FTC Staff Comment Before the New Jersey Division of Consumer Affair Concerning Proposed Rule on Advertising and Sale of New Merchandise

1(}·'OS·/ 1988 	1E, : L1e· 	If/F';]
F~derltl Trade Commission
Office of the Regional Director
2fi Federal Plaza., 22nd Flo
New York, New York 10278
(212) 264·1200
-----_....__..
October 	5, 	1988
James 	J. 	Barry, 	Jr., 	Director
New 	Jersey 	Division 	of 	Consumer 	Affair5
1100 	Raymond 	Boulevard, 	Room 	504
Newark, 	New 	Jer6ey 	07102
Dear 	Mr. 	Barryl
GOMMi~smN AUTHORIZED
VB 8 0.0 6 2
We 	are 	pleased 	to 	respond 	to 	your 	:notice 	inviting
comments 	on 	the 	New 	Jersey 	Division 	of 	Consumer 	Affairs' 	(the
HDivision's") 	proposed 	rule 	entitled 	"Advertising 	and.Sale 	of 	New
Merchandise. ,,1 	The 	proposed 	rule 	would proscribe 	the 	advertising
or 	selling 	of 	any 	merchandise 	as 	"new" 	when, 	in 	fact, 	it 	is 	not
"new 	merchandise" 	as 	defined 	in 	the 	rule. 2 	We 	support 	the
Division'S 	effort 	to 	ensure 	that 	the 	tenn 	"new" 	is 	not 	misused 	to
cauee 	consumer 	injury. 	We 	wish 	to 	note, 	however, 	that 	the
proposed 	rule 	prohibits 	all 	merchandise 	that 	has 	been 	"returned"
from 	being 	sold as 	"new." 	In 	thi8 	respect, 	the 	proposed 	rule 	may
be 	overly 	broad, 	in 	Borne 	inBtances 	prohibiting 	non-deceptive
competitive 	activity 	and 	thereby 	possibly 	injuring 	consumers.
The 	Federal 	Trade 	Commi.ssion 	etaff' e 	intereBt 	in 	the
Division's 	proposal 	stems 	from 	the 	Commission's 	general 	statutory
obligations 	to 	promote 	competition 	and 	to 	prevent 	unfair 	or
deceptive 	advertising 	and 	marketing 	practices. 	As 	you 	may 	know,
the 	Federal 	Trade 	Commission 	is 	a 	law 	enforcement 	agency 	charged
with 	prosecuting 	violations 	of 	Section 	5 	of 	the 	Federal 	Trade
Commiss ion 	Act, 	which 	prohibits, 	among 	other 	thinge, 	unfair 	or
deceptive 	practicee 	in 	or 	affecting 	commerce. 3 	In 	implementing
its 	responsibilities, 	the 	FTC 	staff 	hae 	developed 	considerable
expertise 	in 	unders~anding the 	role 	of 	advertising 	and 	labeling
in 	providing consumers 	with 	reliable 	product 	information.
the 	use
In
of
addition,
the 	term
the 	staff 	has 	specific 	experience 	with
"new." 	For 	example, 	the 	Commission 	has
1 	These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	New York
Regional 	Office 	and 	the 	Bureau 	of 	Economics 	of 	the 	Federal 	Trade
Commission. 	They 	are 	not 	necessarily 	the 	views 	of 	the 	Commission
or 	any 	individual 	Commissioner.
2 	20 	N.J. 	Reg. 	2247 	(Sept. 	6, 	1988) 	(to 	be 	codified 	at 	N.J.
Admin. 	Code 	tit. 	13, 	S 	13:45A-ll.l).
3 	15 	U.S.C. 	S 45 	~ aaq.

