There are several legal issues that small-business owners should consider addressing when it comes to customer interaction. These include advertising, retail pricing and return policies, warranties, and consumer protection laws. Here's a brief rundown:
The Federal Trade Commission (FTC) is the national agency that governs compliance with the laws of advertising. Generally the FTC may take action in cases of false or deceptive advertising. State and local governments, individual consumers and competitors may also take action against a business that violates advertising laws.
Action by government agencies against violators usually begins with an attempt to persuade the business determined to be in violation to take voluntary action. If that attempt is unsuccessful, the government can issue a cease-and-desist order, bring a civil lawsuit, seek a court injunction to stop a questionable ad, and even require the violator to run corrective ads that admit an earlier ad was deceptive. Some states even have laws that provide for criminal penalties such as fines and jail terms for violators, but the latter is a rare occurrence.
Stay out of trouble by following some basic rules:
- Don't promise more than a product will deliver. If a product will remove some but not all types of stains, list only those that your product will affect.
- Be sure the visual image you show in your ad truly reflects what you're offering for sale.
- If you're using someone's picture or written endorsement or quoting from someone's copyrighted work, be sure you get his or her permission in writing.
- Don't knock your competitors.
- Have sufficient quantities of advertised items in stock or state that "Quantities are limited."
- Be careful about advertising something as "free."
- If you advertise credit terms, you should provide all details such as down payment amount, terms of repayment, annual interest rate and so on.
Product Pricing and Return Policies
- Using vocabulary such as "regular" or "reduced" prices is fine if you can prove that you offered the merchandise at a particular price for a specified period of time before "reducing" it.
- If you offer merchandise for sale at a price that's higher than $25 at a location other than your normal place of business, such as at a flea market or a business expo, you should give customers a written receipt or copy of the sales contract and a notice of their right to cancel the sale within three days.
- Other than the "three day rule," you aren't required by law to give any refunds on sales, but you may want to do so anyway to promote good customer relations. If you have a refund policy, you should post the written policy conspicuously in your location.
- If you do business by mail order, you need to become familiar with the FTC's mail order rule.
There are two basic types: express and implied. Both federal laws and state laws may enforce warranties. Services as well as products can be warranted.
Express Warranties These warranties, which are statements or promises about a product or about a promise to correct defects or malfunctions in a product, can be either oral or in writing. Of course, merely giving an opinion or praising a product is not a warranty, For example, "You look good in that," or "I think you're really going to be satisfied with this shampoo" aren't warranties.
Written warranties don't need to be called a warranty or be part of a formal written contract to be legally treated as one. Any statements in product literature or in advertisements may be considered a warranty.
Implied Warranties These don't stem from anything said either orally or in writing or anything done by the seller. They're automatically assumed whenever a product is sold. For example, it's assumed a lawnmower will cut grass that's 4 inches tall or less.
These implied warranties automatically guarantee that the product is fit for ordinary use and any special uses the seller is aware of.
There's also a special implied warranty that occurs if the seller knows the product is required for a particular purpose and the buyer is relying on the seller to assist in the selection of a suitable product. For example, you need paint to cover a particular kind of surface and the seller selects a product that he says will meet your needs.
Breach of Warranty
Who's liable if a customer buys a product from you and the product fails to live up to the warranty? Sometimes the manufacturer, sometimes the retailer and sometimes both. Who's liable is in part determined by who made the warranty to begin with and how much the retailer was involved in assisting the customer select the product. This is a complicated legal area and requires competent legal advice.
Consumer Protection Statutes
Remember that consumers have a great deal of clout these days and that consumers can sue not only to recover the cost of actual loss but also, in some cases, can recover additional punitive damages even if the violation isn't proved to be intentional on the seller's part.
A wise retailer will have an audit of potential and actual practices conducted and pay for competent legal advice now to prevent having to pay for legal advice after someone files suit.
Carlotta Roberts has a J.D. degree from Atlanta Law School. Having worked in the areas of business organization, contracts and employer/employee relations, she's been a consultant to small-business owners since 1981. She worked as a staff attorney concentrating in employment law issues before joining the Small Business Development Center national network in 1986. Currently area director for the Kennesaw State University Small Business Development Center near Atlanta, she has developed two nationally recognized programs: The Cobb Micro Enterprise Council, which won the Vision 2000 award for small-business development in 1999, and the Franchise Institute, developed to provide assistance to franchisees.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.