Buy.com Suit Highlights S & H Issues
A class action lawsuit was filed recently against an online retailer challenging the company's flat rate shipping charge as deceptive. The suit raises some important issues for direct marketers to consider with respect to this standard industry practice. The allegations are limited only to the retailer's shipping charge policy, but the case could affect other marketers that charge for shipping and handling.
According to the Miami Daily Business Review, a consumer who purchased a compact audio disc from Buy.com was charged a flat rate of $1.95 for shipping. The consumer determined that there was a flat rate $1.95 shipping fee on all compact discs, tapes and DVDs, but that the rate was different than the actual amount of postage on the parcel.
The consumer initiated a class action suit against Buy.com on behalf of all similarly situated Florida purchasers. The lawsuit alleges that Buy.com's shipping charge is an inflated charge that includes profit to the retailer. Accordingly, the lawsuit contends that the company's practice was deceptive and violated Florida law.
While the potential damages suffered by the particular consumer appear to be minimal, if damages are calculated based on the damage to all Florida residents, the exposure to the retailer could be substantial.
Shipping and handling charges: What's the law? Generally speaking, a shipping charge should reflect the actual cost of postage, and the handling charge should reflect additional costs associated with fulfilling and processing the order. A merchant that charges shipping, or shipping and handling, should be sure that the costs charged reflect only the documented costs to the merchant. Neither shipping nor handling should include product cost or additional profit.
Several states expressly prohibit the charging of shipping fees that are more than the actual cost of shipping or are unreasonable when compared with other merchants. Other states limit handling charges to a maximum dollar figure, such as $3 to $5. Generally, laws that expressly limit charges to a dollar figure relegate only prize promotions. However, an argument could be made that these prize promotion laws are analogous to other business transactions as to what can be legitimately charged.
For example, Rhode Island has a law relating to shipping charges for prizes, gifts and the like that is consistent with other states' laws. Rhode Island limits shipping charges to the cost of postage, what a delivery service would charge to deliver goods of similar size, weight, type, etc., or the exact amount paid to an independent fulfillment house or supplier.
Handling typically includes the costs associated with the order, such as packaging materials, packaging costs and sometimes customer service. Some states even include promotional costs in the handling charge. Under California law in connection with prize promotions, handling charges are restricted to either what is not unreasonable, the actual cost of handling, the lesser or either $3 or 80 percent of the actual cost of the item to the merchant, or the amount paid to an independent fulfillment house or supplier. Other states have similar definitions, with handling costs varying up to $5.
In addition to shipping and handling, some companies have insurance charges, express mail charges and other optional amounts. While the permissibility of these charges depends on the circumstances at hand, the marketer should be sure that the charges reflect real services being provided and that the amounts charged reflect the real costs of these services.
What may make Buy.com's situation unique is the company's practice of charging only a shipping charge -- not shipping and handling. A flat rate shipping charge would seem more difficult to defend, given that the amount of postage appears on the label.
While a flat rate shipping charge may make sense in the context of one price as charged by a vendor for a package of similar size and weight, it is more susceptible to challenge where general postage is involved, as the amount of postage is easily ascertainable and would seem to vary with the size and weight of the package.
Direct marketers that charge shipping and handling charges should review their practices to determine how their charges are as described and to ensure that the amounts charged can be substantiated to reflect good faith charges to consumers. Not only does this make sense legally, but also excessive or unsubstantiated charges harm customer good will.
Andrew B. Lustigman is a partner at Olshan, New York. His e-mail address is email@example.com