Never A Free Lunch

Everybody loves a bargain. And what bargain could possibly be better than “free?” The crude sign next to a stack of used tires sitting along the shoulder of a rural road may be one thing. A commercial merchant’s offer of free merchandise, it turns out, is quite another. In fact, you may be surprised to learn that there are specific regulatory policies governing the offer and promotion of “free” products or services by businesses.

Since 1971 the Federal Trade Commission has enforced a policy outlined in its Guide Concerning Use of the Word “Free” and Similar Representations. Other non-governmental organizations such as the Better Business Bureaus and some self-regulatory trade associations have established related policies which, though not legally binding, have influential effect on the promotion of “free” offers by their affiliated businesses.

The FTC’s Guide is premised on the assumption that the public continually searches for the best buy. It reflects the underlying policy that offers of free merchandise or services should be designed and promoted in such a way as to avoid any possibility of misleading consumers.

For example, promotions frequently use language such as “Buy 1, get 1 free”, “2 for 1”, or “50% off with purchase of 2.” Often the free product or service offer is contingent on the purchase at full regular price of some other “tied” product or service. The Guide specifies that in making these types of promotions, the merchant must not directly or indirectly recover, either in whole or in part, the cost of the “free” merchandise by marking up the price of the tied merchandise. To meet the Guide’s criteria, the “regular” price of the tied product or service must:

  • be the actual price at which the same (i.e., not inferior or substituted) merchandise has been openly and actively sold by the merchant;
  • in the same geographic area or market in which the “free” offer is being made;
  • in the most recent and regular course of business;
  • for a reasonably substantial period of time (i.e., a 30-day period). Of course no “free” offer would be meaningful if it is made continuously or permanently. To avoid this problem, the Guide specifies that a free offer for a specific product or service:
  • should NOT be advertised in a given trade area for more than 6 months in any 12-month period;
  • at least 30 days should elapse before another such offer is promoted in the same area;
  • no more than three (3) such offers should be made in the same trade area in any 12-month period; and
  • in any such 12-month period, the merchant’s sales of the tied product with the free offer should not exceed 50% of the total volume of his sales of the same product (in the same size in the same area).
        Likewise, a “free” offer should NOT be made for a new or introductory product unless the merchant expects, in good faith, to discontinue the offer after a limited time and to commence selling the product or service at a regular price.
        The Guide sets detailed requirements concerning the clarity, prominence and specific location of disclosures which must be made as to any conditions or obligations upon which the consumer’s receipt of the free item is contingent. Distinct provisions are included for a supplier’s promotion of a free offer, and the requirement of its resellers’ passing-through such offer. Finally, the Guide makes clear that if a product or service is usually sold at a bargained or negotiated price, it should NOT be promoted in any manner with another product being offered as “free.”
        So, while it is common knowledge that someone always pays for the “free” lunch, businesses must also remember that if they promote sales of a product or service by offering free merchandise, they cannot legally put the cost of that promotion on the purchaser. If you are now confused by the complexities of giving away merchandise, consult your friendly MLM attorney.

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