The Federal Trade Commission Act and Consumer Protection Laws D2

Between 1966 and 1975, the Orkin Exterminating Company, the world’s largest termite and pest control firm, offered its customers a “lifetime” guarantee that could be renewed each year by paying a definite amount specified in its contracts with the customers. The contracts gave no indication that the fees could be raised for any reasons other than certain narrowly specified ones. Beginning in 1980, Orkin unilaterally breached these contracts by imposing higher-than-agreed-upon annual renewal fees. Roughly 200,000 contracts were breached in this way. Orkin realized $7 million in additional revenues from customers who renewed at the higher fees. The additional fees did not purchase a higher level of service than that originally provided for in the contracts. Although some of Orkin’s competitors may have been willing to assume Orkin’s pre-1975 contracts at the fees stated therein, they would not have offered a fixed, locked-in “lifetime” renewal fee such as the one Orkin originally provided.Under the three-part test for unfairness stated in the course textbook (see page 1363), did Orkin’s behavior violate FTC Act § 5’s prohibition against unfair acts or practices? Discuss each element of the three-part test and how it applies to the Orkin case Please include 1 peer reviewed source

Per the Federal Trade Commission, no one has the right to increase the prices for a service without showing a substantial reason for doing so. If a business raises the service prices without a valid reason, it violates FTC provisions against unfair trade policies. According to the FTC unfairness policy statement, three elements determine the presence of consumer injury. The injury:

“Must be substantial; it must not be outweighed by countervailing benefits to consumers or competition that the practice produces; and it must be an injury that consumers themselves could not reasonably have avoided” (Alarcon & Ha, 2020, p. 158).

Orkin Exterminating increased the service’s price without offering a valid reason for the decision, a violation of the provisions. The contract agreed upon was a lifetime and the price was stated for the consumers. Increasing the price without explaining the reasons for doing so and showing the change in possible services thereafter was an unfair practice by the company.

1. Generates substantial injury – The consumers were required to pay a significantly higher fee, leading to substantial injury. The breach of 200,000 contracts caused the company to realize $7 million in additional revenues from customers that renewed at the higher fees.
2. The countervailing benefit does not outweigh the injury – The consumer did not get any additional value from the increase in the subscription fee.
3. It was an injury that customers could not have avoided because the contract inhibited them from doing so.

References

Alarcon, M., & Ha, J. (2020). Assessment of Psychological Advertising along Consumer Rights and the Rule on Section 5 of the Federal Trade Commission, Part 1 of 2: Unfairness Doctrine. Journal of Applied Business Research (JABR), 36(4), 153–170. https://doi.org/10.19030/jabr.v36i4.10351