Resale of Consumer Electronics

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Division of Enforcement
Bureau of Consumer Protection
December 20,2006
Christopher Smith, Esq. and Elaine Kolish, Esq.
Sonnenschein, Nath & Rosenthal LLP
1301 K Street, NW
Suite 600, East Tower
Washington, DC 20005-3364
Dear Mr. Smith and Ms. Kolish:
This letter responds to your request on behalf of your client, Sony Electronics Inc.
("Sony"), for a staff advisory opinion regarding Sony's proposal to resell, as "new," returned
consumer electronics products when the company or its authorized vendor can reliably determine
that the products have never been turned on and other particular conditions are met. This
advisory opinion is based on the information that you have provided to us in your letter of
November 15,2006. All references to facts regarding your proposal are based on your
representations; we have not conducted an independent investigation, or otherwise verified the
information that you provided.
You note that Sony, as well as other companies in the consumer electronics industry,
experience high return volumes.' Sony's uniform practice has been to treat all opened and
returned products as used. As a result, following inspection and servicing, these products are
sold as "refurbished" at significantly discounted prices and include a 90-day limited warranty.
You state that, because many of the returned products in fact have never been used, the current
resale policy comes at a substantial financial cost to the company. Sony proposes modifying its
practices by distinguishing between returned products that previously have been turned on and
those that have notY2with the latter category of products being eligible for resale as new, if
specific criteria are met.
1 	Consumer electronics products sold by Sony include video products (DVD
players/recorders, digital cameras, camcorders, televisions, and combination TVNCR or
TV/DVD players), computers (desktop and notebook PCs and related equipment), video game
systems, audio products (desktop, component and portable devices), cell phones, portable digital
assistants, and vehicle electronics.
2 	Sony would regard a product has having been "turned on" if electrical power had
been applied to any of the product's circuitry.

Christopher Smith and Elaine Kolish
December 12,2006
Page 2
You state that Sony would implement the policy modification by having it or one of its
authorized vendors:
i. 	introduce reliable product packaging technologies that ensure an objective
and verifiable process for identifying returned products that have never
been turned on.3
..
11. 	identify, fiom among the products returned by retailers to Sony or its
authorized vendor, those that have never been turned on;
iii. 	visually inspect those products that have not been turned on and reject any
damaged products;
iv. 	ensure that returned products that satisfy the first two conditions have all
of their requisite parts, components, and manuals;
v. 	repackage the returned products that meet the above conditions;
vi. 	provide the same warranty for these returned products as for new products
that have never been sold; and
vii. 	return them to a retailer for sale as new products.
You then ask for the staffs opinion as to whether Sony's proposed course of conduct complies
with the FTC Act and other Commission policy statements.
Section 5 of the FTC Act, which prohibits deceptive acts or practices, governs the issue.
15 U.S.C. tj 45. 	The Commission has explored the concept of deception under Section 5 in two
relevant policy statements.
Our analysis begins with the Commission's 1969 Enforcement Policy on Merchandise
Which Has Been Subjected to Previous Use on Trial Basis and Subsequently Resold as New. 34
Fed. Reg. 176-77. The 1969 Enforcement Policy concerned the then-prevalent business practice
of selling, as new, products that previously had been used on a trial basis by prospective
purchasers. Id. at 176. In that policy statement, the Commission set out the broad principle that
deception lies where a marketer "[fails] to disclose material facts relevant to a purchaser's
decision to buy or not to buy." Id. Because consumers have a preference for new or unused
products, the Commission found that prior use was material to the purchase decision. Id. The
Commission, therefore, concluded that the failure to disclose prior use was unlawfbl even where
3 	Some of these technologies include internal chips or clocks with the ability to
indicate whether a product has been turned on; and tamper-evident tape, seals, or labels affixed to
AC plugs, connectors, or battery compartments.

