Gonzalo E. Mon, Kelley Drye & Warren

As consumers become more cautious with their spending, marketers are trying various strategies to lure them back into stores. One strategy involves offering rebates, whereby consumers who pay full price for an item at retail have the opportunity to receive a partial refund by mail. Although rebates can be beneficial for sellers, they have also come under increased scrutiny from regulators. Over the past few years, various states have passed new laws regulating rebates. As a result, offers that were lawful a few years ago may now be unlawful. In addition, regulators have become more active in challenging companies that fail to follow these laws.

Laws Governing Rebates
Rebate laws in various states dictate what marketers can, cannot, and must say in ads. For example, laws in New York and Oklahoma prohibit advertisers from mentioning an item's post-rebate price (the price after the rebate is deducted) unless the pre-rebate price (the price paid at the register) is clearly disclosed. Even in states where such a disclosure is not specifically mandated by rebate laws, this information is arguably necessary to comply with general advertising laws. Thus, it is always a good idea to highlight the pre-rebate price so that there is no confusion about what consumers must pay.

Other states have more stringent requirements. For example, Connecticut and Rhode Island both prohibit companies from advertising a post-rebate price unless the rebate is given to consumers at the time of purchase. Under these statutes, it would be unlawful to disclose, for example, that a product costs $5 at retail, but will cost $4 after a mail-in rebate. You can, however, advertise that the product costs $5 and that a $1 mail-in rebate is available (as long as you don't mention the final price). Because of differences such as these, it is possible that a rebate offer that is lawful in one state may not be lawful in another.

In addition to price disclosures, some laws dictate how rebates must be fulfilled. On the federal level, the Mail Order Rule requires companies to mail items (including rebate checks) within the time promised or, if no time was promised, within 30 days. Some states have added additional requirements. For example, laws in New York and North Carolina require certain rebates to be fulfilled within 60 days. And Texas enacted a law similar to the Mail Order Rule but also adds a requirement that companies must give consumers the opportunity to correct deficient rebate requests.

Federal and State Enforcement
Federal and state regulators have been actively enforcing rebate laws. For example, this year alone, the Federal Trade Commission has entered into settlements with two companies for failing to mail rebates on time. According to the FTC, although American Telecom Services promised that consumers would receive their rebate checks within eight weeks, many consumers had to wait up to a year for fulfillment. And although Marketing Development Specialists promised to ship rebates checks within ten weeks, some consumers had to wait years for their checks, while others never received their checks at all.

In addition to challenging companies for late payments, the FTC also charged companies with making deceptive claims and engaging in unfair practices in connection with rebate offers. According to the FTC, InPhonic failed to adequately disclose prior to purchase that, among other things, consumers would have to wait up to six months to submit rebate requests and would have to wait up to nine months after purchase to get their rebates. In addition, the FTC alleged that InPhonic engaged in various practices that made it difficult for consumers to submit requests and get paid.

State regulators have also been monitoring rebate practices and, earlier this year, the New York Attorney General settled a case with AT&T Mobility over allegations that the company violated various provisions in New York's rebate laws. The AG alleged that AT&T's advertisements for the rebate offers highlighted the post-rebate price but, in some cases, hid the pre-rebate price within several lines of fine print at the bottom of ads. Moreover, the company did not give customers enough time to redeem their rebates.

The AG also argued that AT&T did not adequately disclose details about how the rebates would be fulfilled. Rather than fulfill the rebates with checks, AT&T issued "debit cards." Unlike checks, though, these cards are subject to a number of restrictions. For example, the cards weren't redeemable for cash, couldn't be used for cash withdrawals, and expired 120 days from issuance. The AG argued that AT&T failed to adequately disclose these important restrictions. To settle the investigation, AT&T agreed to pay more than $2.63 million to consumers and to make significant changes to future rebate ads.

Escheat Laws Add More Complications
Another area where we are likely to see more enforcement is escheat. Under escheat statutes in various states, if a consumer does not cash a rebate check within the amount of time prescribed by law, the check may be presumed to be "abandoned" and the issuer may be required to turn over the funds to the state. As states face budget shortfalls, many are looking for alternate sources of revenue, including escheat. Currently, there is a lawsuit pending in Iowa regarding escheatment of uncashed rebate checks. The court has yet to issue a final ruling, but rebate issuers should pay close attention as the case develops.

Planning a Successful Offer
Companies that offer rebates need to ensure their ads clearly disclose all material terms and comply with laws regarding post-rebate prices. And it is important to ensure rebates are fulfilled in a timely manner. But it isn't enough to set up a rebate system that complies with current laws and forget about it. As states continue to pass new laws, companies need to pay attention and be able to react quickly to changes in the legal landscape. Moreover, companies need to consult with their legal counsel to ensure their rebate programs are designed to comply with applicable escheat laws.

Gonzalo E. Mon is an attorney in Kelley Drye & Warren's Advertising and Marketing Law practice.

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