Have you considered the possibility of getting hit with a class action lawsuit if you set your shipping and handling prices too high? In addition to protecting purchasers from deceptive trade practices concerning more commonly accepted "false advertisements", consumer protection laws prohibit certain types of representations made about a seller's shipping and handling charges.
Different states have laws that differ slightly, so if you market and sell to people throughout the United States, you should keep that in mind. But most states have laws such as consumer fraud statutes, deceptive trade practices laws, and/or unfair competition laws that can punish sellers for charging more than the actual costs of "shipping and handling" for such charges. In California we have the Consumer Legal Remedies Act (CLRA) and other unfair competition statutes including the Business and Professions Code §17200, et. seq.[1] Legally and ethically, it is recommended to carefully set your shipping and handling charges to avoid incurring larger damages from consumer claims in the future.
The Direct Marketing Association (DMA), provides guidance as to the currently accepted practices for determining shipping and handling charges.[2] In particular they say that the charges should be "fair, reasonable, clear and justifiable."[3] To comply with this standard, a seller should disclose what types of costs are included in the shipping and handling, and it should include the costs that are most directly related to the shipping of the product. According to the DMA, costs that are most direct are expenses from common carriers, delivery, packaging, and direct labor.
Some sellers have started avoiding passing on only the costs directly related to shipping expenses by relabeling the charge to something like "shipping and processing." [4] Renaming the charges may be one be in compliance with the law. But because of the risk involved from class action lawsuits, it may be best to either pass on only actual costs to the purchasers, or clearly disclose what costs you are charging for prior to completing the sale.
Because sellers with excessive shipping charges likely do business with a large number of consumers, the particular issues put the sellers at a larger risk for class actions than most issues do. Basically the class action could potentially include all, or a significant portion of, a seller's consumers that paid the excessive charges. Class actions tend to be more widely publicized than most litigation cases and, if the plaintiffs succeed in their claims against the defendant, the defendant could incur serious monetary damages because of the number of class members it must compensate. Thus, sellers should take precautionary measures to avoid getting in this situation.
Many of the class action lawsuits on this particular issue end with a settlement. But even the settlements are costly. In 2002 in a case against Columbia House, a settlement was reached wherein Columbia House paid $5 million in attorney's fees, $200,000 of costs, and provided each class member with a certificate for a reduced price compact disc or cassette with no shipping and handling fees.[5][6] In 2005 a class action against BMG Music Service and Sony Music Entertainment ended with a settlement awarding all class members 75% off of one or two compact discs with free shipping and handling, and attorney's fees of up to $1 million.[7][8] Thus, conservatively charging shipping and handling (or shipping and processing since this term is likely more inclusive and therefore provides the seller more protection) or clearly disclosing the costs that are being passed onto the consumer for your shipping and handling charges is a savvy business decision.
Nonetheless, if you find yourself being sued for excessive shipping and handling charges, it is, as usual, still worth defending your position. There have been some defense victories in these types of cases and you never know when you can win on a technicality. For example, in 2006, the Appellate Court of Illinois reversed a lower court's decision in Smith, Allen, Mendenhall, Emons & Selby v. The Thomson Corporation and ruled in favor of defendants stating that the plaintiff did not prove damages. Plaintiff acknowledged that it knew the full price before purchasing the items and decided that the product was worth that overall price. Therefore, any overcharging of shipping and handling did not affect plaintiff's decision to purchase and the Court felt this negated plaintiff's claim for damages due to defendant's behavior.[9] A more recent case against Amazon.com, Inc.[10] in 2009 ended with a summary judgment in favor of defendant Amazon because the plaintiff did not show a triable issue of fact as to whether he relied on Amazon's representations regarding shipping when deciding whether to make his purchase.[11]
Overall, a cautious approach to setting shipping and handling or processing charges is a safe long-term approach for your business, even if you may be able to successfully defend against lawsuits. Disclosing what costs are included in your shipping and handling or shipping and processing charges in your contracts or Terms of Service is a good practice. WLF Lawyers can assist you with preparation of and alterations to your contracts or Terms of Service to ensure that this information is included. Feel free to contact us for more information.
[1] See California Business & Professions Code §17537 for information about setting shipping and handling prices on "prizes" or "gifts." There also may be other considerations for offering something "free." For more guidance on this issue, see The FTC Guide Concerning Use of the Word "Free" and Similar Representations at http://www.ftc.gov/bcp/guides/free.htm.
[2] The DMA is an independent association not affiliated with the government. For more information on the DMA see http://www.the-dma.org/index.php.
[3] http://www.dmaresponsibility.org/sh/
[4] See Appellant's Reply Brief submitted on behalf of Jennifer-Joy Bronk in Talarico v. Vistaprint USA, Inc., No. BC321402 (CA 2007), discussing and objecting to the approved settlement in the case wherein Vistaprint agreed to say charges were for "shipping and processing" instead of "shipping and handling" to be more inclusive and clear to the consumers.
[5] Columbia House also agreed to start using the term "shipping and processing."
[6] Settlement in California Consumers, et. al. v. Columbia House, No. 216699 (CA 2002).
[7] The Agreement also included conspicuously disclosing all costs associated with shipping and handling charges in the Membership Guides.
[8] Settlement in Trowbridge, et. al. v. Sony Music Entertainment Inc., et. al.,Docket No. 2:01-CV-125-P-H (ME 2005).
[10] The Amazon case had to do with Amazon keeping a portion of the shipping and handling charges paid by a purchaser, even when a third party was the seller and shipped the items.
