order sale of merchandise in commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44. 14. In numerous instances, after having solicited mail orders and telephone orders for merchandise and received "properly completed orders," as that term is defined in Section 435.2(d) of the Mail Order Rule, 16 C.F.R. § 435.2(d), and having been unable to ship some or all of the ordered merchandise to the buyer within the Mail Order Rule's applicable time, as set forth in Section 435.1(a)(1) of the Mail Order Rule, 16 C.F.R. § 435.1(a)(1) (the "applicable time"), defendants have:
15. Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), provides that "unfair or deceptive acts or practices in or affecting commerce are hereby declared unlawful." 16. Pursuant to Section 18(d)(3) of the FTC Act, 15 U.S.C. § 57a(d)(3), a violation of the Mail Order Rule constitutes an unfair or deceptive act or practice in violation of Section 5(a)(1) of the FTC Act, 15 U.S.C. § 45(a)(1). CIVIL PENALTIES AND INJUNCTION 17. Defendants have violated the Mail Order Rule as described above with knowledge as set forth in Section 5(m)(1)(A) of the FTC Act, 15 U.S.C. § 45(m)(1)(A). 18. Each sale or attempted sale, during the five years preceding the filing of this Complaint, in which defendants have violated the Mail Order Rule in one or more of the ways described above constitutes a separate violation for which plaintiff seeks monetary civil penalties. 19. Section 5(m)(1)(A) of the FTC Act, 15 U.S.C. § 45(m)(1)(A), as modified by Section 4 of the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. § 2461, and Section 1.98(d) of the FTC's Rules of Practice, 16 C.F.R. § 1.98(d), authorizes this Court to award monetary civil penalties of not more than $11,000 for each such violation of the Mail Order Rule. 20. Under Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), this Court is authorized to issue a permanent injunction against defendants' violating the FTC Act. PRAYER WHEREFORE, plaintiff requests this Court, pursuant to 15 U.S.C. §§ 45(a)(1), 45(m)(1)(A), 53(b) and 57b, and the Court's own equitable powers to:
DATED: FOR THE UNITED STATES OF AMERICA: DAVID W. OGDEN MICHAEL R. STILES By: Assistant U.S. Attorney EUGENE M. THIROLF By: Attorney OF COUNSEL: ELAINE D. KOLISH HEATHER A. HIPPSLEY PHYLLIS HURWITZ MARCUS |