AN INTRODUCTION TO CONSUMER PROMOTIONS AND DIRECT MARKETING: LEGAL ISSUES
© 2002 By Jacob P. Bryniczka
PURPOSE:
The purpose of this presentation is to expand and refresh the knowledge of promotion and direct marketing professionals about legal issues affecting them and their clients. Although an overview of the legal issues generally affecting promotions will be presented, some emphasis will be given to laws and regulations specifically aimed at the direct marketing of services and products through various means. The objective is not to make everyone legal experts, but to make everyone at least recognize potential legal issues and know enough to contact legal counsel before proceeding further with a promotion concept or marketing assignment.
SCOPE:
Because of time and space limitations, this presentation will cover the general rules governing typical promotions that everyone working in the industry should know. Whenever possible, rules particularly aimed at the direct marketers will be identified and "red flagged." Some attention will be given to the FTC's Mail Order Rule, sales taxes, and other issues affecting customer loyalty programs, catalog sales, and premium offers. Specially regulated industries, such as alcohol, tobacco and dairy, will be identified and only a brief sampling of the special regulations given. At best, this presentation will provide an introduction to legal issues and identify the sources available, which can help make promotions comply with applicable laws.
THE PRESENTATION:
A. LEGAL EFFECT OF CONSUMER OFFERS:
All offers to consumers (eg. coupons, mail-in certificates, chance or skill promotions, self-liquidating offers (“SLOs”), rebates, etc.) can become contracts that are legally binding on both parties. The offer to consumers must be understandable and completeB deceptive, incomplete, or vague offers will generate legal problems for your clients. FULL DISCLOSURE of all material terms and conditions are required. Courts and regulators will hold the sponsor (your client) responsible for any consumer confusion or deception and enforce the contract to favor the consumer. Individual suits by consumers or class action lawsuits by groups of consumers can also be used punish and harass sponsors of deceptive, incomplete or sloppy offers.
B. WHO POLICES CONSUMER OFFERS?
Federal legislation is broad and the number of agencies which could become involved include: Federal Trade Commission, Department of Justice; U.S. Postal Service; Bureau of Alcohol, Tobacco & Firearms; Food & Drug Administration; US Customs; and others. All states have legislation and administrative agencies protecting consumers and regulating businesses. State regulators could include: attorneys general, consumer protection departments, alcohol beverage control departments, dairy and environmental control commissions. In certain instances the consumers (or groups of them) could initiate lawsuits in federal and state courts. Fines, penalties, settlements, or judgments imposed by regulators or by the courts could cost offenders thousands or even millions of dollars. In the case of highly regulated industries such as beverage alcohol, penalties could include temporary suspension or even revocation of an alcohol manufacturer’s license to sell.
C. TYPES OF CONSUMER OFFERS or PROMOTIONS/ laws affecting them
1. "Free" Offers and "Cents-Off" offers/coupons:
Because they have historically been one of the most abused offers, the federal government and most states (even New York City) have laws and regulations governing "free" offers. Both the FTC and FDA have separate and extensive regulations governing "free" and "cents-off" offers. Both sets of federal regulations require that any material terms, limitations, or conditions affecting the offer be "in close conjunction" with the first and most prominent use of the word "free" or with the announcement of the "cents-off"offer. In the case of "free" offers, such material terms, limitations or conditions must be in a type size not less than one third (1/3) of the size of the largest type size used for the word "free" in the materials making the offer. In practice, these regulations do not permit the asterisk and "mice-type" conditions/limitations copy at the bottom of -or hidden in- the offer materials (eg. free standing inserts (“FSIs”), ads, store displays).
The "cents off" regulations specifically cover "introductory," "buy one get one free," and similar offers which suggest that products will be offered for discounted prices or less than normal prices. Maximum durations and frequencies of such offers are set forth in these "cents off" regulations and manufacturers are required to keep pricing records to demonstrate that the special, introductory, or "cents off" prices are, in fact, lower than normal prices at which the products are sold.