James 	J. 	Barry, 	Jr., 	Director 	2
promulgated 	a 	Trade 	Regulation 	Rule 	that 	governs 	the 	sale 	of 	used
motor 	vehicles. 	The 	Rule 	and 	the 	staff 	interpretation 	provide
that 	a 	demonstrator 	car--meaning 	a 	vehicle 	that, 	although 	never
sold 	to 	a 	retail 	customer, 	has 	been 	driven, 	whether 	by 	the
dealer's 	corporate 	officers, 	the 	dealer's 	employees, 	or 	anyone
else--is 	considered 	to 	be 	a 	used 	vehicle. 4 	~imilarly, 	in 	its
Guides 	for 	the 	Household 	Furniture 	Industry, 	the 	Commiasion
maintains 	that 	members 	of 	the 	industry 	should 	not 	make 	any 	direct
or 	indirect 	representations 	that 	an 	induBtry 	product 	is 	"new"
unless 	that 	product 	has 	not 	been 	used 	and 	is 	composed 	entirely 	of
unused materials 	and 	parts. 6
Proposed 	New 	Jersey 	rule 	13145A-ll.1 	states 	that 	it
shall 	be 	unlawful 	for 	any 	person 	to 	advertise 	or 	sell 	any 	mer-
chandise 	as 	"new 	merchandise" 	when 	that 	merchandise 	has 	been
"previously 	owned, 	leased, 	used, 	damaged, 	repaired, 	returned,
operated, 	or 	used 	as 	a 	floor 	model 	or 	demonstrator 	or 	in 	any
other 	Bimilar 	manner." 	In 	the 	statement 	that 	accompanies 	the
text 	of 	the 	proposed 	rule 	in 	the 	September 	6, 	19B8 	New 	Jersey
Register,7 	the 	Division 	notes 	that 	it 	has 	received 	numerous
complaints 	concerning 	businesses--moat 	frequently 	sellers 	of
automobiles 	and 	furniture--that 	have 	advertised 	or 	sold 	as 	"new,"
4 	~ 	Trade 	Regulation 	Rule; 	Sale 	of 	Used 	Motor 	Vehicles,
16 	C.F.R. 	Part 	455 	(1988) 	and 	53 	Fed. 	Reg. 	17661 	(1988), 	respec-
ti vely. 	Prior 	to 	adopting 	the 	Used 	Car 	Rule 	the 	Commission
conducted a 	two-year 	rulemaking 	proceeding. 	The 	evidence 	amassed
during 	the 	proceeding, 	and 	reflected 	in 	a 	GOO-page 	staff 	report
(Bureau 	of 	Consumer 	Protection, 	Federal 	Trade 	Commission, 	SaJe 	of
Used 	Motor 	vehicles 	(1978)), 	established 	that 	purchasers 	of
vehicleB 	regarded 	prior 	use 	or 	repair 	as 	material 	to 	their
purchase 	decisions, 	that,passing 	off 	of 	used 	or 	reraired vehicles
as 	new 	tended 	to 	deceive 	and 	injure 	conswners, 	and 	that 	such
passing 	off 	was 	sufficiently 	prevalent 	to 	warrant 	regulation.
5 	16 	C.F.R. 	Part 	250 	(1988).
6 	Section 	250.8 	of 	the 	Commission's 	Guides 	for 	the
Household 	Furniture 	Industry 	further 	states 	that 	in 	connection
with 	the 	sale 	of 	furniture 	that 	haa 	the 	appearance 	of 	being 	new
but 	contains 	used 	materials 	or 	parts, 	such 	as 	springs, 	latex 	foam
rubber 	stuffing, 	or 	hardware, 	members 	of 	the 	industry 	should
conspicuously 	disc lOBe 	that 	fact. 	Section 	250.9 	delineates 	use
of 	the 	terms 	"floor 	sample," 	"demonstration 	piece," 	"trade-in,"
and 	"discontinued."
7 	20 	N.J. 	Reg. 	2247 	(Sept. 	6, 	1988).

James 	J. 	Barry, 	Jr., 	Director 	3
products 	that 	have 	been 	"previously 	owned, 	leased, 	used, 	etc."
The 	proposed 	rule, 	according 	to 	the 	Division, 	"will 	be 	beneficial
to 	consumer~ 5ince 	'new 	merchandi8e' 	is 	defined 	to 	assure 	a 	uni-
form 	understanding 	of 	that 	term 	by 	both 	buyer 	and 	seller 	and 	to
prevent 	deceptive 	representations. h
The 	adoption 	of 	carefully 	delineated 	measures 	to
prevent 	the 	misuse 	of 	the 	term 	"new" 	may 	benefit 	consumers. 	For
example, 	representations 	that 	returned 	products 	are 	new 	may 	at
times 	injure 	consumers. 	Some 	products 	can be 	purchased, 	and 	then
abused 	or 	otherwise 	devalued 	in 	a 	way 	not 	readily 	apparent, 	and
then 	returned 	to 	the 	seller. 	If 	a 	returned product 	having 	a 	non-
apparent 	flaw 	then 	was 	sold 	to 	another 	customer 	as 	"new," 	that
consumer 	would 	have 	suffered 	economic 	harm 	(and 	perhaps, 	in 	some
instances, 	faced 	tHe 	risk 	of 	physical 	injury) 	as 	a 	result 	of 	that
misrepresentation, 	Accordingly, 	insofar 	as 	consumers 	are 	being
injured 	by 	the 	deceptive 	use 	of 	the 	term 	"new" 	in 	any 	particular
business 	context, 	the 	use 	of 	the 	term 	in 	that 	business 	context
may 	be 	an 	appropriate 	subject 	of 	regulation.