Christopher Smith and Elaine Kolish
December 12,2006
Page 3
returned merchandise had been refurbished to "good as new" condition. Id. at 177. The
Commission noted, however, that this policy applied only to products that in fact had been
"used," as distinguished from products that had "merely been inspected but not used." Id.
The Commission provided more specific guidance in its Policy Statement on Deception,
appended to Clifldale Assocs., Inc., 103 F.T.C. 110, 174 (1984). The Commission stated that it
will find deception where a representation, omission or practice is likely to materially mislead a
consumer acting reasonably under the circumstances. Id. at 176. Materiality is a core element of
deception. A misrepresentation or omission is material if it is "likely to affect a consumer's
choice of or conduct regarding the product," and therefore, injures the consumer who may have
otherwise made a different choice. Id. at 182-83.
Pursuant to the guidance provided by these policy statements, we do not believe that
consumers would be deceived by Sony's resale of returned consumer electronics within the
guidelines described above. As an initial matter, by limiting its program to products that have
never been turned on, it appears that Sony would be reselling products that fall within the
"inspected but not used" category referenced in the 1969 Enforcement Policy. However, the
analysis does not end there. The products, as a result of prior purchase, may carry defects upon
return. For example, a returned product may never have been turned on, but nonetheless may be
damaged or missing requisite parts and inserts. Sony's program appears comprehensive enough
to avoid such defects and protect consumers from injury, thereby likely rendering the fact of prior
purchase immaterial. Therefore, we believe Sony would be acting lawfblly under Section 5 of
the FTC Act in implementing its proposed program, as represented to Commission staff.
This letter sets out the views of the staff of the Bureau of Consumer Protection, as
authorized by the Commission's Rules of Practice. Those views are based on information
provided to Commission staff by you. Staff have not engaged in independent factual
investigation regarding the proposal. In accordance with Section 1.3(c) of the Commission's
Rules of Practice and Procedure, 16 C.F.R. 5 1.3(c), this is a staff opinion only and has not been
reviewed or approved by the Commission or by any individual Commissioner, and is given
without prejudice to the right of the Commission later to rescind the advice and, where
appropriate, to commence an enforcement action. In accordance with Section 1.4 of the
Commission's Rules of Practice and Procedure, 16 C.F.R. 5 1.4, your request for advice, along
with this response, will be placed on the public record.
We appreciate your taking the time to
~ssdciateDirector for Enforcement

S~nnenscheinS O N N E N S C H E I N N A T H & R O S E N T H A L LLP
Christopher Smith
202.408.923 1
kitsmith@sonnenschein.com
Elaine D. Kolish
202.408.3243
eltolish@sonnenschein.com
1301 K Street N.W.
Suite 600, East Tower 	Chicago
Washington, D.C. 20005-3364 	Kansas
202.408.6400 	Los Angeles
202.408.6399 fax 	New Vork
www,sonnenscheln.com 	Phoenix
San Francisco
Short Hills, N.J.
St. Louis
Washington, D.C.
Wesf Palm Beach
November 15,2006
The Honorable Donald S. Clark
Secretary
Federal Trade Commission
600 Pennsylvania Ave., N.W.
Washington, DC 20580
Re: 	Request For a Staff Advisory Opinion
Dear Mr. Clark:
On behalf of Sony Electronics Inc. (Sony) we are requesting a staff advisory opinion,
pursuant to 16 C.F.R. fj 1.1, on the question of whether Sony may lawfully market and sell as
new certain returned consumer electronics products that have never been used and that are
indistinguishable from products straight fiom the factory. Specifically, Sony seeks guidance on
the acceptability of selling consumer electronics products as new products under a narrowly
defined program in which Sony or its authorized vendor would:
(i) 	identify, fi-om among the products returned by retailers to Sony or its authorized
vendor, those that have never been turned on;
(ii) 	visually inspect those products that have not been turned on and reject any damaged
products;
(iii) 	ensure that returned products that satisfy the first two conditions have all of their
requisite parts, components, and manuals;
(iv) 	repackage the returned products that meet the above conditions;
(v) 	provide the same warranty for these returned products as for new products that have
never been sold; and
Y E A R S
2 0 0 6

