The Coming Storm

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January 1, 1998

Like an airplane pilot warned of rough air ahead, the termite control industry is bracing for a possible storm of its own. A high-priority federal and state investigation is currently under way, prompting much handwringing throughout the industry.

In early October, just before the National Pest Control Association’s annual convention in Minneapolis, the rumors began to circulate: At first the news was hushed, known only by a few state associations and the NPCA, which met with the FTC in September. Then the association made a formal announcement, first by way of a notice sent to members, and then by a hastily planned general session at the convention presented before a packed house of pest control professionals.

The Federal Trade Commission, in coordination with attorneys general from at least 23 states, were investigating alleged deceptive practices in the area of termite control. The revelation was for most, both disappointing and surprising. “I was surprised by the fact that there were so many states involved,” said Dick Sameth, president Western Industries, Parsippany, N.J., and past president of NPCA. “It turned out to be more extensive than I originally anticipated.” Sameth had learned of the FTC’s interest in termite control as early as March.

Now pest control operators and experts across the industry are grappling with just what is likely to develop from an investigation that could have long-term implications for the industry. Most want to know exactly what the FTC is investigating, and more important, what the agency is likely to find. PCOs large and small are unsure just how close to home this investigation will hit. And the likelihood of anti-industry media coverage in the wake of the FTC’s findings has more than a few PCOs bracing for trouble. It’s now up to the industry to turn what could be a public relations disaster into something positive.

A MULTI-PRONGED APPROACH. Bennett Rushkoff, an assistant to the attorney general of Maryland, confirmed the existence of a true partnership with a multi-state task force, and said the investigation involves the “whole spectrum” of termite consumer protection issues that have come to the agency’s attention in the last few years. At least 23 states are believed to be involved in the coordinated effort. A few of those known to be participating include Florida, Maryland, Ohio, Kentucky, Texas and Virginia.

The four areas likely being targeted in the investigation — warranty coverage, contract renewal, promotional and sales practices, and pretreats — cover a lot of ground. That said, no one is exactly sure what specific aspects of termite control the Federal Trade Commission is investigating. Experts within the industry are at odds over the likely outcome of an investigation. Considering the complex nature of termite control work, both pre- and post-construction, this is hardly a surprise.

“There are a whole lot of challenges and difficulties in termite control,” said Dr. Michael Potter, extension entomologist with the University of Kentucky, “and while not everyone does everything they should all the time, even the best efforts of the best companies aren’t always successful.”

With regard to warranties, the FTC is likely exploring whether consumers are confused about what their warranty or service agreement includes. Some contracts, for example, may not contain a provision guaranteeing damage repair, but instead offer only a retreatment should termites return to the structure. The FTC wants to know if this distinction is truly understood by customers.

Richard Kramer, president of Innovative Pest Management Consulting, points out that many contracts are unclear in defining how much liability for damage the pest control company will assume. “There are a lot of qualifiers in terms of what conditions under which [the company] will make repairs to a home,” Kramer said. “A lot of them say pre-existing damage is not covered by the guarantee.”

The FTC is also apparently examining the promotional claims made by termite controllers. For example, the NPCA pointed out in its informational memo to members that promises of a “continuous chemical barrier,” or of the effectiveness or longevity of treatments, could be considered misleading if customers aren’t informed of all the possible treatment outcomes. Similarly, customers should not be alarmed into believing they may have termites, when there is no evidence they in fact do.

“That is one [practice] that state pesticide agencies and attorneys general (AGs) have been prosecuting companies for years,” said Bob Rosenberg, director of government affairs for the NPCA.

And the area of termite pretreatments, which has long been a highly controversial service category, is likely to be a major part of the investigation, according to industry insiders. The concern continues to be whether PCOs are using the rate specified by the product’s label, and nothing less. This practice becomes law in 1998 across the country, when manufacturers of soil-applied termiticides are required to re-write their labels, prohibiting the use of less than label rate on pretreats. “Up until this time, PCOs have been able to apply termiticide at any rate they wanted to unless the state required the minimum application rate,” Kramer explained. Some other areas possibly being examined in the investigation include manufacturers’ claims about their products and the efficacy of termite baiting. Clearly, however, the key question being asked by investigators is whether or not customers are being misled.

“Most of these gray areas can be resolved if the salesperson tells the homeowner what’s going to go on,” said industry consultant George Rambo. And this is precisely why proper customer communications are so important. For example, in the case of the company which offers a service-only contract that excludes damage repair, Rambo said, “some states have gone after some companies for not explaining that to the homeowner.”

Tom Forshaw of Forshaw Distribution points out it’s ultimately the consumer’s decision. “It’s up to the homeowner to buy the correct contract and to choose which operator he wants to use,” he said.

GRAY AREAS EXIST. In looking at the focus of the investigation, two broad categories seem to emerge: those actions of unscrupulous companies that are clearly fraudulent, irresponsible and deceptive; and other gray areas of uncertain or confusing practices, some of which exist because the technology of termite control is still evolving. The industry feels its practices have been appropriate and responsible, yet many are still concerned that the investigation will result in broad-based negative action.

