MLMIA Legal Mentoring Bulletin Four

Right to Cancel

Right to cancel applies to orders of tangible personal property, and is sometimes called the “three-day cooling off” rule. It is a federal law that applies nationwide to orders over $25, but—very important—it applies if the transaction occurs away from a fixed business location. Thirty or so years ago, this rule applied to almost every “final sale,” because the direct selling business model consisted of distributors buying from the company and reselling to customers. Routinely there were “two transfers of title,” and the second sale was occurring away from a fixed business location, that is, in the distributor’s home, coffee break rooms in workplaces, or at tables in the back of a rented hotel meeting room. The modern direct selling distribution model is overwhelmingly “direct fulfillment” involving a customer, most often with distributor guidance, placing the order directly with the company, which is at a fixed business location.

Note that the focus here is “buyer’s remorse” and that this Federal law only applies if the sale occurs “away” from the seller’s main office. The sales order form that the Company provides its distributors should contain all the legally required notices. The distributor must give two copies to the buyer on every sale. In addition, the distributor must orally inform the buyer of the three-day right to cancel at the time the buyer purchases the goods.

If two things happen at the time of the sale—namely the buyer sends the method of payment directly to the company and the company directly fulfills the order—the prevailing wisdom is that this rule does not apply. Even though the distributor was sitting right there next to the buyer (making sure he or she gets business volume credit for the order), this is still a customer buying from a fixed business location. But if the distributor takes the money or method of payment, and/or delivers the product, we now have a sale occurring away from a seller’s main office, and the rule applies, because of this distributor involvement. The Federal Trade Commission web site and the attorney for the company are the resources for writing the exact language required on the sales order form.    

The above is provided as general information and, although written by MLMIA Board Member and Direct Selling Specialist Attorney Gerald Nehra, is NOT provided as the rendering of legal advice. Readers are urged to seek the counsel of attorneys or firms with special knowledge of direct selling laws. The four firms that devote their practice exclusively to counseling corporations about direct selling legal issues are, in alphabetical order: Babener & Associates, Jeffrey A. Babener, 503-226-6600, [email protected]; Grimes & Reese, PLLC, Kevin D. Grimes and Spencer Reese, 208-522-2600, [email protected]; Nehra & Waak, Attorneys at Law, Gerald Nehra and Richard Waak, 231-755-3800, [email protected]; and D. Jack Smith Law Firm, D. Jack Smith, 901-292-5225, [email protected].