The FTC charges stem from consumer complaints about delays in receiving rebates and promised products from Iomega. Cash rebates and promises of free merchandise with purchases are a popular way for resellers to offer attractive prices and bundled products. But critics say resellers are at the mercy of manufacturers to make good on these promotions.
Iomega today settled the charges for $900,000--the largest civil penalty ever for a non-fraudulent violation, said Matthew Gold, staff attorney for the FTC. The company could be subject to civil or criminal contempt if it misrepresents the shipping time of any rebate or service in the future or fails to provide any rebate in the time promised.
Iomega develops and manufactures removable storage products under the Zip, Jaz, and Clik brand names. Criticism about Iomega's business practices date back to late 1996, when customers of Iomega's Zip drives reported waiting up to three or four months for promised rebates.
The settlement "concerns fulfillment problems that are part of Iomega's past," said Susan Stillings, director of corporate communications for Iomega. The delays in rebate fulfillment were due to "the overwhelming response to our early rebate and registration card programs in late '96 and into '97. Since that time, Iomega has paid, and intends to pay, every qualified rebate."
"The FTC has taken an interest in some of the computer manufacturers, and the fine is in the range [of previous fines for similar cases]," Stillings said, noting that the settlement has already been accounted for and will not be reflected in the company's fourth quarter earning statement.
"The decision to settle had to do with the expense of litigation and the expense of the management time that it ties up to work through these issues," Stilling said. "It was in the best interest of our shareholders to settle the case."
"It was a series of promotions for the storage products," Gold said. "Iomega offered consumers who purchased their products either a cash rebate or merchandise. In many, many instances, they were very, very late in delivery of the merchandise or the rebate."
In doing so, Iomega violated the FTC's Mail Order Rule, which requires that a company deliver merchandise within the time promised, or if no time is promised, within 30 days, according to Gold.
"We're trying to draw the line between a situation where a company got in over its head, and couldn't handle something, vs. a situation where a company set out to defraud," Gold said, noting that Iomega falls under the former classification. Under the terms of the deal, Iomega is encouraged to make available adequate support staff to respond to demand for such promotions.
Iomega's problems stemmed from the company's growing pains as its Zip and Jaz drives exploded in popularity, said Mary Bourdon, a storage analyst at Dataquest, noting that other Dataquest analysts sent away for but never received rebates from Iomega.
"They didn't expect the kind of growth rate they experienced, so they didn't have the right infrastructure in place," Bourdon said, adding that she believes the company's customer service issues are behind it.
Breaks Dell record
Iomega's settlement breaks the record set by Dell Computer, which in April settled charges that it violated mail order advertising rules. The Dell case was settled for $800,000.
The FTC is hoping the size of the settlement will deter other vendors from engaging in similar behavior.
"The Iomega case is a sign that we are looking very closely at this," Gold said. "I would say that dealers that are [offering manufacturer rebates] are doing so at their own risk, because they are, in my view, vouching for the idea that the rebate is going to be delivered."
"I don't know how widespread it is," he continued. "You hear of isolated instances, but you don't necessarily know if it's a situation where things fall through the cracks, or whether it's a real pattern that points to a problem. This is definitely an area that we are interested in."
Iomega's customer service also came under fire last year after many Zip drive users complained the products have a defect which came to be known as the "click of death."