Hunton Retail Law Resource

With the National Retail Foundation estimating 8 to 12 percent growth in U.S. e-commerce in 2017, retailers across the country are vying to compete for a piece of the $400B+ pie. Crucial to their efforts is that retailers offer a seamless online and in-home customer experience, which includes maximizing shipping and returns efficiencies. But equally as important is that retailers remain compliant with FTC regulations and state unfair competition and business practices laws, in order to minimize their exposure to an ever-expanding putative class of the 80 percent of Americans who place online orders each year.

In that vein, we have previously reported and advised on the rise in ADA and TCCWNA claims in 2015 and 2016. Now, over the past few months, a new trend has emerged that has ramifications for virtually every participant in the online retail space: a rise in the number of class action claims challenging allegedly excessive shipping & handling (“S&H”) fees. Regardless whether an online retailer offers flat or incremental S&H fees, standard and expedited S&H options or free shipping with returns-only S&H fees, few are immune from claims that the fees charged do not align perfectly with retailers’ underlying shipping costs.

The Plaintiffs’ Bar Strikes, Resulting in Quick Settlements

The past year has seen an unprecedented wave of pre-litigation demand letters and putative class action lawsuits concerning allegedly deceptive, unfair and “unethical” S&H fees: many retailers have recently received demand letters, and cases have been brought in state and federal courts against a number of retailers and product manufacturers, including Express, LLC, Deluxe Corp. and Omaha Steaks International, Inc. The trend has caught the attention of industry trade groups like the Retail Industry Leaders Association, which in May of 2017 asked its membership to keep it apprised of any developments on the excessive S&H fee front.

In all of the filed cases, the complaint alleges that the retailer violated California’s Unfair Competition Law (“UCL”) and Consumers Legal Remedies Act (“CLRA”) by charging S&H fees that exceeded the cost of shipping through the postal service. The plaintiffs seek refunds of all S&H charges in excess of the retailers’ actual shipping costs. Underlying these claims is a reliance on several advisory sources: the Data & Marketing Association’s (“DMA’s”) Guidelines for Ethical Business Practices (which states that “[p]ostage, shipping or handling charges, if any, should bear a reasonable relationship to actual costs incurred”); the DMA’s companion handbook Do the Right Thing (which states that “[w]hen figuring shipping and handling fees, it is important to reflect the costs as accurately as possible so that your customers or prospects are not likely to view these fees as a company ‘profit center’”); and a 1980 consent order issued by the FTC (which found that a charge for “freight” had the “capacity and tendency to mislead” customers who expected that such a term reflected the merchant’s costs).

Three cases have been quickly dismissed, likely as a result of settlements between the retailers and the named plaintiffs. In a fourth case, however, the parties fully briefed the company’s motion to dismiss, and on April 21, 2017, the court dismissed the plaintiff’s claims under the UCL and CLRA. See Case No. 8:17-cv-26, Dkt. 27 (C.D. Cal. Apr. 21, 2017). The court held that the complaint failed to allege plausible harm because “[v]isitors to [the company’s] website are presented with the shipping and handling charges” during the checkout process, and because consumers unsatisfied with the S&H fees were “free to make their purchases elsewhere.” The court also noted that customers are “free to do their research and determine whether the shipping and handling charges appear congruent with the actual costs of shipping and handling,” and that “those looking for the best deals will find their way to the merchants who offer the best combination of quality, price, and service.” In granting the dismissal, the court implicitly declined the plaintiff’s invitation in his briefing to follow an earlier outcome from Byler v. Deluxe Corp., 222 F. Supp. 3d 885 (S.D. Cal. 2016), in which a plaintiff survived a motion to dismiss under facts similar to those at issue above.

Proactive Risk-Management Steps for Online Retailers

The cases described above certainly are not the first of their kind, as previous cases have explored the same issues, as well as the legality of charging S&H fees on “free” goods, collecting tax on S&H fees and embedding S&H fees into the cost of dynamically priced goods. But claims of this type are accelerating at an unprecedented pace. Moreover, all 50 states have consumer protection and unfair competition laws similar to those being litigated in California, and the nature of e-commerce makes retailers susceptible to liability in virtually any state’s courts. Fortunately, the FTC, DMA and several court decisions provide insight on precautions that online retailers can take to minimize their exposure:

• Online retailers should make overt and detailed disclosures regarding their S&H fees during the ordering process, including descriptions of the fee amounts, speed, common carrier and any other relevant aspects of each shipping option. The DMA advises that “when ordering online, shoppers should receive shipping information early in the order path,” and that S&H fees “should be disclosed clearly and conspicuously and in advance of the consumer’s completing an order.” However, these disclosures need not be made on the initial offering page for a product. The FDA’s .com disclosures booklet makes clear that S&H fees may be disclosed during the checkout process, rather than on the initial offering page, because “consumers expect these charges.”
• Online retailers should conduct an audit or cost study of their actual shipping and fulfillment costs, which can be used in conjunction with legal counsel to determine reasonable S&H rates to charge consumers. Should a retailer operate multiple websites from which it sells the sale item, it should ensure that S&H fees remain constant across all such websites.
• Online retailers should refrain from representing to customers that their S&H rates constitute, reflect or are reasonably related to the “actual costs” of shipping. As the DMA itself notes, there are many components to a S&H charge above and beyond the actual costs imposed by the common carrier. These can include everything from labor, packaging, and other material costs; to the cost of warehousing, insurance, returns and maintaining call and distribution centers; to administrative, overhead and inventory costs. Online retailers should also ensure that the fees charged are termed “shipping and handling” or “shipping and processing” (as opposed to just “shipping”).
• Online retailers should require customers to affirmatively select one option as to S&H fees when checking out, or, if there is only one option available, affirmatively confirm the S&H amount to be charged.
• Online retailers should consider adding an arbitration provision and class-action waiver to their terms and conditions governing disputes arising from online orders.
• Online retailers should take S&H demand letters and class action lawsuits seriously. With S&H fees only amounting to a few dollars, it can be tempting to not give much thought to these types of class action lawsuits. However, thousands of dollars in liability could stack up from a mere click of a button. Hiring experienced counsel is key to defeating these actions early in the litigation process. If you receive a demand letter, confer with counsel about your options for settling out of court or litigating the claims.