FTC Reaches $9.3 Million Settlement With Fashion Nova for Violation of Mail Order Rule

Advertising Law

On April 21, 2020, the FTC reached a proposed settlement with Fashion Nova, an American fast fashion retail company, for failing to ship merchandise in a timely manner without notifying customers and giving them an opportunity to cancel their orders. Fashion Nova also provided gift cards as compensation for unshipped merchandise, instead of providing refunds.

The FTC’s Mail, Internet, or Telephone Order Merchandise Rule (the Mail Order Rule, or Rule) applies to merchandise sold to customers online, by mail or by phone. Under the Rule, a retailer is prohibited from soliciting sales that it cannot reasonably expect to ship within a stated time or, if no time is stated, within 30 days. If a retailer is unable to ship merchandise by the stated shipment date, it must inform the customer and receive customer consent for the delayed shipment, or offer a prompt refund.

Fashion Nova allegedly violated the Mail Order Rule by advertising “Fast Shipping,” “Free 2 Day Shipping on all U.S. Orders $75 and Up,” “Fast Canada Shipping Only $10,” “Fast International 6-10 Shipping Only $15” and “Expect Your Items Quick!” throughout its website when, in fact, the retailer regularly failed to meet these express shipping promises and neither notified customers of shipping delays nor gave them the chance to cancel orders in exchange for a refund.

The FTC further alleged that the retailer failed to refund customers for items that were not shipped, issuing gift cards instead. Under the Rule, a seller’s refund obligations are enumerated based on the buyer’s method of payment. For nonenumerated payment methods, sellers can provide refunds in the form of cash, check or money order, or sellers can provide refunds using the same method that the customer used. Offering a gift card or store credit is not considered a refund under the Rule.

The proposed settlement requires Fashion Nova to pay between $7.04 million and $9.3 million to the FTC for use in refunding customers who were harmed by the retailer’s actions, and $2.26 million to be refunded directly by the retailer to customers. Customers who received gift cards in lieu of a refund will also be eligible for refunds. The retailer is further prohibited from violating the Rule in the future and must ship goods within one day of receipt of an order unless a shipping date is otherwise specified.

Find the FTC’s Mail Order Rule here.

Find the Complaint here.

Find the Proposed Consent Order here.

Why it matters: The settlement with Fashion Nova comes on the heels of a similar investigation and settlement that saw Fashion Nova reach a $1.75 million deal with prosecutors in four counties in California in December 2019, after repeatedly running afoul of a state law that requires companies to ship orders to consumers within 30 days. In furtherance of that settlement, Fashion Nova agreed to pay $250,000 in restitution to the customers affected, along with $1.5 million in penalties and costs in order to shake the charges brought against it by the district attorneys of Los Angeles, Alameda, Napa and Sonoma counties.

Companies should ensure that they have a reasonable basis for all shipping representations, communicate with consumers and otherwise comply with the Mail Order Rule. Andrew Smith, director of the FTC’s Bureau of Consumer Protection, stated that “Online retailers need to know that our Mail Order Rule requires them to notify customers in the event of shipping delays and offer the right to cancel with a full refund—not just a gift card or a store credit.”

E-commerce retailers should keep a rigorous schedule and calendar for shipping orders. If they cannot fulfill orders in the time promised on their website, and in any event within 30 days, it is crucial to comply with the Mail Order Rule requirements for notification of cancellation rights. The ins and outs of Mail Order Rule compliance can be tricky, especially when dealing with preorder sales and backorders. However, understanding the requirements of the Mail Order Rule takes on new significance for online retailers during this time of significant supply chain disruptions, which can result in delays in fulfillment. The Fashion Nova case shows the potential exposure in violating these requirements.

For those unfamiliar with the FTC’s Mail Order, here is a quick primer to assist with your compliance with the Mail Order Rule.

A. Reasonable Basis for Shipping Representations

An advertiser must have a “reasonable basis” for any express or implied shipping representation. Under the Mail Order Rule, if the advertiser makes no shipping representation or the shipping representation is not clear and conspicuous, the advertiser must have a reasonable basis for believing that it can ship the merchandise within 30 days of receipt of an order. The 30-day period begins when the order is completed. An order is considered completed when the advertiser receives the correct full or partial payment accompanied by all the information needed to fill the order.

B. Changes to the Shipment Date

If an advertiser changes the shipment date by providing a notice of delay, the advertiser must have a reasonable basis for the new shipment date or, if the advertiser does not provide a new shipment date, it must have a reasonable basis for any representation that the advertiser does not know when the merchandise will be shipped.

