The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices Series
By Kevin Grimes
Virtually everyone has heard something about some mysterious state or federal law or regulation that provides some buyers under certain circumstances the ability to cancel some types of purchases or contracts within three days.
But . . . most folks are rather hazy on the details.
On January 6, 2015, the FTC made a change to the federal “cooling off” rule[i] (which is actually a federal regulation). Although the change is not tremendously significant, direct sellers and their independent contractors (“ICs”) need to be aware of the change . . . as well as the other pieces of the Rule.
The Cooling-Off Rule is a federal trade regulation rule that was published by the FTC to address unfair and deceptive practices in sales conducted at locations other than the fixed place of business of the seller. In other words, if you’re marketing products or services for a network marketing company, this federal regulation applies to YOU and the company. Even though the vast majority of sales are not made on a door-to-door basis, the Rule calls all such sales “door-to-door sales.”
In addition to sales at consumers’ homes, door-to-door sales include sales at facilities rented on a temporary or short term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants; or sales at the buyer’s workplace. The Rule requires door-to-door sellers to provide consumers with written and oral notice of a buyer’s right to unilaterally rescind a contract within three business days from the date of the transaction. Additionally, sellers must provide buyers with a completed receipt, or a copy of the sales contract, containing a summary notice informing buyers of the right to cancel the transaction.
What is New?
Under the new rule, the revised definition of “door-to-door sales” distinguishes between sales at a buyer’s home and those at locations outside the home. The revised definition retains coverage for sales made at a buyer’s home that have a purchase price of $25 or more, and it increases the purchase price to $130 or more for all other covered sales.
When is the Change Effective?
The change becomes effective on March 13, 2015.
What Do Companies and ICs Need to Know?
The Rule is applicable to the:
- Sale, lease, or rental;
- Of consumer goods or services;[ii]
- With a purchase price of:
- $25 or more for sales made at a buyer’s residence;[iii] or
- $130 or more for all other temporary locations;
- In which the seller[iv] or his representative personally solicits the sale;[v] and
- The buyer’s agreement or offer to purchase is made at a place other than the place of business[vi] of the seller (e.g., sales at the buyer’s residence or at facilities rented on a temporary or short-term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants, or sales at the buyer’s workplace or in dormitory lounges).
This means that certain sales to customers will fall within the scope of the Rule, and some will not. In addition, if the enrollment of a new IC exceeds the applicable threshold ($25 for sales made at the buyer’s residence and $130 for sales made at all other temporary locations), the Rule will apply.[vii] Whether a particular sale is or is not subject to the Rule depends on the facts involved. Because it’s difficult (and sometimes impossible) to know whether the Rule is applicable to a particular transaction, it’s simply a “best practice” to insure that your documents, corporate practices, and your ICs’ practices always meet the requirements of the Rule.
There are six exemptions to the Rule, however, most of them will be inapplicable to direct selling companies and their ICs . . . most of the time.[viii]
What Do Companies and ICs Need to Do?
The Rules requires “sellers” (direct selling companies) and “their representatives” (ICs) to:
- Furnish the buyer with a fully completed receipt or copy of any contract pertaining to the sale at the time of its execution;
- Which is in the same language, e.g., Spanish, as that principally used in the oral sales presentation;
- Which shows the date of the transaction;
- Contains the name and address of the seller, and
- In immediate proximity to the space reserved in the contract for the signature of the buyer or on the front page of the receipt if a contract is not used and in bold face type of a minimum size of 10 points, a statement in substantially the following form:
“You, the buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the attached notice of cancellation form for an explanation of this right.”[ix]
- Furnish the buyer with two copies of the Notice of Cancellation[x] at the time the buyer signs the contract or otherwise agrees to buy the consumer goods or services;
- Before furnishing copies of the “Notice of Cancellation” to the buyer, complete both copies by entering the name of the seller, the address of the seller’s place of business, the date of the transaction, and the date, not earlier than the third business day following the date of the transaction, by which the buyer may give notice of cancellation;
- Exclude in any contract or receipt any confession of judgment or any waiver of any of the rights to which the buyer is entitled under the Rule, including the buyer’s right to cancel the sale in accordance with the provisions of the Rule;
- Inform each buyer orally, at the time the buyer signs the contract or purchases the goods or services, of the buyer’s right to cancel;
- Not misrepresent in any manner the buyer’s right to cancel;
- Honor any valid notice of cancellation by a buyer and within 10 business days after the receipt of such notice, to:
- Refund all payments made under the contract or sale;
- Return any goods or property traded in, in substantially as good condition as when received by the seller; and
- Cancel and return any negotiable instrument executed by the buyer in connection with the contract or sale and take any action necessary or appropriate to terminate promptly any security interest created in the transaction;
- Not negotiate, transfer, sell, or assign any note or other evidence of indebtedness to a finance company or other third party prior to midnight of the fifth business day following the day the contract was signed or the goods or services were purchased;
- Notify the buyer, within 10 business days of receipt of the buyer’s notice of cancellation, whether the seller intends to repossess or to abandon any shipped or delivered goods.
