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Make a ‘free offer,’ and get liability for free

BY CSA STAFF

By David Zetoony, [email protected]

Nothing catches a customer’s eye quite like the word “free.” Perhaps that’s why so many retailers advertise that they are giving away another unit of a product (e.g., “buy one get the second free”); another product altogether (e.g., “buy X and get Y free”); a complimentary product (e.g., “free vase with purchase of flowers”); or, as is often the case with online sales, a free service (e.g., “free shipping,” “free rush delivery,” “free gift card,” or “free gift wrap”).

Although almost every retailer uses free promotions at some point in time, many retailers, including many national chain stores, are not aware of the state and federal rules that regulate how free offers can be made, and are surprised to learn that a free offer can lead to something that is certainly not free — a government investigation, a class action lawsuit, or, as happened earlier this summer to Staples and Office Max, a legal challenge from a competitor.

Although retailers should consult an attorney to determine if a specific promotion that they intend to run complies with the advertising laws (and for retailers that operate in more than one state the advertising laws of each state in which they operate), here are some general things to think about in terms of using free promotions.

Its not free if the customer pays more
You should not increase the price of the item that you are selling in order to recover any part of the cost of the item that you are giving away for free. This applies to situations in which you are giving away free products, and to situations in which you are giving away free services such as shipping. To avoid any allegation that a business has increased its price to recover the cost of the free product, consider pricing the product that you are selling at, or below, the lowest price that it was sold in the 30 days before the free promotion begins.

Terms* and conditions†
Any terms, conditions, or restrictions on the free offer must be clear and conspicuous. Avoid putting terms and conditions in a footnote, or in fine print, or as a website link; instead put them immediately next to the word “free.” Also be aware that imposing too many restrictions may be interpreted as inherently deceptive, and could lead to liability.

Timing is everything
If a free offer goes on for too long it begins to look like you are selling two products for one price as part of a combination or bundled offering. As a result, laws require that products not be permanently sold with a free give-away. For instance, some states require that retailers:

  • Wait a certain amount of time between using free offers with a product (e.g., 30 days);
  • Limit the number of free offers made each year in connection with a particular product (e.g., 3 per year);
  • Limit the total amount of time that a product is advertised with any free offer (e.g., no more than 6 months per year); and
  • Limit the number of units sold in conjunction with a free promotion (e.g., no more than 50% of sales).

Free or not free, there may be no in between
Be careful about trying to skirt the rules that govern the use of the term “free” by describing a promotion as being “like free” or “almost free.” The National Advertising Division of the Council for Better Business Bureaus, which is the premier arbitration body for advertising disputes, has taken the position that “merchandise is either free or its not” and that promotions which advertise something as “like free” are held to the same standard as promotions that advertise something as “free.”

Best practices
In order to ensure that a “free” promotion does not cause legal problems, consider taking the following steps:

  • Before running a free promotion ask your legal department, or general counsel, if the promotion complies with all of the applicable laws;
  • To make it easier to design free promotions in the future, keep a list of the promotions that have already been vetted for legal compliance. It is sometimes easier to recycle promotions that are known to comply, than to go through the process of confirming that a new promotion is compliant; and
  • Create a written procedure that provides information to marketers and copyrighters concerning the types of documentation that they should keep before, and after, running a free promotion.

David Zetoony defends national retailers in cases that involve advertising, marketing and privacy. He practices at the law firm of Bryan Cave LLP in Washington, D.C., and can be reached at [email protected] or 202-508-6030.

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Sears Holdings brings back Christmas Club card

BY CSA STAFF

HOFFMAN ESTATES, Ill. Sears Holdings announced that it is bringing back its Christmas Club card for Sears and Kmart shoppers.

“Sixty-seven percent of Americans feel guilty that they aren’t saving enough money, so we want to make it as easy as possible for them to budget and save for the upcoming 2010 holiday season,” said Susan Ehrlich, president of financial services for Sears Holdings.

 

When activated between now and Oct. 31, Christmas Club card users will earn a 3% reward — up to a maximum $100 — based upon the value they have on their cards on Nov. 15. The reward will be added to customers’ Christmas Club cards by Nov. 24. To activate cards or add additional value, customers can visit any Sears or Kmart store location, or online at www.sears.com/christmasclub or www.kmart.com/christmasclub.

 

Customers can start their Christmas Club cards with as little as $5, and can add value as often as they want at any one of Sears Holdings’ approximately 3,900 full-line and specialty retail stores, or online, the company reported.

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Blockbuster loss widens, reaches new forebearance agreement

BY CSA STAFF

DALLAS Blockbuster reported that total revenues for the second quarter of 2010 were $788 million, compared with total revenues of $982 million for the same period one year ago. Net loss for the second quarter of 2010 was $69 million, or 32 cents per share, compared with a net loss of $37 million, or 21 cents per share, in the second quarter of 2009.

The company announced that it has also reached a new forbearance agreement with noteholders who have, collectively, represented that they hold approximately 70% of the company’s 11.75% senior secured notes due 2014. The executing noteholders have agreed to forbear from exercising certain rights and remedies they may have under the indenture and related collateral documents arising from not receiving payments due under the senior secured notes on July 1. The forbearance period, under the new forbearance agreement, will expire on Sept. 30, unless earlier terminated in accordance with its terms, the company reported. The forbearance period may be extended upon written agreement by the parties.

Jim Keyes, chairman and chief executive officer of Blockbuster, stated, “We appreciate the continued cooperation of our senior secured noteholders and the other parties involved in our ongoing recapitalization efforts. While making progress, this extension allows additional time to complete these complex, multiparty negotiations. To take advantage of its unique multi-channel model and revitalize its global brand, Blockbuster will require an improved capital structure. Our objective is to complete a recapitalization as soon as possible so we are better positioned to focus our attention and resources on the strategic opportunities to continue our business transformation.”

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