"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."

The FTC Three-Day Customer Rule

By Jeffrey A. Babener

1998

 

 

Networkers and companies must contend with an oddly named rule, "the cooling off rule," every time they pull out a retail sales form. Why all this legal language, and who started it after all?

Over the years, FTC regulation of direct selling has taken many forms. The FTC has adopted policies regulating pyramids, business opportunities, earnings representations, resale price maintenance, and mail order merchandising.

One specific FTC rule, however, goes right to the heart of the activity of every multilevel marketing company and independent distributor or sales representative. It involves the fundamental aspect of multilevel marketing: "one-on-one contact," often in the home of the retail customer.

The FTC has adopted regulations and guidelines on door-to-door sales, knowledge of which is essential to all participants in the MLM industry.

Various state and federal statutes and regulations grant a consumer the right to rescind a contract under certain circumstances, supplementing his common law rights to revoke a contract in instances of fraud, misrepresentation, mistake or minority.

The FTC rule, entitled "Cooling Off Period For Door-to-Door Sales," is one such regulation according a consumer a unilateral right to rescind his purchase agreement without penalty. Though much confusion has arisen due to inconsistent state laws in the area of door-to-door sales, this rule specifically provides that its purpose is not to preempt such laws, except to the extent that they directly conflict with its provisions.

The FTC defines door-to-door sales as a sale, lease, or rental of goods or services for personal, family, or household use, having a purchase price of $25 or more, in which the seller personally solicits the sale, and his buyer's agreement or offer to purchase is made at a place other than his main or permanent branch office. It should be kept in mind that, in addition to the buyer's home, this rule is also applicable at "temporary places of business," such as hotel rooms, convention centers, fairgrounds, restaurants, the buyer's workplace and dormitory lounges.

The rule requires that the door-to-door seller disclose (to the buyer) the buyer's right to cancel the transaction at any time prior to the third business day (excluding Sundays and holidays) following the actual sales transaction. Disclosure is to be accomplished by inclusion of the following paragraph in the purchase agreement:

"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."

The rule provides that the "Notice of Cancellation" form must be easily detachable from the receipt or invoice and must be provided in duplicate. It must be completed and furnished to the buyer at the time of agreement. The FTC has gone so far as to specify the size of type on the form. A brief summary of some of the requirements is as follows:

  1. The purchaser must be informed that he may cancel the transaction without penalty or obligation within three business days from the date of the sale.

  2. The customer is informed that, if he does cancel the sale, any payments made will be returned within ten (10) business days following receipt by the seller of the cancellation notice.

  3. If the customer cancels, he or she must make the merchandise available in substantially good condition to the seller at the customer's residence or the customer may, at his or her option, return the merchandise at the seller's expense and risk if the seller has a policy permitting such a method of return.

  4. If the customer makes the merchandise available to the seller and the seller does not pick it up within 20 days of the date of a notice of cancellation, the customer may retain or dispose of the merchandise without further obligation.

  5. If the customer does not make the merchandise available to the seller, he or she remains on the hook.

  6. The customer may cancel the sale by mail or by personal delivery of the signed and dated cancellation notice or by any other written form of notice, including a telegram.

Several other specifics should be keep in mind for compliance with this FTC rule:

  1. The seller must furnish the buyer with a receipt or copy of the sales order at the time of purchase.

  2. The sales order must be signed by the purchaser.

  3. The seller must orally inform the buyer at the time he signs the contract or purchases his goods of his right to cancel.

Obviously, there is an absolute prohibition to place a provision in the purchase order which provides that the buyer waives his right to cancel the FTC rule.

Multilevel marketing companies and distributors should also be aware that there are certain types of sales that are exempt from the door-to-door rule.

One last note. Many states have adopted their own specific statutes or regulations on door-to-door sales. One would think that the FTC would have adopted one uniform rule for use throughout the United States so that direct sellers were not faced with complying with multiple variations of regulations on door-to-door sales. Unfortunately, this is not the case. The FTC's policy statement provides:

"The Commission is cognizant of the significant burden imposed upon door-to-door sellers by the various and often inconsistent state laws which provide the buyer with the right to cancel door-to-door sales transactions. However, it does not believe that this constitutes sufficient justification for preempting all of the provisions of such laws or of the ordinances of the political subdivisions of the various states. This section will not be construed to annul, or exempt any seller from complying with the laws of any state, or with the ordinances of political subdivisions thereof, regulating door-to-door sales, except to the extent that such laws or ordinances, if they permit door-to-door selling, are directly inconsistent with the provisions of this section."

So why do you need to know about this rule? You need to know because it is a fundamental part of every sale made by an MLM distributor or company. Violation of the FTC rule constitutes an "unfair and deceptive act or practice, which can subject the distributor or company to federal or state prosecution or civil liability.

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

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