Discussion

Prior to beginning work on this discussion,

  • Review Chapter 48 of the course textbook.

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.

Your initial response should be a minimum of 200 words.

Answer:

The Orkin case can be evaluated under the three-part test for unfairness stated in the FTC Act § 5’s prohibition against unfair acts or practices. The three elements are: (1) an injury that is significant and substantial, (2) that is not reasonably avoidable by consumers, and (3) that is not outweighed by countervailing benefits to consumers or competition.

First, the Orkin case involved a significant and substantial injury to consumers. By imposing higher-than-agreed-upon annual renewal fees, Orkin breached roughly 200,000 contracts and realized $7 million in additional revenues from customers who renewed at the higher fees. This resulted in a significant financial harm to the customers who relied on the original contracts, which guaranteed a lifetime guarantee with a fixed and locked-in renewal fee.

Second, the injury was not reasonably avoidable by consumers. The contracts gave no indication that the fees could be raised for any reason other than specific and narrow ones. Consumers had no way of avoiding the injury as they were relying on the original contracts and had no reason to suspect that the fees would be raised in the future.

Third, the injury was not outweighed by countervailing benefits to consumers or competition. The additional fees did not purchase a higher level of service than that originally provided for in the contracts. Additionally, Orkin’s competitors would not have offered a fixed and locked-in “lifetime” renewal fee, meaning that consumers did not have the option to switch to a competing firm.

In conclusion, based on the three-part test, it appears that Orkin’s behavior in raising the annual renewal fees without prior notice or agreement violated FTC Act § 5’s prohibition against unfair acts or practices. The injury was significant, not reasonably avoidable by consumers, and not outweighed by countervailing benefits.

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