Neverthele8s, 	we 	urge 	the 	Division 	to 	consider 	whether
the 	proposed 	rule's 	broad 	applicability 	and 	uniform 	definition 	of
"new" 	also 	may 	have 	an adverse 	effect 	on 	the 	important 	and 	useful
role 	retailers' 	return 	policies 	have 	in 	the 	marketplace 	and 	may
be 	particularly 	prejudicial 	to 	mail-order 	companies 	and 	their
patrons. 	For 	example, 	a 	department 	store 	may 	now 	permit 	a 	con-
sumer 	to 	purchase 	a 	garment 	to 	be 	tried 	on 	at 	the 	consumer's
home 	and 	returned 	to 	the 	store 	if 	the 	garment 	does 	not 	fit 	pro-
perly 	or 	otherwise 	does 	not 	suit 	the 	purchaser. 	Such 	a 	return
policy 	may 	be 	practicable 	because 	returned 	garments 	in 	"new"
condition 	can 	be 	reintroduced 	to 	the 	store's 	inventory 	and
resold 	as 	"new." 	If, 	as 	a 	result 	of 	the 	adoption 	of 	the 	proposed
rule, 	the 	department 	store 	could 	not 	resell 	returned 	garments 	as
"new, II 	it 	well 	might 	determine, 	as 	a 	matter 	of 	practical 	econo-
mics, 	either 	to: 	(a) 	increase 	the 	prices 	of 	its 	merchandise 	to
cover 	the 	costs 	of 	keeping 	"brand-new" 	merchandise 	separate 	from
"returned-new" 	merchandise 	and 	to 	recover 	any 	depreciation 	that
resul ts 	from 	the 	sale 	of 	"returned-new" 	merchandise 	at 	reduced
prices, 	or 	(b) 	abolish 	the 	liberal 	return 	policies 	that 	consumers
8 	For 	example, 	some 	cosmetic 	products 	can 	be 	adulterated
easily, 	whether 	intentionally 	or 	inadvertently, 	Because 	such
adulteration 	may 	be 	undetectable, 	return 	and 	resale 	o~ 	such
cosmetic 	products 	mGY 	poee 	~ 	substantial 	health 	hazard 	in
addition 	to 	a 	risk 	of 	economic 	injury, 	to 	consumers.

... '-' '-" .--" ..... _' '-/ 1,...'
James 	J. 	Barry, 	Jr., 	Director
volue. 	Either 	outcome 	could 	diminish 	consumer 	welfare. 9
The 	possible 	adverse 	effects 	caused 	by 	the 	rule's
treatment 	of 	returned 	merchandise 	might 	be 	magnified 	for 	mail-
order 	sellers. 	Retail 	store 	customers 	can 	try 	on 	garments 	in 	the
stores' 	dressing 	rooms 	prior 	to 	making 	a 	purchase 	decision.
Based 	on 	our 	discussion 	with 	Division 	staff, 	we 	understand 	that
under 	the 	proposed 	rule, 	merchandise 	that 	is 	tried 	on 	ot 	the
store 	but 	not 	purchased 	can, 	in 	many 	instances, 	still 	be 	marketed
aB 	"new." 	Mail-order 	customers 	cannot 	try 	on 	garments 	prior 	to
purchase. 	If 	they 	are 	not 	satisfied, 	they 	must 	return 	the
garment 	to 	the 	seller. 	The 	proposed 	rule, 	however, 	appears 	to
prohibi t 	the 	seller 	from 	reselling 	the 	garment 	as 	"new." 	Since
customers 	cannot 	tryon 	garments 	from 	mail-order 	sellers 	prior 	to
purchase, 	the 	return 	rate 	for 	mail-order 	sellers 	might 	be
higher 	than 	for 	retail 	stores. 	Thus, 	the 	increase 	in 	coste 	(and
ultimately 	prices) 	associated 	with 	the 	rule's 	treatment 	of
returned 	merchandise 	might 	be 	proportionately 	higher 	for 	mail-
order 	sellers 	than 	for 	retail 	merchants, 	reducing 	the 	competitive
viability 	of 	an 	alternative 	shopping mode. lO
Consumers 	are 	likely 	to 	be 	aware 	of 	stores' 	liberal
return 	policies. 	An 	ordinary 	consequence 	of 	those 	policies--and
one 	that 	consumers 	well 	may 	understand--is 	that 	previously 	sold
goods 	that 	remain 	in 	"new" 	condition 	may 	be 	resold 	as 	"new."
