The Federal Trade Commission today settled charges that
removable drive maker Iomega failed to honor rebate promotions in a timely
manner in a record-setting cash settlement designed to send a message to
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
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
"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
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
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
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."