Coupon Squeeze in California

Posted on by Chief Marketer Staff

Marketers can no longer give Californians the “gift” of coupons. A law passed Oct. 10 prohibits marketers from offering a coupon as a gift or prize if consumers must pay money to use it.

Legislators wanted to close a loophole in existing law that prohibited offers which ask consumers to pay a fee to collect a gift or prize. That law didn’t cover coupons. Assembly Bill 1231 does.

The Senate’s target was unscrupulous direct-mail marketers, but industry advocates worry that the law will inhibit packaged goods and fast-food companies as well.

The problem is the state’s two-part test for judging coupons. It’s illegal to offer a coupon as a gift or prize if 1) consumers have to pay money to use it; and 2) the majority of sales the year before were accompanied by a coupon.

That first criterion would cover all discount coupons, contends Steven Durchslag of Winston & Strawn, who fought the bill on behalf of the Promotion Marketing Association. “The vast majority of coupons are cents-off and by definition require a purchase for their use,” he says.

The second test gets really hairy. Does the law measure “majority of sales” by dollar or volume? Total corporate sales, brand sales, or SKU sales? Retailers who honor coupons are liable, too – how should they measure their percentage of sales by coupon? The law doesn’t say.

And that ambiguity could make marketers shy away from any couponing, Durchslag contends. “Major companies have their legal departments scrutinizing laws to determine if a particular promotion is legal. They almost always have only the text of the law to guide them,” Durchslag wrote Gov. Gray Davis. “If the text raises such a serious specter of illegality . . . many companies will forego such promotions.”

The state won’t go after coupons unless they’re overtly described as “free” or “gift,” says Colin Grinnell, spokesman for the bill’s author, Assembly Member Michael Machado. As for ambiguous measurements, “the burden is on the state or locality to prove coupons accompanied more than 50 percent of sales. That would be tough to prove” for legitimate coupons, he says.

Coupons that cover the full cost of a product, or the cost of at least one item in a suite of products, still qualify as gifts or prizes. The bill takes effect Jan. 1.

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