As with all consumer offers, the expiration date of these offers must be prominently set forth. Whenever possible refer to the coupon checklist developed by our firm to insure that the required elements are included in your clients' "free"offers or "cents-off" offers.
In at least two regulated industries, the dairy and alcohol industries, rebates and coupons offering “cents off,” “free” products, and similar discounts are subject to special restrictions and are sometimes are prohibited. State dairy regulators often prohibit coupons or other offers which could or do result in sales of specified dairy products below cost. The dairy laws and regulations of each state must be consulted to determine affected products and local rules. State alcohol regulators also enforce laws and regulations that severely limit the use of free, cents off or similar coupon offers.
2. Merchandise, premium, catalog, and similar consumer offers:
Because of abuses, the FTC adopted a "Mail Order Rule" to strictly govern offers of any sort to consumers which contemplate that merchandise ordered by the consumers will be mailed to them. If the transaction is finalized by mail, the Rule applies. Consequently, the FTC Rule applies where consumers redeem points from "loyalty programs" (e.g., Amex Rewards), redeem proofs of purchase (with or without accompanying cash) for premiums/merchandise, or select items from a catalog, direct mail offer, shopping TV channel, or site on the Internet and have the items mailed to them. The mail order rule can even be applied to control the amount of time in which sweepstakes prize fulfillment must take place. Some basic provisions of the Mail Order Rule include:
a. The consumer must be informed in written offer materials of the date by which the mail order will be shipped ("shipping date"). This shipping date must have been set using some reasonable basis.
b. If no shipping date stated in the offer, the Rule requires that the order be shipped within 30 days of the date the order is properly completed, payment/requirements fulfilled and sufficient shipping information provided by the consumer.
c. As soon as it is determined that a delay in shipping will occur the Rule requires the sponsor to send a first notice in writing which gives the customer notice of the delay, the new shipping date, and the right to either consent to the delay (by not responding) or cancel the order and receive a prompt refund of money paid (by signing and returning the cancellation election included in the notice). This "option notice" must be sent before the announced original shipping date or within 30 days of the completed order if no shipping date was announced. The Rule sets forth the proper content of the "option notice"- it requires a statement that the customer's order will be automatically canceled if the item is not shipped within 30 days of the original shipping date.
d. If the item cannot be shipped on or before the delayed/revised shipping date, the consumer must be sent a second notice (i.e., a "renewed option" notice) informing him that if he does not agree in writing to a further delay in shipping, his order will be canceled. To keep the order alive the consumer must return in writing his consent to a further delay.
e. The FTC Mail Order is comprehensive and could cause substantial penalties to be levied. For example, the Mail Order Rule was applied to a pet food manufacturer’s "proof-of-purchase” coupon offer where this pet food manufacturer was required to pay $90,000 to settle FTC charges that it violated the Mail Order Rule. Violation of the Mail Order Rule stemmed from the manufacturer’s failure to ship promotional merchandise in a timely manner, to advise consumers of the cancellation rights and to issue prompt refunds in connection with promotional items purchased in whole or in part with proof-of-purchase coupons or labels.
3. Direct Mailing of Unordered Merchandise as Free Samples:
It is NOT legal to send unordered merchandise through the mails. The federal unordered merchandise laws, however, do permit two kinds of unordered merchandise to be legally sent through the US Mail without the consumer's prior consent:
a. free samples that are clearly marked as such; and
b. merchandise mailed by charities seeking contributions.
The law provides that consumers may consider unordered merchandise as free gifts which they are not obligated to return or pay for.
Federal laws include a special chapter called "Nonmailable Matter." Among the items listed as "nonmailable" are: contraceptive devices or information, unsealed or improperly sealed items containing any fragrances, "household items" which do not comply with the "child resistant packaging" rules, perishable items, items exceeding mail size and weight limits, or any other item whose mailing, possession or use is restricted or prohibited by law. Consequently, caution must be applied where regulated or dangerous or poisonous product samples are part of a direct mailing. For example, alcohol and tobacco product samples should not usually be sent through the mail. Also, free samples of certain pills or medicines must be carefully screened and checked as to “mailability” with the US Postal Service and/or FDA.
