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Making Sure Your “Free Offer” Is Free From Legal Trouble This Cyber Monday (US, CA, UK)

Introduction

The other day my iPhone 6S finally had enough and called it quits. While the five-year-old iPhone was admittedly more suited for display at the Smithsonian, its demise nonetheless came to me as a surprise. Unfortunately, my iPhone’s death meant that I was temporarily locked out of all my accounts with two-factor authentication. Fortunately, however, I was looking for an excuse to get a new phone anyway. And what not a better time than on Cyber Monday?

If you are an online retailer of products or services, then odds are Cyber Monday sales are nothing new to you. Once considered the little brother equivalent to Black Friday is now one of the most successful business opportunities to bring in new and returning customers. Adobe Analytics reported a record $9.4 billion in Cyber Monday Sales in 2019, up 19.7% from the year before.

2020 Holiday Shopping Trends

If there is anything we can be sure about in 2020, it’s that consumers will be spending even more money this upcoming Monday. COVID-19 has already led to a significant shift in how consumers do their holiday shopping. Further, fears of overcrowding and the potential of superspreader events have led many companies to elect for online sales instead of in person.

For example, Walmart decided it would remain closed on Thanksgiving this year, a first in over 20 years. CEO John Furner’s decision to give employees the day off indicates that companies were not expecting the typical in-store chaos they experienced on Black Fridays in the past.

Overview

It’s unlikely that the opportunity presented by Cyber Monday this year is news to you. You’ve already been working on your marketing material, reworking your website, and taking other necessary steps to capitalize on the boom in online consumer spending. If your startup plans to offer a sale or promotion this Cyber Monday, it is important to ensure your offer is consistent with your respective advertising and promotional laws.

In this article, we will look at a widespread Cyber Monday promotion: the free offer.

Free Offer Regulation

The offer of “Free” merchandise or service is a promotional device frequently used to attract customers. Providing merchandise or services with the purchase of some other article or service has often been found to be a useful and valuable marketing tool.

Free offers include the use of language such as Buy One Get One (BOGO) or other similar marketing strategies. Substitution words like “gift,” “given without charge,” “bonus,” or other words that give the perception that merchandise or services are “Free” are also included under the free offer umbrella.

Who Regulates Free Offers in the US?

In the US, actions may be brought against you in both Federal and State courts. Customers may not bring a claim directly against a company in the United States. Instead, they may submit their complaint to be investigated and tried by either the FTC or their State Attorney General. In either case, both governing authorities are concerned with any possibility that consumers will be misled or deceived. 

State AGs

Because State advertising laws may be stricter than Federal, it is possible to have a claim brought by a State Attorney General and not the FTC. Every state has its own variation of free offer rules. Some even have specific restrictions on certain trades or practices. To save time, we will only focus on the more common enforcement action, regulation from the FTC. Still, you should nonetheless be aware of the specific laws in each state you are advertising. Thankfully many states, notably California and New York, have issued clear guidance on how free offers must be delivered to customers to ensure compliance.

The FTC

Almost every consumer-facing business is governed in part by Section 5 of the Federal Trade Commission Act (the “FTC Act”). Section 5 gives the FTC authority to initiate investigations or enforcement actions against any “unfair or deceptive acts or practices in or affecting commerce.” The FTC will consider any act unfair when it causes substantial injury to consumers who cannot reasonably avoid the injury themselves.

What Does “Free” Mean?

The word “Free” indicates that he is paying nothing for that article and no more than the other’s regular price. Thus, a purchaser has a right to believe that the merchant will not directly and immediately recover, in whole or in part, the cost of the free merchandise or service by marking up the price of the article which must be purchased, by the substitution of inferior merchandise or service, or otherwise.

A purchaser has a right to believe that the merchant will not directly and immediately recover, in whole or in part, the cost of the free merchandise or service by marking up the price of the article which must be purchased, by the substitution of inferior merchandise or service, or otherwise. In short, you cannot increase the price of a particular product to supplement the expense of giving away the free offer.