S~nnenscheinSONNENSCHEIN NATH & ROSENTHAL LLP
Federal Trade Commission
November 15,2006
Page 2
(vi) 	return them to a retailer for sale as new products.'
This request is based on our understanding of prior Commission policy and precedent
that require a seller to disclose when it is selling goods that have been previously used, but do
not require returned goods that have merely been "inspected" by consumers to be described as
used when resold. Sony3srequest does not require the FTC staff to define the entire scope of
actions that can reasonably constitute inspection. Instead, we only ask the staff to conclude (a)
that a product that has never been turned on will not be considered used, and (b) that the other
elements of Sony's proposed program will assure that a consumer buying such a product will
encounter the same product purchase and usage experience as if he or she had bought a new
consumer electronics product that had not been purchased previously.
We explain below the reasons for Sony's proposed course of action and provide
additional details about how the program would be implemented. Additionally, we set forth an
analysis of why we believe Sony's proposed conduct is legally permissible and why it is
appropriate for the FTC staff to provide the requested guidance.
Sony's Proposal to Sell Certain Unused Returned Consumer Electronics as New
Like many other consumer electronics companies, Sony experiences a high volume of
product returns from consumers, the wholesale value of which has grown dramatically in recent
years. As a matter of policy, Sony generally treats all opened returned products as if they have
been used by consumers. These returned products, which are often inspected and serviced, are
designated by Sony as "Class B" products. These products are sold as refurbished products at a
significantly discounted price, and they typically include a 90-day limited warranty rather than a
longer new product warranty.
Because of the undifferentiating nature of its resale policy, many products designated as
Class B by Sony have never even been turned on - having merely been inspected by purchasers
before being returned to Sony. Such products have nothing wrong with them when returned by
consumers and require no servicing before they are sold at a Class B discount.
' The consumer electronics products potentially covered by Sony's program include but are not limited to the
following products: video products (e.g.,DVD playerslrecorders, digital cameras, camcorders, televisions, and
combination TVIVCR or TVDVD players); computers (desktop and notebook PCs and related equipment); video
game systems; audio products (desktop, component and portable devices); cell phones; portable digital assistants;
and vehicle electronics.
EGRITY
Y E A R S
2 0 0 6

S~nnenscheinSONNENSCHEIN NATH & ROSENTHAL LLP
Federal Trade Commission
November 15,2006
Page 3
The financial cost to Sony of its Class B resale policy is substantial. Consequently, Sony
would like to modify its policy to distinguish between returned products that have not been
turned on and those that have been operated. Such a modification would provide Sony with
greater flexibility in both inventory control and supply chain management while ensuring
compliance with the Commission's policies.
Although even some use of a product reasonably could be considered mere "inspection,"
Sony proposes to take an extremely conservative approach to the question of whether a returned
Sony product has been used by a consumer. Sony's proposed program is based on the simple,
bright line standard of whether a product has been turned on - i.e., if it has not been turned on, it
has not been used. This approach avoids a potential slippery slope, because it does not require
the FTC to evaluate or determine how much use is acceptable.
To implement this policy change in a consistent, verifiable manner, Sony would use
existing, reliable product and packaging technologies to determine if a purchaser has turned on a
returned product. For example, some of Sony's electronic products contain an internal chip or
clock that allows Sony to determine if a product has been turned on and for how long. Sony also
may use tamper-evident tape, seals or labels, which can be affixed to AC plugs, connectors or
battery compartments, to provide a clear indicator of consumer use of a product. Sony would
determine on a product-by-product basis which technology it would use to determine if a
consumer has turned on a product. If the consumer has turned on the product at all - even if only
to conduct a cursory inspection of the product's operation - Sony would disqualify the product
fi-om future sale as a new product. Sony's plan thus avoids subjective evaluations about whether
or to what extent a returned product has been used by a consumer. Stated in its simplest terms, if
electrical power has been applied to any of the product's circuitry, then it cannot be sold as
L C
new."
The other elements of Sony's program ensure that the consumer purchasing experience
would be the same as it would be with other new products. Sony would visually examine unused
products to ensure that they are complete and undamaged, and if so, place them in new
packaging.2 sony also would provide the same wmanty for these repackaged products as for
This program will not involve refurbishment of products to a "good as new" condition. If there is visible damage,
such as scratches, dents or cracks, the product would not be eligible for the program. Of course, minor cosmetic
blemishes, such as fingerprints that a consumer might leave on a product when handling it, would be removed and
would not render the product ineligible for the program. Otherwise damaged products would be designated for
Sony's refurbished sales program. Moreover, if the product is otherwise acceptable but a minor part or piece of
product dormation (e.g.,a headphone, manual, or warranty card) is missing because the consumer omitted the item
from the package when returning the product, then the missing item would be replaced.