4. Chance Promotions:
Recent Developments: The direct mail industry's use of chance promotions has in recent years become strictly regulated by new federal and state laws. The American Family Publishers case and similar complaints filed with or by federal and state authorities led to the introduction and adoption of very restrictive legislation at both the federal and state levels. In 1999 the U.S. Congress passed "The Deceptive Mail Prevention and Enforcement Act." This federal law and similar new state laws place special disclosure requirements upon direct mail chance promotions. Bold print disclosures are often required- stating not only that "no purchase is required" but also stating that "a purchase will not in any way increase your chances of winning." This restrictive legislation is clearly designed to combat the blatant abuses and deception employed by some prominent direct mail sponsors of chance promotions (e.g., Publisher's Clearing House, Readers' Digest, et al.). However, such legislation is broad enough to adversely affect any chance promotions offered by direct mail to a named individual.
All federal and state laws prohibit "lotteries." An illegal lottery consists of 3 elements: prize, chance and consideration. In order to be legal, a chance promotion must not require consideration (e.g., purchase) in order for a consumer to participate fully. What is sufficient "consideration" to make a chance promotion turn into an illegal lottery is often not clear and hotly debated. For example, the requirement of multiple store visits in order to participate has been found by some regulators to be "consideration." To be legal, a chance promotion must offer, and give equal dignity (status) to, the "no purchase necessary" means of entering. Typically this means a "no purchase" 3”x 5” card mail-in entry or a toll free 800 number means of entry. Until very recently, some state regulators required even Internet only chance promotions to offer mail-in or 800 number entries—but, with the expansion of computer/ online access these alternative means of entry are no longer required for Internet only promotions.
Other laws and Regulations: The new restrictions aimed at direct mail sweepstakes will supplement existing federal and state laws regulating chance promotions. Most laws already require a prominent statement of such things as: the no purchase means of entry, the value/description of prizes, how winners are selected (random drawings or winning game piece), the odds of winning, the name and address of the Sponsor, where winners' lists can be obtained, and whether unclaimed prizes will be awarded. Long standing FTC regulations state that, in the case of “instant win,” game piece type chance promotions, all game pieces must be randomly and secretly mixed, seeded, and distributed ( with sufficient pieces held back for mail-in entrants) so that no one knows the location of any winning game pieces. Recent attempts to guarantee "winners in every chain store or market" or attempts to seed grand prize winners through "reverse shop lifting" of the products containing game pieces are patently illegal and contrary to FTC statements on the subject.
Game registration and bonding: Each chance promotion where the prize pool exceeds $5,000 is subject to advance registration and bonding in the states of New York and Florida. Retailer involvement requires registration also in Rhode Island. The amount of the bond posted in New York and Florida depends on the total value of all prizes offered (and whether the client has successfully conducted prior promotions). In New York 30 days advance registration is required. The registration process requires a full disclosure of the Official Rules of the promotion. (The Official Rules are considered the Sponsor’s contract with the participating consumer.) Once the Rules are filed and/or offered to consumers, they cannot be changed. Careful planning and drafting of such Official Rules with qualified legal counsel is, therefore, highly recommended.
Regulated Industries: Additional and special restrictions apply to chance promotions sponsored by alcohol or tobacco manufacturers. For alcohol beverage sponsored chance promotions, most states restrict the type of chance promotions which can be offered and many require, in advance, “prior approvals” by the state alcohol beverage control (“ABC”) regulatory bodies. By limiting the dollar value (e.g., 25 cents for beer) of what can be given as a gift or a prize to consumers of alcohol products, California has, in effect, prohibited the use of chance promotions, skill contests and other promotions in connection with the marketing of alcohol products in that state. Again advance planning with competent legal counsel is crucial to avoiding the regulatory traps.