C. What Is a Reasonable Basis?

To demonstrate a reasonable basis, the following factors are important:

  • Anticipated demand
  • Supply/inventory to meet the anticipated demand
  • Whether the fulfillment system can handle the cumulative anticipated demand for all products
  • Whether adequate records are kept for each individual transaction to ensure that products can be shipped within the applicable time period

D. What to Do if the Advertiser Cannot Ship on Time

If the advertiser learns that the product cannot be shipped on time, the advertiser must determine whether it will ever be able to ship the order.

  • If the advertiser cannot ship the order, the order must be promptly canceled and a full refund must be made.
  • If the advertiser can ship the order later, the advertiser must seek the customer’s consent to the delay.
  • The customer must be notified reasonably quickly and must have sufficient advance notice in order to cancel the order or accept the delay. Notice of a delay must not occur after the time period originally promised or, if no time period was promised, 30 days.

Delay notices can be provided by telephone, fax, mail or email, as long as the chosen method will get to the consumer reasonably quickly.

E. First Delay Option Notice

The first delay option notice must provide (a) a definite revised shipping date or (b) a statement that the advertiser cannot provide a revised shipping date. In addition, it must state that the customer has the option of canceling the order and obtaining a prompt refund if s/he does not consent to the delay; provide a means of canceling the order at the advertiser’s expense; and, if a revised shipping date cannot be provided, state the reason for the delay and state that if the customer agrees to the indefinite delay, the customer can cancel at any time until the merchandise has shipped. As long as the new shipment date is 30 days or less from the originally anticipated shipment date (or 60 days or less from the order date), the company is permitted to treat the customer’s silence as consent to the delay. However, the company must inform the consumer that silence will be treated as consent.

F. Subsequent Delay Option Notice(s)

If the advertiser cannot ship the merchandise by the definite revised shipment date provided in the prior notice, the advertiser must seek the consent of the customer to any further delay. While the customer’s silence can be treated as consent to a delay when the first delay option notice is sent, it cannot be treated as consent for subsequent delay notices. A subsequent delay option notice must provide (a) a new definite revised shipment date or (b) a statement that the advertiser cannot provide a date if the date is unknown. In addition, it must also provide (a) a statement that the customer can cancel immediately if s/he chooses not to wait; (b) a statement that unless the advertiser receives notice that the customer agrees to wait beyond the most recent revised definite shipment date and the merchandise has not shipped by then, the order will be automatically canceled; (c) some means for the customer to inform the advertiser of the customer’s decision to delay or cancel at the advertiser’s expense; (d) the reason for the delay; (e) and the statement that if the customer agrees to an indefinite delay, the customer may cancel at any time.

G. When Must the Advertiser Cancel?

Cancellation is required in the following circumstances:

  • The customer exercises an option to cancel before the merchandise is shipped.
  • The customer fails to respond to the advertiser’s first notice of a definite revised shipment date of 30 days or less and the advertiser has not shipped the merchandise or received the customer’s consent to a further delay by the definite revised shipment date.
  • The customer does not respond to the notice of a definite revised shipment date of more than 30 days (or the notice that the advertiser is unable to provide a definite revised shipment date) and the advertiser has not shipped the merchandise within 30 days of the original shipment date.
  • The customer consents to a definite delay, but the merchandise has not been shipped and the advertiser has not obtained the customer’s consent to any additional delay by the agreed-upon shipment time.
  • The merchandise has not been shipped by the required delay time.
  • The advertiser determines that it will never be able to ship the merchandise.

H. Amendments

On September 17, 2014, the FTC enacted certain amendments to the Mail Order Rule. Specifically, the amendments made the following changes to the rule:

  • Now that consumers use broadband and high-speed connections to access the Internet, the rule now clarifies that it applies to online orders, not just mail and telephone orders.
  • The rule requires that refunds be made within seven working days if third-party credit cards (e.g., Visa or Mastercard) are used to make the purchase. FTC notes that this doesn’t impose any additional burden on sellers because they must already comply with the seven-working-day refund period in Reg Z. If the seller is the creditor (i.e., for a store card where the retailer itself is the issuer, not a bank or a finance company), the refund period remains one billing cycle.
  • Refunds may be issued by methods that are at least as fast and reliable as first class mail for all payment methods.
  • Refunds can be issued by cash, check or money order or the retailer can use the same method as the buyer used.

The list of covered payment methods now includes debit cards, prepaid gift cards and online payment services (e.g., PayPal). Previously, the Mail Order Rule had covered only cash, checks, money orders and credit cards.

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ATTORNEY ADVERTISING

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