Recommended ResourcesText

Langvardt, A. W., Barnes, A. J., Prenkert, J. D., McCrory, M. A., & Perry, J. E. (2019).Business law: The ethical, global, and e-commerce environment(17th ed.). Retrieved from https://www.vitalsource.com

question

• Under the three-part test for unfairness stated in the course textbook (see page 1363), did Orkin's behavior violate FTC Act 5's prohibition against unfair acts or practices?
• Discuss each element of the three-part test and how it applies to the Orkin case?

Between 1966 and 1975, the Orkin Exterminating Company, the world's largest termite and pest control firm, offered its customers a "lifetime" guarantee that could be renewed each year by paying a definite amount specified in its contracts with the customers. The contracts gave no indication that the fees could be raised for any reasons other than certain narrowly specified ones. Beginning in 1980, Orkin unilaterally breached these contracts by imposing higher-than-agreed-upon annual renewal fees. Roughly 200,000 contracts were breached in this way. Orkin realized $7 million in additional revenues from customers who renewed at the higher fees. The additional fees did not purchase a higher level of service than that originally provided for in the contracts. Although some of Orkin's competitors may have been willing to assume Orkin's pre-1975 contracts at the fees stated therein, they would not have offered a fixed, locked-in "lifetime" renewal fee such as the one Orkin originally provided.

Pg

1363 Unfairness Section 5's prohibition of unfair acts or practices enables the FTC to attack behavior that, while not necessarily deceptive, is objectionable for other reasons. As demonstrated by the case discussed in an Ethics in Action box that appears later in the chapter, the FTC focuses on consumer harm when it attacks unfair acts or practices. To violate 5, this harm: Must be substantial. Monetary loss and unwarranted health and safety risks usually constitute substantial harm, but emotional distress and the perceived offensiveness of certain advertisements generally do not. Must not be outweighed by any offsetting consumer or competitive benefits produced by the challenged practice. This element requires the commission to balance the harm caused by the act or practice against its benefits to consumers and to competition generally. A seller's failure to give a consumer complex technical data about a product, for example, may disadvantage the consumer, but it may also reduce the product's price. Only when an act or practice is injurious in its net effects can it be unfair under 5. Must be one that consumers could not reasonably have avoided. An injury is considered reasonably unavoidable when a seller's actions significantly interfered with a consumer's ability to make informed decisions that would have prevented the injury. For example, a seller may have withheld otherwise unavailable information about important product features, or used high-pressure sales tactics on vulnerable consumers.