5. Skill Contests:
The advantage of skill contests is that consideration/purchases can be required from the consumer in order to participate, with the exception of MD and VT residents. The skill must be recognizable and measurable (for example: an essay, photograph, recipe, song contests). Judging criteria and independent judges must be provided. Contest rules must be carefully drafted and reviewed to prevent disputes or any allegations that the promotion, because chance plays the largest part in determining the ultimate winner, is not a true skill contest, but an illegal lottery. As a "rule of thumb" do not let chance determine in any way (even for tie-breaking) the winner of a skill contest if a purchase (eg. proof of purchase or other consideration) is required to enter. Skill contests in connection with the sale of alcohol products are banned in some states such as Texas.
6. Customer Loyalty Programs:
These "loyalty" programs have grown dramatically in popularity since the beginning of "frequent flyer rewards" programs. Offering loyal consumers "added value" without additional cost by assigning redeemable points related to their purchases is very attractive. Not unlike the trading stamps of an earlier era, these customer loyalty programs are used by various sponsors outside the airline industry and offer the redemption of "loyalty points" for desirable merchandise produced by third parties. Although no one has yet suggested that such programs should be registered and bonded under the old state trading stamp laws (to insure consumers of proper redemption of their points), many operators of such loyalty programs are running into legal and practical problems in administering the programs and getting consumers to redeem points. Redemption of points is desirable because the Sponsor's exposure to future claims is diminished with each redemption.
Here are the potential legal issues and problems to consider when suggesting or administering such programs:
a. Technically the "points" are things of value and cannot be required to be surrendered in order to enter a chance promotion-- unless a clear "no purchase necessary" means of entry is provided. As things of value such "points" may be found to be subject to state laws related to trading stamps, escheat of unclaimed assets, sales taxes, and barter.
b. The terms and conditions of the entire "customer loyalty" program must be carefully planned and fully disclosed to the targeted consumers in advance of assigning points; keep in mind that once established the "terms and conditions" are difficult, if not impossible, to change, especially if the changes diminish the rights of the consumers or the use of the points.
c. To avoid staggering future liabilities to point holders and long term administration costs, such programs should have point expiration dates and "use them or lose them" restrictions so that consumers know that they must use the points by a certain date and that, if they don't have enough by that date, they may lose them.
d. Assume that all state and federal laws related to merchandise sales apply to the program, including the FTC Mail Order Rule, sales and use taxes, consumer protection laws, etc.
e. Always reserve the right of the sponsor of the program to change or terminate the program upon advance notice to participating consumers.
f. As with other promotional offers to consumers, loyalty programs are contracts with the participating consumers and the courts / regulators will interpret any vague or incomplete provisions against the sponsor and for the benefit of the consumer.
CONCLUSION:
As noted at the beginning, this presentation is only an introduction to the vast array of legal issues that arise in the promotion and marketing industry. Understandably there are a number of important subjects that were not addressed. Some of these other subjects include: 1. Contracts with clients, suppliers, tie-in partners, free-lancers, actors and others; 2. Trademarks, service marks, copyrights and other intellectual property or rights, such as the rights of publicity and privacy; and, 3. Proper presentation, administration, execution and fulfillment of consumer offers and promotions, including the drafting of terms & conditions and “official rules,” awarding or delivering prizes and premiums. Depending on the promotion or marketing program involved, experienced legal counsel can render advice on these and other subjects and help ensure that the program will be in compliance with the unique and varied laws affecting your industry. In short, plan to consult knowledgeable legal counsel when promotions and direct marketing programs are being developed.
May 2002
Copyright 2002 Jacob P. Bryniczka of Wake, See, Dimes, Bryniczka and Bloom
Footnote: Mr. Bryniczka has represented clients in the promotion and marketing industry for 30 years. Since 1984, he and his firm have served as general legal counsel to D.L. Ryan Companies, Ltd. (“Ryan Partnership’). Over the years Mr. Bryniczka has prepared and given presentations to various audiences on the laws affecting the promotion and marketing of consumer products, including a 1995 presentation to Canadian lawyers in Toronto sponsored by the Ontario Bar Association and a March 2002 presentation ( with Attorney Russell Ferguson of WSD&B) on the legal issues involved in the promotion and marketing of alcohol products for employees of a prominent beer manufacturer and its promotion agencies.
