Online Retailers Fined for Late Product Deliveries

FRAMINGHAM (07/27/2000) - By levying a total of US$1.5 million in fines Wednesday to seven online retailers for failing to meet promised product shipment schedules last December, the U.S. Federal Trade Commission (FTC) has made it clear that Santa Claus must deliver gifts when companies say he will -- or else.

The FTC said the seven companies agreed to pay the civil fines in order to settle charges that they violated a rule governing mail and telephone orders by providing buyers with inadequate notices of shipment delays and by "continuing to promise specific delivery dates when timely fulfillment was impossible."

The seven companies include CDnow Inc., KBkids.com LLC, Macys.com Inc., The Original Honey Baked Ham Co. of Georgia Inc., Patriot Computer Corp. and Toysrus.com Inc., plus the now-defunct Minidiscnow.com. In addition to paying the penalties, the six retailers still in business promised to change their shipping policies to ensure that similar violations don't happen again this year, the FTC said.

The commission said it undertook an investigation of the companies last December after receiving numerous complaints from consumers. Under the Mail and Telephone Order Rule, the FTC requires retailers to ship goods within 30 days of receiving an order or to provide a notice of delay to the buyer, who could then choose to wait for delivery or cancel the order.

The investigation found that all seven companies failed to send delay notices and offer online shoppers the opportunity to cancel their orders. KbKids.com, Macys.com, Toysrus.com and Minidiscnow.com also were judged to have taken orders knowing they couldn't meet promised shipping schedules, according to the FTC.

Jodie Bernstein, director of the FTC's Bureau of Consumer Protection, said in a statement that the rule in question applies equally to online and bricks-and-mortar retailers and warned e-commerce companies "to comply with the law or face stiff penalties." During last year's holiday season, she added, many online retailers "ended up looking more like Scrooge than Santa."

FTC attorney Heather Hippsley said some of the seven retailers targeted by the FTC received many more orders than they anticipated and had problems processing them, despite having enough inventory on hand. But even so, a company "can't tell [consumers] that it's going to ship within a certain amount of time if it doesn't have a reasonable basis to believe it can," she said.

David Cooperstein, an analyst at Forrester Research Inc. in Cambridge, Mass., called last December's shipping delays a symptom of a booming Internet economy.

Cooperstein noted that similar problems occurred in 1997 and 1998, and that the number of online shoppers is expected to more than double during this year's holiday season.

In that kind of environment, predicting demand isn't easy for online retailers, Cooperstein said. Continued delivery glitches are likely until the e-commerce business becomes mature, he added. But the penalties levied by the FTC show that back-end order fulfillment systems are "just as important as the fancy front-end Web site stuff," Cooperstein said. "People still have to get what they ordered delivered to them."

The FTC said Macys.com, KBkids.com and Toysrus.com are each paying $350,000 in penalties. Patriot Computer is paying a $200,000 fine, while Honey Baked Ham was assessed a $45,000 penalty.

CDNow was fined $300,000, but the FTC said the amount that will actually be paid was reduced to $100,000 because of the online music retailer's "poor financial condition." Minidiscnow.com, which is no longer operating, will be required to fully reimburse each consumer who has ordered but not received any of its products.

This is the second enforcement action the FTC has taken against Web sites in the past two weeks. Early last week, the commission said it was sending e-mail messages to "scores of Web sites" warning them to comply with a children's online privacy protection law that went into effect in April. And last Friday, the FTC followed that up by announcing that it was charging Toysmart.com Inc. with violating the new law before the online toy retailer went out of business in May.

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