Additionally, the US limits free offers to only those that are infrequent.  The FTC puts value in the special meaning of a free offer, and prohibits a free offer thirty days before or after another one has run.  Further, you may not use the same free offer more than twice a year. Finally, the offeror’s sale of the product in the size promoted or service specified with a “Free” offer should not exceed 50 percent of the total volume of his sales of the product, in the same size or offering.

What is Required in Your Disclosure of Conditions?

To avoid any action from the FTC, all of the terms, conditions, and obligations should appear in close conjunction with the offer of “Free” merchandise or service. For example, disclosing the terms of the offer outlined in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer is not regarded as disclosed at the outset. 

However, mere notice of the existence of a “Free” offer on the main display panel of a label or package is not precluded provided that:

  1. The notice does not constitute an offer or identify the item being offered Free;
  2. The notice informs the customer of the location, elsewhere on the package or label, where the disclosures required by this section may be found;
  3. No purchase or other such material affirmative act is required in order to discover the terms and conditions of the offer; and
  4. The notice and the offer are not otherwise deceptive.

But Wait… There’s More. – Beyond the US

Although Black Friday and Cyber Monday were once considered US-based traditions, the opportunity to capitalize on holiday spending has spread the two practices internationally. For the most part, other countries offer very similar requirements for free offer promotions. Still, there are also a few differences.  

To highlight the similarities, we will look at two other countries where Cyber Monday has become popular: Canada and the United Kingdom.

Canada

The principal federal statute regulating advertising in Canada is the Competition Act, a law of general application and applies to both business and consumer advertising. It includes both civil and criminal provisions prohibiting representations to the public promoting the supply or use of a good or service or any business interest that are false or misleading in a material respect.  

Just as in the United States, Canadian citizens cannot bring claims directly against your company. Consumers may file complaints to the Commissioner, ASC, or the Tribunal or Courts to challenge advertising.

In the same way that each state has its own particular rules on advertising, the 10 Canadian provinces and 3 Canadian territories have their own regulations on consumer protection and deceptive practices. While there are many similarities between these statutes, there are important differences (namely Quebec). The powers (including the remedies and penalties that may be imposed) vary by regulator.

Generally speaking, it is prohibited to make a representation to the public that is deceptive in a material respect to promote a good or service or business interest. If a representation could influence a person to buy or use the good or service advertised, it is material. Just like the FTC Act in the US, the focus is on the consumer’s perception, not what the company intended. Further, the pivotal issue is whether or not deception occurred.

If a free offer is made in Canada, the item must be free and available to the consumer at no cost. Suppose a second item is bundled with the first item at no extra cost to the consumer. In that case, it is permissible for the advertiser to claim the second item is ‘free with purchase’ of the first item provided there is no attempt to recover the cost of the free item.

For free claims advertised in Quebec, advertisers must take care to comply with a unique requirement under Quebec’s Consumer Protection Act that prohibits placing more emphasis in an advertisement on a premium than on the good or service associated with the premium.

United Kingdom

The Advertising Standards Authority (ASA) is the UK’s independent regulator of advertising across all media. The ASA may take the Consumer Protection from Unfair Trading Regulations 2008 into account when it rules on complaints about marketing communications alleged to be misleading.

The ASA requires that marketing communications must not materially mislead or be likely to do so. This applies to the impression created by marketing communications as well as specific claims. Just as in the US and Canada, it will rule based on the likely effect on consumers, not the marketer’s intentions.

For more information on the UK advertising law, check out the ASA’s guidance on the use of free.

Conclusion

Cyber Monday turns 15 this year and will undoubtedly be a year for the record books. I sincerely hope that you, your team, and your startup can share in the unprecedented level of online consumer spending. As you continue to worry about site speed and mobile compatibility, don’t further burden yourself with concerns of FTC or other regulatory enforcement. Make sure your free offer is free from legal trouble this Cyber Monday.

And when the digital dust settles, ensure that you are protected from other legal troubles as well. Law4Startups offers an extensive library of free legal documents for Canada, the UK, and the US. For any other legal questions, please contact us, and we’d be happy to assist you in the right direction.

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