Reference no: EM131473552

Question: ORKIN EXTERMINATING CO. v. FTC, 849 F.2D 1354 (11TH CIR. 1988)

FACTS Between 1966 and 1975, Orkin Exterminating Company sold "lifetime" guarantees for extermination services. The contracts provided that the customer could renew his or her "lifetime" guarantee by paying an annual renewal fee in an amount specified in the contracts. The contracts did not provide for any increase in this fee. By 1980, Orkin had determined that increasing costs and inflation rendered the contracts disadvantageous to Orkin. Orkin thus informed the customers that their annual renewal fees were going to be increased by 40 percent. Although many customers complained, they did not have any viable alternatives as switching to other competitors would have been no cheaper than paying Orkin's increased rates. The FTC issued an administrative complaint that Orkin had committed an unfair act or practice in violation of Section 5 of the FTC Act. The ALJ agreed and issued an order requiring Orkin to roll back all fees in pre-1975 contracts to the levels specified in the contracts. Orkin appealed to the Commission, which affirmed the ALJ's decision. Orkin then appealed to the U.S. Court of Appeals. DECISION The U.S. Court of Appeals noted that the FTC's Policy Statement on Unfairness provides: [T]o justify a finding of unfairness the injury must satisfy three tests.

It must be substantial; it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and it must be an injury that consumers themselves could not reasonably have avoided. The court then reviewed the Commission's findings. The Commission had found that the first prong of the standard, requiring a finding of substantial injury to consumers, had been met. The Commission had stated: "The harm resulting from Orkin's conduct consists of increased costs for services previously bargained for and includes the intangible loss of the certainty of the fixed price term in the contract." In fact, Orkin's increase in annual fees generated more than $7 million in additional renewal fees. In examining the second prong, the Commission had determined that the increase in annual fees did not result in any benefits to consumers, as it was not accompanied by an increase in the level or quality of the service provided. Finally, with regard to the third prong, the Commission had found that the consumers could not have reasonably avoided the injury. The contracts had not given the consumers any indication that Orkin might raise the annual fees; thus "[a]nticipatory avoidance through consumer choice was impossible." Nor could consumers have avoided their injuries by switching their business to one of Orkin's competitors. The Court of Appeals found no error in the Commission's findings and affirmed the Commission's cease-and-desist order.