The FTC expects that companies will inform (and remind) their independent contractors of the requirements that are applicable to them. Accordingly, these requirement should be set forth in the Policies and Procedures. In addition, companies should remind their independent contractors of these requirements not less than annually.
Is there a potential downside to violating the Rule?
Yes, there is. A few of the cases the Federal Trade Commission has pursued include:
$22,000 – FTC v. Vision Group of America, Inc., for alleged violation of the Cooling-Off Rule and deceptive income claims.
$40,000 – FTC v. College Resource Management, Inc., for alleged violation of the Cooling-Off Rule and deceptive claims.
$972,000 – FTC v. Screen Test U.S.A, for alleged violation of the Cooling-Off Rule and deceptive claims.
Violation of the Rule can be very expensive.
If you’re bored and want to see the entire text of the Rule, click here.
Let’s do it right!
The Thermonuclear, Scorched-Earth, Mother-Of-All Best Practices SeriesTM is a collection of articles, reports, and blogs that articulates, educates, and advocates the absolute highest and best business and legal practices for direct selling companies and their independent contractors. We invite and look forward to your feedback.
[i] The actual title of the federal cooling-off regulation is Trade Regulation Concerning Cooling-Off Period for Sales Made at Homes or Certain Other Locations, and is found in Title 16 of the Code of Federal Regulations, Part 429.
[ii] “Consumer goods or services” are defined in the Rule as “goods or services purchased, leased, or rented primarily for personal, family, or household purposes, including courses of instruction or training regardless of the purpose for which they are taken.”
[iii] This is true regardless of whether the transaction is consummated under single or multiple contracts.
[iv] A “seller” is defined as “any person, partnership, corporation, or association engaged in the door-to-door sale of consumer goods or services.”
[v] Such solicitations include those in response to or following an invitation by the buyer.
[vi] The “place of business” is defined in the Rule as “the main or permanent branch office or local address of a seller.”
[vii] How do I know that the Rule applies to Starter Kits and Enrollment Fees? I have talked with multiple FTC staff attorneys. Even though the enrollment of an IC involves the commencement of a business, the FTC’s position is that it involves the sale of “consumer goods or services.”
[viii] The term door-to-door sale does not include a transaction:
(1) Made pursuant to prior negotiations in the course of a visit by the buyer to a retail business establishment having a fixed permanent location where the goods are exhibited or the services are offered for sale on a continuing basis; or
(2) In which the consumer is accorded the right of rescission by the provisions of the Consumer Credit Protection Act (15 U.S.C. 1635) or regulations issued pursuant thereto; or
(3) In which the buyer has initiated the contact and the goods or services are needed to meet a bona fide immediate personal emergency of the buyer, and the buyer furnishes the seller with a separate dated and signed personal statement in the buyer’s handwriting describing the situation requiring immediate remedy and expressly acknowledging and waiving the right to cancel the sale within 3 business days; or
(4) Conducted and consummated entirely by mail or telephone; and without any other contact between the buyer and the seller or its representative prior to delivery of the goods or performance of the services; or
(5) In which the buyer has initiated the contact and specifically requested the seller to visit the buyer’s home for the purpose of repairing or performing maintenance upon the buyer’s personal property. If, in the course of such a visit, the seller sells the buyer the right to receive additional services or goods other than replacement parts necessarily used in performing the maintenance or in making the repairs, the sale of those additional goods or services would not fall within this exclusion; or
(6) Pertaining to the sale or rental of real property, to the sale of insurance, or to the sale of securities or commodities by a broker-dealer registered with the Securities and Exchange Commission.
[ix] I call this paragraph “the Pointer.”
[x] The seller may select the method of providing the buyer with the duplicate notice of cancellation form, provided however, that in the event of cancellation the buyer must be able to retain a complete copy of the contract or receipt. Furthermore, if both forms are not attached to the contract or receipt, the seller is required to alter the last sentence in the Point to conform to the actual location of the forms. You can find the Notice of Cancellation in §429.1 of the Rule.
See below for a nicely formatted copy of the article: