S~nnenschein 

SONNENSCHEIN NATH & ROSENTHAL LLP 

Christopher Smith 

202.408.923 1 

kitsmith@sonnenschein.com 

Elaine D. Kolish 

202.408.3243 

eltolish@sonnenschein.com 

1301 K Street N.W. 

Suite 600, East Tower Chicago 

Washington, D.C. 20005-3364 Kansas 

202.408.6400 Los Angeles 

202.408.6399 fax New Vork 

www,sonnenscheln.com Phoenix 

San Francisco 

Short Hills, N.J. 

St. Louis 

Washington, D.C. 

Wesf Palm Beach 

November 15,2006 

The Honorable Donald S. Clark 

Secretary 

Federal Trade Commission 

600 Pennsylvania Ave., N.W. 

Washington, DC 20580 

Re: Request For a Staff Advisory Opinion 

Dear Mr. Clark: 

On behalf of Sony Electronics Inc. (Sony) we are requesting a staff advisory opinion, 

pursuant to 16 C.F.R. fj 1.1, on the question of whether Sony may lawfully market and sell as 

new certain returned consumer electronics products that have never been used and that are 

indistinguishable from products straight fiom the factory. Specifically, Sony seeks guidance on 

the acceptability of selling consumer electronics products as new products under a narrowly 

defined program in which Sony or its authorized vendor would: 

(i) identify, fi-om among the products returned by retailers to Sony or its authorized 

vendor, those that have never been turned on; 

(ii) visually inspect those products that have not been turned on and reject any damaged 

products; 

(iii) ensure that returned products that satisfy the first two conditions have all of their 

requisite parts, components, and manuals; 

(iv) repackage the returned products that meet the above conditions; 

(v) provide the same warranty for these returned products as for new products that have 

never been sold; and 

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(vi) return them to a retailer for sale as new products.' 

This request is based on our understanding of prior Commission policy and precedent 

that require a seller to disclose when it is selling goods that have been previously used, but do 

not require returned goods that have merely been "inspected" by consumers to be described as 

used when resold. Sony3s request does not require the FTC staff to define the entire scope of 

actions that can reasonably constitute inspection. Instead, we only ask the staff to conclude (a) 

that a product that has never been turned on will not be considered used, and (b) that the other 

elements of Sony's proposed program will assure that a consumer buying such a product will 

encounter the same product purchase and usage experience as if he or she had bought a new 

consumer electronics product that had not been purchased previously. 

We explain below the reasons for Sony's proposed course of action and provide 

additional details about how the program would be implemented. Additionally, we set forth an 

analysis of why we believe Sony's proposed conduct is legally permissible and why it is 

appropriate for the FTC staff to provide the requested guidance. 

Sony's Proposal to Sell Certain Unused Returned Consumer Electronics as New 

Like many other consumer electronics companies, Sony experiences a high volume of 

product returns from consumers, the wholesale value of which has grown dramatically in recent 

years. As a matter of policy, Sony generally treats all opened returned products as if they have 

been used by consumers. These returned products, which are often inspected and serviced, are 

designated by Sony as "Class B" products. These products are sold as refurbished products at a 

significantly discounted price, and they typically include a 90-day limited warranty rather than a 

longer new product warranty. 

Because of the undifferentiating nature of its resale policy, many products designated as 

Class B by Sony have never even been turned on - having merely been inspected by purchasers 

before being returned to Sony. Such products have nothing wrong with them when returned by 

consumers and require no servicing before they are sold at a Class B discount. 

' The consumer electronics products potentially covered by Sony's program include but are not limited to the 

following products: video products (e.g., DVD playerslrecorders, digital cameras, camcorders, televisions, and 

combination TVIVCR or TVDVD players); computers (desktop and notebook PCs and related equipment); video 

game systems; audio products (desktop, component and portable devices); cell phones; portable digital assistants; 

and vehicle electronics. 

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The financial cost to Sony of its Class B resale policy is substantial. Consequently, Sony 

would like to modify its policy to distinguish between returned products that have not been 

turned on and those that have been operated. Such a modification would provide Sony with 

greater flexibility in both inventory control and supply chain management while ensuring 

compliance with the Commission's policies. 

Although even some use of a product reasonably could be considered mere "inspection," 

Sony proposes to take an extremely conservative approach to the question of whether a returned 

Sony product has been used by a consumer. Sony's proposed program is based on the simple, 

bright line standard of whether a product has been turned on - i.e., if it has not been turned on, it 

has not been used. This approach avoids a potential slippery slope, because it does not require 

the FTC to evaluate or determine how much use is acceptable. 

To implement this policy change in a consistent, verifiable manner, Sony would use 

existing, reliable product and packaging technologies to determine if a purchaser has turned on a 

returned product. For example, some of Sony's electronic products contain an internal chip or 

clock that allows Sony to determine if a product has been turned on and for how long. Sony also 

may use tamper-evident tape, seals or labels, which can be affixed to AC plugs, connectors or 

battery compartments, to provide a clear indicator of consumer use of a product. Sony would 

determine on a product-by-product basis which technology it would use to determine if a 

consumer has turned on a product. If the consumer has turned on the product at all - even if only 

to conduct a cursory inspection of the product's operation - Sony would disqualify the product 

fi-om future sale as a new product. Sony's plan thus avoids subjective evaluations about whether 

or to what extent a returned product has been used by a consumer. Stated in its simplest terms, if 

electrical power has been applied to any of the product's circuitry, then it cannot be sold as LC new." 

The other elements of Sony's program ensure that the consumer purchasing experience 

would be the same as it would be with other new products. Sony would visually examine unused 

products to ensure that they are complete and undamaged, and if so, place them in new 

packaging.2 sony also would provide the same wmanty for these repackaged products as for 

This program will not involve refurbishment of products to a "good as new" condition. If there is visible damage, 

such as scratches, dents or cracks, the product would not be eligible for the program. Of course, minor cosmetic 

blemishes, such as fingerprints that a consumer might leave on a product when handling it, would be removed and 

would not render the product ineligible for the program. Otherwise damaged products would be designated for 

Sony's refurbished sales program. Moreover, if the product is otherwise acceptable but a minor part or piece of 

product dormation (e.g., a headphone, manual, or warranty card) is missing because the consumer omitted the item 

from the package when returning the product, then the missing item would be replaced. 
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other new similar products. Because Sony (or its authorized agent), and not retailers, would run 

the program, Sony can ensure that the policy is properly and uniformly applied across all returns. 

Sony and Industry Experience With Returns Show the Significance of Sony's Request 

Currently, as would be the case under the new program, retailers send all returned 

products to return centers operated by Sony or its authorized agent. These return centers perfom 

the necessary inspections and refurbishment to prepare a returned item for resale as Class B 

products. Sony's experience through these return centers indicates that only a very small 

percentage of returns are actually defective products and that a very significant percentage fall 

into the "no problems found" (NPF) category. Because many of the NPF products are items that 

have never been turned on, Sony incurs significant losses from their sale as Class B products. 

Similar industry-wide patterns of returns also have been reported. For example, a 

consumer survey conducted by the Consumer Electronics Association (CEA) in 2005 indicated 

that many consumers return products for reasons other than a defect, including (a) to obtain a 

different brand or model, (b) because they no longer wanted it, (c) because they already owned 

it, or (d) because they spent too much money on it3 The CEA survey also indicated that nearly 

50 percent of all returns occur within a week after purchase. Overall, these statistics suggest that 

many purchasers of consumer electronics products may merely open the box and inspect the 

product without using it before returning it to the retailer or to the manufacturer. 

Sony's Proposed Course of Action Is Lawful 

Sony believes that its proposed course of action, as described in this letter, is lawful and 

would not be deceptive under the FTC Act or under the standards the Commission has expressed 

in its 1984 Policy Statement on Deception and in its 1969 Enforcement Policy on "Merchandise 

Which Has Been Subjected To Previous Use On Trial Basis and Subsequently Resold as New." 

The 1969 policy statement is particularly relevant. Although the 1969 Enforcement Policy 

predates the Commission's Policy Statement on Deception, it has not been repudiated by the 

Commission. Moreover, we believe that application of the Deception Statement's analytical 

tools leads to the same conclusion the Commission reached in its 1969 Enforcement Policy. 

The 1969 statement, whle reaffirming the Commission's long-held view that consumers 

have a preference for new or unused goods, also draws an important distinction between 

3 "Return Rates and Issues for CE Products Update," Consumer Electronics Association (CEA) Market Research 

Report (Nov. 2005). 

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"inspectionyy and Specifically, the Commission concluded that trial use by a consumer 

and subsequent refix-bishment of returned products to a good-as-new conhtion requires 

disclosure, but that its "policy applies only to merchandise that has been used, and not to 

merchandise that has merely been inspected but not used."' 

Under the Deception Policy Statement there must be a representation, omission or 

practice that is likely to mislead a consumer, acting reasonably under the circumstances, to his or 

her detriment.6 In other words, the representation, omission or practice must be a material one. 

Under its proposed program, Sony would treat the products as new, in terms of their pricing, 

packaging and warranty. The resulting implied representation that the repackaged products are 

new would not be misleading to consumers because the products would in fact be new, having 

never been used by their previous purchasers.7 

Although Sony recognizes that the FTC appreciates empirical data on consumer 

expectations when it is available, we are unaware of any such empirical data in this case. 

Nevertheless, the absence of such data is not a bar to an advisory opinion. It is well established 

in Cornmission case law that the Commission may use its accumulated expertise to determine 

what facts are material to consumers and when it is deceptive to omit those facts from marketing 

materials.' In the past, the Commission has generally alleged a deceptive failure to disclose 

information only when the omitted information involved health or safety or the key financial 

terms and conditions of a transaction. 

We also suggest that the FTC can find additional support for Sony's proposed course of 

action in various state laws that expressly or impliedly permit "unused" goods to be sold as new. 

Many of these states have based their laws on the Uniform Deceptive Trade Practices Act and 

the Uniform Consumer Sales Act, which prohbit the resale, as new, of returned products only if 

the products have been used, altered, reconditioned or reclaimed. Under those statutes, mere 

34. Fed. Reg. 176, 177. 

Id. at 177. 

Appended to Clzffdale Associates, Inc., 103 F.T.C. 110, 174 (1984). 

Just as we believe that Sony has no legal obligation to disclose that goods are "used" because they have never been 

turned on and thus fall squarely into the "inspected" category, we also believe that disclosure of the mere fact of 

prior purchase is not a material omission that might trigger a disclosure requirement. The Commission's Policy 

Statement expressly recognizes that "not all omissions are deceptive, even if providing the information would 

benefit consumers.. .." Id. at 183, n.4. Such a disclosure requirement also would be inconsistent with state laws, as 

discussed below. 

See, e.g., PJzer, 81 F.T.C. 23, 58 (1972). 
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inspection that does not entail use or alteration of the product would not change the status of the 

product fiom "new" to Notably, the Ohio Administrative Code states affirmatively that 

"returned goods, which have not been used by a previous purchaser, shall be considered new or 

unused."I0 

Furthermore, in 1998 the Office of the Attorney General of the State of California came 

to the same conclusion reached by the FTC in 1969 when it analyzed the question: "must 

merchandise be advertised as 'secondhand or usedy if it is used, worn, or sampled for a short 

time by a consumer and then returned in like-new condition pursuant to the retailer's policy 

allowing returns of merchandise at the customer's discretion." Attorney General Daniel E. 

Lungren concluded that it must be so advertised," unless such use is for inspection purposes 

onlY.'~" 

In analyzing the question, Attorney General Lungren was guided in part by the Oregon 

Supreme Court's decision in Weigel v. Ron Tonkin Chevrolet co.12 In that case the court held 

that because there was a transfer of legal possession of the auto and the purchaser had 

discretionary use of the vehicle for his or her own purposes for five days, the auto must be 

represented as used or secondhand. The court's decision was based not on the fact of the sale, 

but on the purchaser's use of the product. In that case, the court also commented on the common 

practice of using goods for inspection purposes only, stating that "merchandise other than 

automobiles sometimes is sold, examined, or tried out at home, and returned to the seller. 

