From Brick & Mortar to the Web: An Overview of Federal Laws and Regulations to Consider When Operating an E-Commerce Business

Long before COVID-19 affected retail companies had already started shifting to e-commerce platforms, marked by retail giants exclusively in the e-commerce space.  Even banks acknowledged this trend, by no longer offering cash-back credit rewards for just gas and grocery purchases, but for online purchases too.  Now, as COVID-19 affects a growing number of retail stores, with some being forced into bankruptcy, many will likely close brick-and-mortar storefronts, in favor of e-commerce platforms.  While e-commerce may allow retailers to shed dollars on rent, store associates, and other costs, they must take prudent measures to ensure the dollars saved are not lost to defending against future enforcement actions or class action litigation.  This update highlights a number of the issues e-commerce retailers should consider to maintain regulatory compliance and to minimize the risks of potential litigation.

Marketing and Advertising

The Federal Trade Commission (“FTC”) and Food and Drug Administration (“FDA”) have routinely reminded retailers, even in the wake of COVID-19, of marketing and advertising requirements.  Even though a product label itself may not contain any marketing or advertising claims, language on websites, social media accounts, videos and other mediums must also comport with the FTC Act and, if a product qualifies, with FDA regulations too.  As a general matter, claims must be truthful, cannot be deceptive or unfair, and must be evidence-based.  Should a retailer utilize influencers or endorsements, the FTC has set forth additional requirements for adequate disclosures about these promotional relationships.  If a retailer makes representations about the source of the product or its components, the FTC has strict guidelines on when it is appropriate to make “Made in the USA” claims.  The type of product also dictates further compliance.  For example, dietary supplements and drugs may contain health related claims that must be substantiated by “competent and reliable scientific evidence.”  The same is true for products with environmental claims as governed by the FTC’s Green Guides.  In short, marketing language is subject to significant scrutiny in consumer sales so retailers have to be careful what they say, whether express or implied.

Promotions and Pricing

The FTC Act prohibits unfair and deceptive advertising, which extends to product pricing.  The FTC's Guides Against Deceptive Pricing generally require that a retailer offer an item at a price for a reasonable, substantial period of time in good faith, and in the regular course of business, before advertising that price as the former or regular price (16 C.F.R. § 233.1).  Companies cannot artificially inflate a product’s price for short period of time in order to support a claim that an item is discounted when the price is thereafter reduced.  Additionally, companies cannot distort price comparisons: retailers cannot advertise their product as less than another merchant or manufacturer unless principal retail outlets are selling the product at a higher price. Also, a retailer who advertises a manufacturer's or distributor's suggested retail price should be careful to avoid creating a false impression that it is offering a reduction from the price at which the product is generally sold in its trade area.  When retailers utilize sales, sweepstakes, contents and other promotions, additional legal requirements may be implicated.  Finally, a popular phrase provoked by COVID-19 is “price gouging.”  This illegal activity is exhibited by the use of “excessive” or “unconscionable” pricing, which may be measured by the average prices in an affected area over a given look-back period prior to the emergency or event that triggered the escalated pricing.  While there is no federal law governing price gouging, President Trump issued an executive order instructing the Department of Justice to investigate and prosecute price gouging of medical resources pursuant to the broad executive authority under the Defense Production Act.  Many states also have laws on the books that prohibit price gouging, several of which come with steep fines.  See, e.g., D.C.’s Natural Disaster Consumer Protection Act.  Retailers therefore need to be sensitive to the pricing advertised for products to avoid it be construed as deceptive.

Privacy and Payment Processing

A retailer maintains the ultimate responsibility for the protection of consumers’ personal information.  This includes the collection of email addresses for the distribution of marketing materials.  Businesses cannot freely transmit or sell such data.  To the extent a website is directed at children under the age of 13, retailers may have additional obligations under the Children’s Online Privacy Protection Act (COPPA).  A website should have a conspicuous privacy policy conveying how the website processes and uses consumer information.

As for payments, businesses should partner with reliable payment processing companies to help with the safe transfer of payment and consumer information as well (i.e. credit card information, consumer address).  Businesses should also establish merchant accounts with a financial institution with requisite safeguards in place.  Financial institutions are required to adhere to the Financial Services Modernization Act, which includes protecting consumers’ “nonpublic” personal information.  Under the Fair Credit Reporting Act, the FTC’s “Red Flag Rules” also require financial institutions to institute identify theft protections.  Some of these obligations, i.e. fraud protection, are borne in part by the financial institution of the consumers.

Shipping

Without consumers’ ability to pick up their products comes the obvious issue of shipping.  Under the FTC’s “Mail Order Rule” when retailers advertise merchandise, they must have a reasonable basis for stating or implying that they can ship within a certain time advertised.  “Reasonable basis” means that the merchant has, at the time of making the representation, such information as would under the circumstances satisfy a reasonable and prudent businessperson, acting in good faith, that the representation is true.  When there is no shipment statement, retailers must have a reasonable basis for believing that the products can be shipped within 30 days.  Because of the 30-day default, this requirement is sometimes referred to as the “30-day Rule.”  Importantly, if a retailer cannot meet the prescribed shipment date or default, 30-day period, it must seek the customer’s consent to the delay.  There is specific language that must be included in a notice to a customer about a shipping delay, including offering the customer the option to cancel the order.  In addition to timing, retailers should be cognizant of U.S. restrictions on shipping certain products.  Last, companies need to have conspicuous return and refund policies so that customers understand how to ship back unwanted or damaged merchandise.  Careful consideration should be afforded to state laws as return and refund requirements vary by state.  For example, under Virginia’s Consumer Protection Act, retail merchants must maintain a conspicuous policy of providing, for a period of not less than 20 days after date of purchase, a cash refund or credit to the purchaser’s credit card account for returned merchandise.   

Protections

Beyond following the law, there are some proactive measures retailers can adopt to improve compliance.  Almost all retail web sites currently have their own “Terms and Conditions.”  These disclosures generally outline the nature of the relationship between the retailer and consumer, the jurisdiction (i.e. state) governing the sale activity, procedure for disputes (i.e. arbitration or court), limitations of liability, policies for returns or order issues, privacy considerations, and other matters governing the use of the website.  Such terms and conditions establish the rights and responsibilities of the retailer and consumer.  Retailers should also consider commercial insurance coverage necessary to cover e-commerce activity, including but not limited to product liability, professional liability, privacy and cyber risks, and intellectual property infringement.  While insurance does not insulate a retailer from liability, it ensures that a retailer will have the financial means to address covered claims.

Final Thoughts

The foregoing provides an overview of some of the essential issues related to e-commerce for retailers expanding their internet presence.  Other legal considerations, albeit not exhaustive, include consumer reviews, intellectual property (i.e., copyright, trademark), accessibility (i.e., ADA requirements), marketing activity stemming from website interaction (i.e. promotional emails or texts), and assessing sales tax.  Retailers should be thoughtful and prudent in their e-commerce activities, mindful that regulators and class action attorneys are overseeing the same with a critical eye.  Seyfarth is available to address these or other pressing issues affecting your online business.