Back-orders and Rule 435 Compliance: Breaking the law! Breaking the Law! Breaking the Law!

retail-onlinePerhaps the thorniest and most overlooked areas of eCommerce are compliance with the varied regulatory burdens imposed by any number of governmental entities. One specific compliance issue, adherence to FTC (Federal Trade Commission) Rule 435 on back-orders can send even the most well-run eCommerce shop into paralyzing spasms of analysis paralysis as to how best adhere to both the spirit and letter and the law.

It bears stating at the outset that Rule 435’s language is opaque and hard to decipher, and that while this post offers general advice on how to achieve compliance to the rule, it is always wise and we strongly urge readers to engage their corporate counsel in regards to a specific course of action for their review and approval.

The FTC “Mail or Telephone Order Merchandise Rule”, otherwise known as is codified in 15 U.S.C. §57a and 5 U.S.C. §552. These sections outline how DTC sellers must communicate information about back-orders to affected customers. While the plain-text of the rule speaks just to mail and telephone orders, the FTC has indicated that they consider eCommerce orders to fall under the jurisdiction of the rule, as fulfillment of DTC orders is typically done via common carrier, thereby falling under the “mail” portion of the rule.

When a merchant sells goods to the public, the merchant must have a “reasonable basis” to believe that the goods sold can be shipped within 30 calendar days of the date the order was submitted.

If the merchant can’t ship within those 30 days, the merchant is required to send a “First Delay Notice” which outlines a specific revised ship date, and outlines how the customer may cancel the order at no cost if they do not wish to wait for the back-order. If a revised shipment date cannot be provided, the merchant must explain why they cannot provide that date. Non-response to this notice, given a revised ship date, can be used to infer acceptance of the new ship date.

If the merchant cannot ship within the revised ship date as outlined in the First Delay Notice, the merchant MUST issue a “Later Delay Notice.” This notice must state that unless the customer SPECIFICALLY directs the merchant to not cancel the order, that the order will be cancelled on the 31st day after the order was originally placed. The Later Date Notice must also include a specific ship-by date, or provide an explanation why a date cannot be provided.

If the customer agrees to the revised late shipment date, they retain the right to cancel the order at any time prior to shipment at no cost. The Later Date Notice must outline the no-cost manners available to the customer.

In all cases, notices must be provided as soon as the merchant knows that they will not be able to ship within the provided timeframe in order to give the customer the maximum amount of time to make their decision. Finally, the merchant may cancel an order at any time, issuing a prompt refund and sending the customer notification of the order cancellation.

In cases where the merchant settles on transactions prior to shipment, the merchant must promptly refund the amount of the canceled item (item cost, tax, and shipping). Promptly is defined as:

  • If the customer paid by cash, check, or money order, the merchant must refund the correct amount by first class mail within seven working days after the order is canceled.
  • If the customer paid by credit, the merchant must notify the customer that the account will not be charged, or if the customer has already been charged, that within one of the customer’s billing cycle the refund will post, after the order is cancelled.
  • The refunded amount for the item must be for the price paid by the customer, and not the current price set for the item. Most organizations remain in compliance with this portion of the rule, by only settling on items after shipment of those items.

Great care should be given to always remain in compliance with these rules so as to not risk being fined for willful non-compliance. Technical non-compliance, where the merchant was attempting to be in compliance but had misunderstood or misapplied part of the rule is usually resolved with a “fix-it ticket” requiring the merchant to demonstrate how they’ve remedied the situation and are prepared to be in compliance in an on-going nature.

As should have become clear, staying in compliance with the FTC rules around backorders is a complex exercise that involves all aspects of an organization; eCommerce front-line, customer service, fulfillment, and legal counsel.


  1. Matthew Tarpy

    A note of thanks to Amanda Breyer for a great deal of legwork and research on this topic.

  2. I’ve been interested in taxations for longer then I care to admit, both on the individualized side (all my working life history!!) and from a legal point of view since passing the bar and following up on tax law. I’ve offered a lot of advice and rectified a lot of wrongs, and I must say that what you’ve put up makes complete sense. Please continue the good work – the more individuals know the better they’ll be armed to deal with the tax man, and that’s what it’s all about.

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