S~nnenscheinSONNENSCHEIN NATH & ROSENTHALLLP
Federal Trade Commission
November 15,2006
Page 4
other new similar products. Because Sony (or its authorized agent), and not retailers, would run
the program, Sony can ensure that the policy is properly and uniformly applied across all returns.
Sony and Industry Experience With Returns Show the Significance of Sony's Request
Currently, as would be the case under the new program, retailers send all returned
products to return centers operated by Sony or its authorized agent. These return centers perfom
the necessary inspections and refurbishment to prepare a returned item for resale as Class B
products. Sony's experience through these return centers indicates that only a very small
percentage of returns are actually defective products and that a very significant percentage fall
into the "no problems found" (NPF) category. Because many of the NPF products are items that
have never been turned on, Sony incurs significant losses from their sale as Class B products.
Similar industry-wide patterns of returns also have been reported. For example, a
consumer survey conducted by the Consumer Electronics Association (CEA) in 2005 indicated
that many consumers return products for reasons other than a defect, including (a) to obtain a
different brand or model, (b) because they no longer wanted it, (c) because they already owned
it, or (d) because they spent too much money on i t 3 The CEA survey also indicated that nearly
50 percent of all returns occur within a week after purchase. Overall, these statistics suggest that
many purchasers of consumer electronics products may merely open the box and inspect the
product without using it before returning it to the retailer or to the manufacturer.
Sony's Proposed Course of Action Is Lawful
Sony believes that its proposed course of action, as described in this letter, is lawful and
would not be deceptive under the FTC Act or under the standards the Commission has expressed
in its 1984 Policy Statement on Deception and in its 1969 Enforcement Policy on "Merchandise
Which Has Been Subjected To Previous Use On Trial Basis and Subsequently Resold as New."
The 1969 policy statement is particularly relevant. Although the 1969 Enforcement Policy
predates the Commission's Policy Statement on Deception, it has not been repudiated by the
Commission. Moreover, we believe that application of the Deception Statement's analytical
tools leads to the same conclusion the Commission reached in its 1969 Enforcement Policy.
The 1969 statement, whle reaffirming the Commission's long-held view that consumers
have a preference for new or unused goods, also draws an important distinction between
3 "Return Rates and Issues for CE Products Update," Consumer Electronics Association (CEA) Market Research
Report (Nov. 2005).
EGRITY
Y E A R S