Whether such merchandise is 'new' or 'usedy does not depend on the fact of an earlier sale; it 

depends on whether the article was used."I3 The Attorney General believed that Weigel correctly 

interpreted the terms "secondhand or used" for its purposes. Thus, under the Attorney General's 

opinion, disclosure of the prior purchase of a product depends upon whether the product has been 

used, unless such use is for inspection purposes only. 

See Michael P. Sullivan, 'What Goods or Property are 'Used,' 'Secondhand,' or the Like, for Purposes of State 

Consumer Laws Prohibiting Claims that Such Items are New," 59 A.L.R. 4' 1192,s 2. 

10 Section 109:4-3-08. Other states such as Mississippi and Idaho have taken similar positions ("goods are not 

considered used if a prior consumer was given a full refund or exchange for the goods, in the normal course of 

business, and if the goods are not known to presently or formerly have defects"). See, e.g., Mississippi, 24 000 002 

R.5 1 (2006), and Idaho, IDAPA 04.02.02.1 13 (Returned Goods) (2005). See also Louisiana, LAC 16:III.S 11 (2003). 

I' Opinion of Daniel E. Lungren, Attorney General, Clayton P. Roche, Deputy Attorney General, No. 97-1009 

(May 22, 1998) (emphasis added). 

l3 Id. at 490, n.2. 

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Sony believes that, under its proposed program, consumer electronics products that have 

not been turned on will not have been subjected to any use. The act of merely opening the 

packaging and examining a product without turning it on should be considered "inspection" and 

should not trigger any affirmative disclosure duties nor any prohibition on representing the goods 

as new. 

At its most basic level, Sony's proposed program embodies the principles contained in 

the Commission's 1969 policy statement and in the principles expressed in state laws and in the 

California Attorney General's opinion regarding a company's disclosure duty. We believe that 

the principles of the 1969 policy statement remain valid and are consistent with those in the more 

recent Deception Policy Statement. Accordingly, Sony submits that it would be appropriate for 

the FTC to conclude that Sony consumer electronics products returned by consumers without 

ever being turned on can be considered "merely inspected" and not "used" and thus be eligible 

for sale as new products. 

Sony's Request Satisfies the Commission's Criteria for a Staff Advisory Opinion 

Sony believes that the issues raised by this request satisfy the criteria in the Commission's 

Rules of Practice for issuance of a staff advisory opinion. The question posed by Sony is not a 

purely hypothetical or theoretical one, because Sony is prepared to act upon a favorable opinion 

issued by the staff. Sony is seeking this advisory opinion because, as noted above, the FTC has 

not issued guidance in this area in nearly 40 years, and there is no clear FTC or other guidance 

on the particular question posed by Sony. Furthermore, because of uncertainty about this issue, 

Sony and possibly other manufacturers are unnecessarily designating unused, "merely inspected" 

products as Class B products. This situation creates substantial economic injury to 

manufacturers such as Sony, as well as to consumers, who may pay higher overall retail prices or 

may experience the effects of reduced marketplace competition resulting from lower 

manufacturer profitability. Thus, resolution of Sony's question is likely to be of significant 

public interest. 

Conclusion 

The conservative approach Sony is proposing will assure that returned products that 

qualify under this program will be indistinguishable from new products delivered &om the 

factory. The fact that a qualifylng product was previously purchased will not affect its 

performance because the product will never have been turned on and thus never have been used. 

Moreover, Sony's plan to examine qualifylng returned products visually for damage and 

completeness prior to repackaging and to provide a new product warranty will ensure that the 

returned products are indistinguishable from products that have never been sold. This 

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comprehensive plan will eliminate any potential harm to subsequent purchasers resulting from 

the qualifying products' previous purchase. Accordingly, Sony believes that its proposed 

program to sell, as new, returned products that have not been turned on and that meet the 

program's other criteria will satisfy the Commission's consmer protection objectives and 

requirements. 

We appreciate your consideration of this request. Please let us know if you would like us 

to provide additional information to assist the staffs review. We would also be pleased to meet 

with the staff to discuss any questions they might have. 

. .. 

Yours very truly, 

Christopher Smith 

Elaine D. Kolish 

cc: Lydia B. Parnes, Director, Bureau of Consumer Protection 

James A. Kohm, Associate Director, Division of Enforcement 

Sandy Prabhu, Esq., Division of Enforcement 

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