Fulfillment: California Court Clarifies Rule on Cataloger Fees

Reported by Donna Loyle, editor in chief, Catalog Success magazine

In a precedent-setting case for catalogers, a California Appellate court recently clarified rules concerning fees listed on order forms. In short, the fees were allowable because the order forms created shipment contracts, not sale-on-approval contracts. The case is an important one for direct marketers.

The case, Wilson vs. Brawn of California, was brought by a customer of International Male catalog, owned by Hanover Direct. The plaintiff, Jacq Wilson, argued that the insurance fee he paid for his shipment was deceptive, even though he knew of the fee before ordering and did not want to return the items after he received them.

Wilson argued that International Male’s contracts were sale-on-approval contracts, because the cataloger offered a satisfaction guarantee to customers. Therefore, the insurance fee did not have any value to customers, because the cataloger bore the risk of loss for any damage to products during shipment. The trial court ruled in favor of Wilson, but the California Court of Appeal over-ruled and sided with the catalog company.

Following is an Idea Factory exclusive interview with George Dougherty and Charles Bergen, principals at Grippo and Elden (http://www.grippoelden.com/), the Chicago-based law firm that represented Brawn of California in the case.

Idea Factory: Please give us some background on this case and its importance to catalogers.

Bergen: Lately several lawsuits have been filed disputing catalogers’ fees, such as shipping and handling. This case, however, was about an insurance fee as disclosed on an order form for International Male catalog. In California, there are laws that allow consumers rights of recovery in which the plaintiff doesn’t even have show he or she has been harmed. The charge just has to be offensive to the person.

Dougherty: It’s a very pro-consumer piece of legislation.

Bergen: The plaintiff in this case, Jacq Wilson of San Francisco, claimed that the insurance fee charged by International Male was illusory. He claimed the fee was misleading. The trial court ruled that Wilson’s transaction qualified as a sale-on-approval contract. But the Appellate court over-ruled and said it was a shipment contract.

Idea Factory: What’s the difference between a sale-on-approval and a shipment contract?

Dougherty: Under the Uniform Commercial Code there are three types of contracts, two of which were pertinent to this case.

One is a sale-on-approval contract. This is when I send a good to a customer and say: “Try it out. If you like it, you tell me, and I’ll charge you for it. If not, send it back.” The questions, though, are when does title for the good transfer, and who bears the risk of loss if the product is not delivered?

Under a shipment contract, if I’m the seller, I take your order and give it to a common carrier like the U.S. Postal Service to deliver the item to you. Under a shipment contract, the title and risk of loss changes to the buyer when I give the good to the common carrier (as long as I select a reasonable common carrier). The mail order industry operates under the assumption that once it delivers a good to a common carrier, the item belongs to the buyer. Accountants, auditors, banks and others consider the good to have been sold and title and risk of loss transferred to the buyer.

The California trial court, however, said that International Male’s contracts were not shipment contracts but sales on approval based on the cataloger’s satisfaction guarantee. And as such, the insurance fee that International Male charged was deceptive in that the cataloger bore the risk of loss until delivery. The Appellate court disagreed and said these were shipment contracts. Just because you offer a satisfaction guarantee in which a customer can return a good within 60 days, doesn’t convert the transaction from a shipment contract to a sale-on-approval contract.

Bergen: The plaintiff also argued that if a good is lost or stolen in transit, the cataloger would replace the item anyway, so an insurance fee was illusory. Our answer was: not as long as the cost to replace the good about matches the actual fees charged. The fee then is a real benefit.

Dougherty: The plaintiff claimed it was a sale on approval, and as such, the insurance fee did not have any value. Under the UCC, once the cataloger delivers the good to a common carrier, the consumer owns the good. And so the fee did add value to the order.

Idea Factory: When was the case filed?

Bergen: In 2002. Wilson bought a T-shirt and tank top from International Male catalog and liked the goods. He did not want to return them, so he wasn’t harmed by the goods in any way. But he shared an office with a lawyer who disputed the insurance fee -- although Wilson bought the items knowing the fee and paid it. The trial court heard the case in 2004, and the Appellate Court’s decision came in September. Wilson’s lawyer has filed suits against several other Hanover catalogs on this same issue. That’s why this is an important case for the catalog industry.

Idea Factory: What kind of precedent was there for this case?

Bergen: We found no case law that addressed this issue in particular. Catalogers then should look carefully at what they disclose on an order form as this was a ground-breaking and precedent-setting case.

Idea Factory: What should catalogers do in light of the Appellate Court’s decision in Wilson vs. Brawn of California?

Bergen: Have your lawyers check your disclosures to customers on the fees you charge, and make sure the disclosures are accurate. The corresponding costs you incur should about match the costs for the services. They don’t have to be exact, but should be in the ballpark.

Dougherty: If you offer a satisfaction guarantee, make sure the language is appropriate based on what is discussed in our case. Make appropriate adjustments if necessary. Given that there’s now more clarity on these topics, review your existing order forms to see if there are opportunities available for your business based on the decision.

Bergen: Have your legal counsel look carefully at your existing order forms to be sure you’re within the safety harbor this case creates.