S~nnenscheinSONNENSCHEIN NATH & ROSENTHALLLP
Federal Trade Commission
November 15,2006
Page 5
"inspectionyyand 	Specifically, the Commission concluded that trial use by a consumer
and subsequent refix-bishment of returned products to a good-as-new conhtion requires
disclosure, but that its "policy applies only to merchandise that has been used, and not to
merchandise that has merely been inspected but not used."'
Under the Deception Policy Statement there must be a representation, omission or
practice that is likely to mislead a consumer, acting reasonably under the circumstances, to his or
her detriment.6 In other words, the representation, omission or practice must be a material one.
Under its proposed program, Sony would treat the products as new, in terms of their pricing,
packaging and warranty. The resulting implied representation that the repackaged products are
new would not be misleading to consumers because the products would in fact be new, having
never been used by their previous purchasers.7
Although Sony recognizes that the FTC appreciates empirical data on consumer
expectations when it is available, we are unaware of any such empirical data in this case.
Nevertheless, the absence of such data is not a bar to an advisory opinion. It is well established
in Cornmission case law that the Commission may use its accumulated expertise to determine
what facts are material to consumers and when it is deceptive to omit those facts from marketing
materials.' 	In the past, the Commission has generally alleged a deceptive failure to disclose
information only when the omitted information involved health or safety or the key financial
terms and conditions of a transaction.
We also suggest that the FTC can find additional support for Sony's proposed course of
action in various state laws that expressly or impliedly permit "unused" goods to be sold as new.
Many of these states have based their laws on the Uniform Deceptive Trade Practices Act and
the Uniform Consumer Sales Act, which prohbit the resale, as new, of returned products only if
the products have been used, altered, reconditioned or reclaimed. Under those statutes, mere
34. Fed. Reg. 176, 177.
Id. at 177.
Appended to ClzffdaleAssociates, Inc., 103 F.T.C. 110, 174 (1984).
Just as we believe that Sony has no legal obligation to disclose that goods are "used" because they have never been
turned on and thus fall squarely into the "inspected" category, we also believe that disclosure of the mere fact of
prior purchase is not a material omission that might trigger a disclosure requirement. The Commission's Policy
Statement expressly recognizes that "not all omissions are deceptive, even if providing the information would
benefit consumers.. .." Id. at 183, n.4. Such a disclosure requirement also would be inconsistent with state laws, as
discussed below.
See, e.g., PJzer, 81 F.T.C. 23, 58 (1972).

S~nnenscheinSONNENSCHEIN NATH & ROSENTHAL LLP
Federal Trade Commission
November 15,2006
Page 6
inspection that does not entail use or alteration of the product would not change the status of the
product fiom "new" to 	Notably, the Ohio Administrative Code states affirmatively that
"returned goods, which have not been used by a previous purchaser, shall be considered new or
unused."I0
Furthermore, in 1998 the Office of the Attorney General of the State of California came
to the same conclusion reached by the FTC in 1969 when it analyzed the question: "must
merchandise be advertised as 'secondhand or usedyif it is used, worn, or sampled for a short
time by a consumer and then returned in like-new condition pursuant to the retailer's policy
allowing returns of merchandise at the customer's discretion." Attorney General Daniel E.
Lungren concluded that it must be so advertised," unless such use is for inspection purposes
onlY.'~"
In analyzing the question, Attorney General Lungren was guided in part by the Oregon
Supreme Court's decision in Weigel v. Ron Tonkin Chevrolet co.12 In that case the court held
that because there was a transfer of legal possession of the auto and the purchaser had
discretionary use of the vehicle for his or her own purposes for five days, the auto must be
represented as used or secondhand. The court's decision was based not on the fact of the sale,
but on the purchaser's use of the product. In that case, the court also commented on the common
practice of using goods for inspection purposes only, stating that "merchandise other than
automobiles sometimes is sold, examined, or tried out at home, and returned to the seller.
Whether such merchandise is 'new' or 'usedy does not depend on the fact of an earlier sale; it
depends on whether the article was used."I3 The Attorney General believed that Weigel correctly
interpreted the terms "secondhand or used" for its purposes. Thus, under the Attorney General's
opinion, disclosure of the prior purchase of a product depends upon whether the product has been
used, unless such use is for inspection purposes only.
See Michael P. Sullivan, 'What Goods or Property are 'Used,' 'Secondhand,' or the Like, for Purposes of State
Consumer Laws Prohibiting Claims that Such Items are New," 59 A.L.R. 4' 	1192,s 2.
10 Section 109:4-3-08. Other states such as Mississippi and Idaho have taken similar positions ("goods are not
considered used if a prior consumer was given a full refund or exchange for the goods, in the normal course of
business, and if the goods are not known to presently or formerly have defects"). See, e.g., Mississippi, 24 000 002
R.5 1 (2006), and Idaho, IDAPA 04.02.02.113 (Returned Goods) (2005). See also Louisiana, LAC 16:III.S11(2003).
I ' Opinion of Daniel E. Lungren, Attorney General, Clayton P. Roche, Deputy Attorney General, No. 97-1009
(May 22, 1998) (emphasis added).
l 3 Id. at 490, n.2.
Y E A R S
2 0 0 6

