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News & trends
November 2007 | Volume 43, Issue 11
Rebate ripoffs spark consumer lawsuits, new legislation
Carmel Sileo, Associate Editor
When David and Lisa Faigman of California decided to buy cell phones
in 2005, they—like millions of other shoppers—were drawn
to a special promotion from Cingular Wireless (now AT&T Mobility,
Inc.) that made a “buy one, get one free” offer of its popular
Razr phone, with the purchase of a service contract. The Faigmans
signed up, paid the before-rebate price, and filled out the required
paperwork.
But when the rebate came, it wasn’t a check or cash: It was
in the form of three Visa “reward cards,” which had to be
used to buy merchandise; could not be exchanged for cash; and had
a raft of provisions, exclusions, and limitations so long that the
cards expired before the Faigmans could fully use them.
Consumer rebates have long been a popular way to sell everything
from cars to computers. The use of reward cards—similar to store
gift cards, except that they expire after a set time—is a new
wrinkle in the rebate world, and it’s one that has left many
consumers dissatisfied.
The Faigmans sued as part of a class action, alleging violations
of federal laws against unfair competition, false advertising, and
unjust enrichment. AT&T moved for dismissal, but in July, a federal
court in California allowed the case to go forward. (Faigman v.
AT&T Mobility LLC, 2007 WL 2088561 (N.D. Cal. July 18, 2007).)
“These consumers were operating on expectations built by years
and years of advertising,” said Bruce Simon, a Santa Monica lawyer
who represents the Faigmans. “The company didn’t disclose
that they were sending Visa cards, they didn’t disclose the limits
on the use of the Visa cards, and the cards ended up expired with
balances on them because the customers didn’t use them in time.”
According to the court’s opinion, nowhere did Cingular’s
advertising indicate that customers would receive cards in lieu of
a cash rebate. And while other forms of tender, the court found, “may
satisfy this expectation [of cash] . . . the more terms, conditions,
and restrictions that are placed upon a form of tender, the less equivalent
it becomes to cash or check.”
The California court noted that because Cingular placed several pages
of “terms and conditions” on the cards, their value lessened.
The cards “must be activated, the cards are only accepted at
certain locations, the cards can incur service charges, the cards
will be declined in transactions that exceed the balance of the card,
the cards expire, the cards are not redeemable for cash, the cards
do not earn interest,” Judge Marilyn Hall Patel wrote for the
court. These and many other restrictions meant that the cards were
a far reach from cash equivalents, she found.
Cingular argued that the advertisements the Faigmans used as evidence
in court were not the exact ones that Lisa Faigman had responded to
in the Cingular store. But the court found that the Faigmans’
representative samples were “likely very similar, considering
plaintiffs’ allegations regarding Cingular’s uniformity
in marketing.”
Cingular also claimed that its use of the term “mail-in rebate
card” referred to the Visa card consumers would receive in the
mail, not the card that consumers used to get their rebates. The court
called this argument “entirely without merit” and concluded
that “Cingular is bound by the language it has created.”
“This is a clear case of false advertising and unfair competition,”
Simon said. “It would simply have been fair to let the customers
actually know what they were getting.”
Rebate rage
Other cases attest to the growing rebate rage. In 2006, the attorney
general for Washington, D.C., sued InPhonic, Inc., an online seller
of cell phones, after receiving thousands of complaints about the
company’s failure to honor rebates. The city and InPhonic reached
a multimillion-dollar settlement agreement early this year. (In
re InPhonic, No. 4390-06 ( D.C., Super. Ct. Feb. 15, 2007).)
In June, California-based computer retailer Soyo, Inc., reached a
settlement with the Federal Trade Commission (FTC) over complaints
about excessive delays in rebate processing. (In re Soyo, Inc.,
2007 WL 1740943 (U.S. Fed. Trade Commn. June 4, 2007).)
In the past few years, consumer complaints about rebates have become
more vocal—or at least more visible. The Better Business Bureau
reports that complaints about rebates tripled from around 900 in 2001
to more than 2,700 in 2005. The Internet is awash in sites that complain
bitterly about delayed or denied rebates, and others that instruct
buyers on the best way to fight the companies’ obstructive tactics.
The biggest gripes concern the difficulty of meeting the requirements
for getting the rebate. In some cases, consumers must keep the original
box and cut out a specific part of it; most companies won’t accept
photocopied receipts, only originals; and many consumers say that
when they do receive the rebate check, it might look like junk mail
and get tossed, or there may be an impossibly short time period during
which it can be cashed.
Several retailers, including Best Buy and Office Max, have found
rebates so problematic that they’ve decided to stop using them
entirely. Last year, computer manufacturer Dell announced that it
would scale back 70 percent of its rebate programs over the next year.
Other companies, like Costco, now offer the rebate instantly, when
the item is purchased.
