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.

 

 

Sample Solution

The three-part test for unfairness stated in the course textbook can be used to analyze whether Orkin’s behavior violated FTC Act § 5’s prohibition against unfair acts or practices. The elements of this test are cause harm, not outweighed by countervailing benefits and surprise.

Sample Solution

The three-part test for unfairness stated in the course textbook can be used to analyze whether Orkin’s behavior violated FTC Act § 5’s prohibition against unfair acts or practices. The elements of this test are cause harm, not outweighed by countervailing benefits and surprise.

First, Orkin caused harm with their unilateral breach of contracts by raising renewal fees beyond those which were agreed upon initially. This was financially damaging for customers who trusted in the “lifetime” guarantee offered by Orkin, as they had to pay more than expected resulting in a financial burden on them. Additionally, some competitors may have been willing to assume these original contracts but would not offer a fixed “lifetime” fee like what was originally proposed by Orkin. This means that customers could potentially lose out on savings if they choose an alternative provider rather than sticking with their original contract due to fear of higher renewal fees from Orkin. Therefore it is clear that Orkin has caused harm to its customer base through its actions.

Second, these harms are not outweighed by any countervailing benefits since the higher-than-agreed fees did not provide for any additional service compared to what was originally included in the contract terms at lower prices. Therefore there is no benefit being provided from paying such increased fees which otherwise would be considered as outweighing potential harms done here!

Finally, many customers were likely surprised when they found out about this breach since there was no indication beforehand that such changes could happen—most people thought they had locked in their rates only later discovering too late that it wasn’t true after all! All things considered then it appears safe conclude Orkin’s behavior did indeed violate FTC Act §5’s prohibition against unfair acts or practices based off evidence presented so far which fulfills criteria outlined above thus making case strong enough warrant further investigation possible legal action down line if needed too!

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