S~nnenscheinSONNENSCHEIN NATH & ROSENTHAL LLP
Federal Trade Commission
November 15,2006
Page 7
Sony believes that, under its proposed program, consumer electronics products that have
not been turned on will not have been subjected to any use. The act of merely opening the
packaging and examining a product without turning it on should be considered "inspection" and
should not trigger any affirmative disclosure duties nor any prohibition on representing the goods
as new.
At its most basic level, Sony's proposed program embodies the principles contained in
the Commission's 1969 policy statement and in the principles expressed in state laws and in the
California Attorney General's opinion regarding a company's disclosure duty. We believe that
the principles of the 1969 policy statement remain valid and are consistent with those in the more
recent Deception Policy Statement. Accordingly, Sony submits that it would be appropriate for
the FTC to conclude that Sony consumer electronics products returned by consumers without
ever being turned on can be considered "merely inspected" and not "used" and thus be eligible
for sale as new products.
Sony's Request Satisfies the Commission's Criteria for a Staff Advisory Opinion
Sony believes that the issues raised by this request satisfy the criteria in the Commission's
Rules of Practice for issuance of a staff advisory opinion. The question posed by Sony is not a
purely hypothetical or theoretical one, because Sony is prepared to act upon a favorable opinion
issued by the staff. Sony is seeking this advisory opinion because, as noted above, the FTC has
not issued guidance in this area in nearly 40 years, and there is no clear FTC or other guidance
on the particular question posed by Sony. Furthermore, because of uncertainty about this issue,
Sony and possibly other manufacturers are unnecessarily designating unused, "merely inspected"
products as Class B products. This situation creates substantial economic injury to
manufacturers such as Sony, as well as to consumers, who may pay higher overall retail prices or
may experience the effects of reduced marketplace competition resulting from lower
manufacturer profitability. Thus, resolution of Sony's question is likely to be of significant
public interest.
Conclusion
The conservative approach Sony is proposing will assure that returned products that
qualify under this program will be indistinguishable from new products delivered &om the
factory. The fact that a qualifylng product was previously purchased will not affect its
performance because the product will never have been turned on and thus never have been used.
Moreover, Sony's plan to examine qualifylng returned products visually for damage and
completeness prior to repackaging and to provide a new product warranty will ensure that the
returned products are indistinguishable from products that have never been sold. This
EGRlN
Y E A R S

S~nnenscheinSONNENSCHEIN NATH & ROSENTHAL LLP
Federal Trade Commission
November 15,2006
Page 8
comprehensive plan will eliminate any potential harm to subsequent purchasers resulting from
the qualifying products' previous purchase. Accordingly, Sony believes that its proposed
program to sell, as new, returned products that have not been turned on and that meet the
program's other criteria will satisfy the Commission's consmer protection objectives and
requirements.
We appreciate your consideration of this request. Please let us know if you would like us
to provide additional information to assist the staffs review. We would also be pleased to meet
with the staff to discuss any questions they might have.
. ..
Yours very truly,
Christopher Smith
Elaine D. Kolish
cc: 	Lydia B. Parnes, Director, Bureau of Consumer Protection
James A. Kohm, Associate Director, Division of Enforcement
Sandy Prabhu, Esq., Division of Enforcement
Y E A R S
2 0 0 6