“Rebates have been a problem for years,” said Joe Ridout,
a spokesman for Consumer Action, an advocacy group with offices in
San Francisco and Washington, D.C. “They are a big source of
consumer complaints. The reason is that they primarily come down to
an endurance race between the buyer and the company: Who can jump
through the most hurdles? Who can hold out the longest?”
Ridout cited a report prepared by the Aberdeen Group, a Boston-based
business consulting firm that found that 60 percent of consumers who
buy products advertised with a rebate don’t even bother claiming
it; of those who do, about half have problems. Other studies have
put the number of rebate users at anywhere from 20 percent to 50 percent,
with about half experiencing frustration during the process. A 2005
Business Week article reported that TiVo (maker of the popular
digital video recorder) saved $5 million in expected rebate costs
because so few purchasers filled out the form.
Many consumer advocates say the problems are not solely with the
manufacturer or the retailer, but also with the companies that process
the rebates. These are the intermediaries who set up the program,
receive and process the forms, and—assuming all goes well—mail
out the checks.
But some critics say there’s something wrong with a system that
denies or delays so many rebate applications, and they point to burdensome
requests for receipts, UPC codes, and other information, unreadably
small print, and other hurdles consumers face.
“It’s classic bait and switch,” said Jeff Sovern,
a professor at St. John’s University School of Law. Sovern, who
hosts a consumer affairs blog for Washington, D.C.-based Public Citizen,
said the requirements imposed by the processors have become so arcane
and onerous that it’s no wonder people are frustrated.
The industry term for low rates of rebate fulfillment—whether
because buyers don’t fill out forms properly, miss deadlines,
or just don’t bother making claims—is “breakage.”
Last year, a rebate company called Parago, which handles rebates for
electronics retailer Circuit City, applied for (and received) a patent
for its rebate-processing system. Parago described the system as specifically
designed to induce a large amount of breakage.
“That definitely fits with some of what we’re starting
to see as we pursue these cases,” said Simon, who has represented
plaintiffs in other rebate-related class actions.
“It’s no secret that rebate-processing companies explicitly
advertise themselves as discouraging or denying rebates,” Ridout
said.
Or worse. In September, Dean Takahashi, a reporter for the San Jose
Mercury News, discovered over 1,300 unopened rebate requests
in the dumpster of a San Jose rebate-processing company. The company’s
owner blamed a bad employee for the rebate dumping. “In all my
years of reporting,” Takahashi wrote, “I have never encountered
such outrageous behavior against consumers.”
Legal correctives
In response to these criticisms, lawmakers are trying to curb some
of the worst abuses of the rebate racket.
Several states have passed laws that restrict how rebates can be
used or advertised. New York, for instance, requires companies to
give buyers at least 14 days to redeem a rebate and requires stores
to stock rebate forms for customers’ use; Massachusetts lawmakers
were considering a proposal to extend the claim period to a full year.
New York also mandates payment of rebates within 60 days, Texas says
they must go out within 30 days, and Florida is considering a 15-day
requirement.
In Connecticut and Rhode Island, any seller that advertises the after-rebate
price must offer an instant rebate at the time of purchase. Maryland
and New Jersey are considering similar laws. And last year, Sen. Charles
Schumer (D-N.Y.) proposed a laundry list of changes to federal laws
regarding how rebates are advertised and processed.
Last April, the FTC held a workshop titled “The Rebate Debate,”
in which representatives from consumer groups, academic institutions,
the federal government, and the rebate-processing industry discussed
the advantages and disadvantages of consumer rebates.
One of the invited speakers was Matthew Edwards, a business professor
at Baruch College of the City University of New York, who warned against
overly aggressive legislation that might do more harm than good. Drawing
on research that he used in an article he published this year in the
Stanford Journal of Law, Business, and Finance, Edwards argued
that rebates had strong enough advantages—in that they offer
some consumers distinctly lower prices—that lawmakers should
focus on egregious abuses, not day-to-day annoyances. For instance,
he cited research showing that giving purchasers long deadlines to
redeem their rebates actually increased breakage—because it gave
them more chances to put off sending in their forms or to forget entirely
about them.
Norma Garcia, senior staff attorney for Consumers Union, noted that
years of rising consumer complaints and increased legal actions against
rebate companies have not led the companies to regulate themselves
well, and that continued monitoring by the FTC is necessary.
“I personally think rebates are great, when they work,”
said Ridout. “I’ve used them, and I like them. What consumers
have to keep in mind is that if the company tells you to fill out
the form with your left hand using blue magic marker, and emboss it
with red sealing wax, and mail it out under a full moon, you have
to do all that, and you’ll get your rebate. Also, you should
consider the rebate a bonus, not as money in the bank.”
But Bruce Simon said consumers do view rebates as money in
the bank, and rightly so.
“They spent the money under certain expectations, that they
would get their money back,” he said. “That’s the point:
It is not a bonus, it is their money.”
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