Consumers 	who 	purchase 	garments 	from 	merchants 	offering 	liberal
return 	policies 	may, 	in 	many 	instances, 	be 	motivated 	to 	do 	so 	by
the 	very 	existence 	of 	a 	liberal 	return 	policy. 	In 	order 	to 	avail
themselves 	of 	suc;~ 	a 	policy, 	they 	may 	be 	willing 	to 	purchase
goods 	in 	"new" 	condition, 	irrespective 	of 	whether 	those 	garments
9 	It 	might 	be 	argued 	that 	consumers 	would 	be 	better 	off 	if
"brand-new" 	merchandise 	were 	distinguishable 	from 	"returned-new"
merchandise, 	and 	that 	they 	would 	be 	willing 	to 	pay 	a 	price
premium 	for 	"brand-new" 	merchandise. 	:"et, 	merchants 	generally
are 	free 	to 	make 	this 	distinction 	now 	(for 	an 	exception, 	see 	the
Used 	Car 	Rule, 	16 	S.F.R. 	Part 	455). 	The 	fact 	that 	merchants
rarely 	make 	this 	distinction 	may 	indicate 	that 	consumers, 	in
rot-ny 	markets, 	do 	not 	prefer 	"brand-new" 	merchandise 	enough 	to
cover 	the 	merchants' 	costa 	of 	distinguishing 	it 	from 	"returned-
new" 	merchandise.
10 	Further, 	if 	mail-order 	sellers 	chose 	to 	abandon 	liberal
return 	policies, 	instead 	of 	impo13ing 	offsetting 	general 	price
increases, 	mail-order 	purchasers 	might 	be 	deprived 	entirely 	of
the 	ability 	to 	try 	on 	garments 	prior 	to 	being 	irrevocably
committed to 	their 	purchase.

James 	J. 	Barry, 	Jr., 	Director
were 	"previously 	owned, 	used,
Accordingly, 	there 	may 	be 	no 	benefits 	to
depriving 	consumers 	of 	merchants / 	liberal
respect 	to 	goods, 	such 	as 	clothing, 	that
returned 	with 	a 	concealed 	quality 	defect. 11
5
[or] 	returned."
offset 	the 	costs 	of
return 	policies 	with
seem 	unlikely 	to 	be
In 	sum, 	we 	support 	the 	Division's 	effort 	to 	ensure 	that
misuse 	of 	the 	term 	"new" 	does 	not 	reBul t 	in 	COnBumer 	injury.
However, 	the 	DiviBion 	may 	wish 	to 	limit 	regulation 	of 	use 	of 	the
term 	"new" 	to 	thosEi 	specific 	factual 	situations 	where 	evidence 	of
consumer 	injury 	exists, 	and 	define 	"new" 	in 	a 	manner 	that
protects 	consumers 	from 	unwitting 	purchase 	of 	devalued 	or 	debasEid
merchandise 	without 	otherwise 	compromising 	consumers' 	ability 	to
avail 	themselves 	of 	the 	benefits 	of 	liberal 	return 	policies 	and
the 	convenience 	afforded 	by mail-order 	purchasing.
We 	hope 	that 	these 	remarks 	are 	helpful 	to 	the 	Division.
Please 	do 	not 	hesitate 	to 	contact 	UB 	if 	you 	have 	any 	questions 	or
would 	like 	further 	information.
Sincerely,
j/;~J~/J8~Michael 	Joel 	Bloom
Regional 	Director
11 	Clothes 	are 	but 	one 	example 	of 	merchandiae 	that 	has
little 	potential 	for 	being 	returned 	to 	a 	store 	with 	a 	concealed
quality 	defect. 	Other 	examples 	include 	Buch 	diverse 	products 	as
glassware, 	pots 	and 	pans, 	light 	fixtures, 	luggage, 	jewelry,
picture 	frames, 	etc.
Some 	states 	have 	proscribed 	the 	representation 	of 	"used
merchandise" 	a8 	"new," 	but 	have 	expre8sly 	provided 	that 	"new
merchandise" 	includes 	"merchandise 	previously 	Bold 	but 	returned
within 	a 	reasonable 	time 	by 	the 	consumer 	for 	full 	c=edit 	if 	Buch
merchandi8e 	i8 	not 	damaged or 	deteriorated." 	Wyo. 	Stat. 	S 	40-12-
105(a)(xii) 	(1987). 	See 	also 	Ohio 	Rev. 	Code 	Ann. 	S 	109:4-3-08
(Baldwin 	1988); 	R.I. 	Gen. 	Laws 	S 	23-26-1(6) 	(1987); 	and 	W. 	Va.
Code 	§ 	47-1A-2 	(1987).