“The scope is so broad,” pointed out Bob Rosenberg, “that every person ought to consider themselves a potential target of a state-civil investigation.”

According to Donnie Blake, president of Okolona Pest Control Inc., Louisville, Ky., for the vast majority of PCOs, if any problems are found, they are more than likely unintentional. “This may be a wake-up call that will cause them to evaluate their practices and correct any unintentional practices,” he said. Kramer agrees: “This issue is something that relates to a very limited number of companies,” he said. “The majority of companies don’t have a lot to fear.”

The type of actions all reputable PCOs would condemn include such things as forging customer signatures to maximize contract renewals, failing to honor contractual obligations, or not applying the required amount of termiticides in order to save on costs. And these are all things the FTC would appear to be looking for. But other items being examined are not quite as clear-cut.

“The claim of a continuous barrier, we know that’s difficult to do,” explained Rob Lederer, executive director of NPCA. “And we know for a fact that as a result of the new, environmentally pleasing chemicals, that retreats are a normal part of the business. Also how you sell a job, how you market it, how you promote the job, whether or not you include repairs in the pricing, those are the kinds of things they are concerned about that are gray.”

For instance, it’s difficult, and some would say impossible, to provide a truly “continuous” termite barrier, yet many companies aim to provide just that. No PCO can promise that one treatment will eliminate all the termites in and around a structure. And when it comes to contracts and renewals, the possibilities are endless. Some, but not all, firms provide re-inspections to renewing contract-holders. And some firms have limitations when it comes to repairing termite damages.

Blake points out that some of the areas being covered in the investigation are actually beyond the PCO’s control. “One of the things that may come out of this is if there are problems with termite control, maybe it’s not all the pest control operator’s fault,” Blake said. “Building practices in recent years have changed and there are shortcuts used that make termite control much more difficult.”

Another area of confusion regarding the changing termite control industry, is how the loss of chlordane nearly a decade ago has affected the industry. Some industry insiders are concerned that PCOs haven’t truly revamped their methodologies to reflect the limitations of the less persistent termiticides which replaced chlordane. “We have an industry that’s very slow to change,” said one industry insider. “While chemistries and procedures have changed, their practices haven’t.” Even so, he adds, the investigation may not be all bad. “It could serve as a wake-up call to the industry. We could turn this into a positive.”

THE MEDIA SPIN. While no one is sure how the FTC will characterize its findings, the immediate concern is how the national media will portray the various aspects of the investigation. Will a fair distinction be made between the acts of unscrupulous PCOs and those of professionals who are doing the best job they can given what is known about termites and the control options currently available?

The truth is, it’s only a matter of time before the issue hits the mainstream media. PCT has learned that at least one major TV news magazine, ABC’s Primetime Live, has already contacted industry experts around the country, inquiring about termite damage and the pest control industry. According to Lederer, at least a few other syndicated TV news programs also are interested in covering the issue, as well as several national newspapers. And early evidence seems to indicate the results of such well-publicized exposés could be as damaging to the industry as the investigation itself.

“We know for a fact,” said Lederer, “that this task force [the FTC and state AGs] is leaking stories to the national media, and our job is to be prepared and as organized as they are.” Mike Potter has been contacted twice by representatives from ABC’s Primetime Live. “They were in the early stages of an investigative story on pest control practices,” Potter said, “and I didn’t sense that it was going to be one of those positive, feel-good reports.” During the conversation, Potter tried to impress upon the network why a factual, balanced report was so important, both for the industry, which still remembers the distorted CBS Eye to Eye report about termite work which aired in 1994, and for the consumer, who has little understanding of the intricacies of termite control.

The FTC, meanwhile, has not revealed what event(s) prompted the investigation, but has stated repeatedly that it did not arise from consumer complaints. Many industry insiders have speculated that some recent and high profile enforcement actions taken by AGs in states such as Ohio, Florida, Kentucky and Missouri — incidents which have included hundreds of thousands of dollars in fines — have drawn attention to the broader issue of whether the problems are endemic to the industry.

Lederer believes the investigation is likely attached to a number of lawsuits in the recent past between state attorneys general and PCOs. “It’s very consistent with the FTC’s latest attempts to investigate industries in partnership with states,” he added.

THE FTC CONNECTION. The termite control industry has rarely drawn the interest of state attorneys general. And it’s never before been examined by the FTC. The industry’s own guardians, the structural pest control regulatory officials, typically stick to the more germaine issues of pesticide use and licensing requirements. In this investigation, it’s clear that even the regulatory officials are unsure what will develop.

“We didn’t instigate the investigations,” said Carl Falco, president of the Association of Structural Pest Control Regulatory Officials (ASPCRO). “They’re going to go on regardless of what we do. And that being the case, ASPCRO has encouraged every state where the AG is part of this investigation to at least attempt to forge a working relationship with their AG.” In the meantime, state regulatory officials are providing AGs and the FTC with the information they need to make good decisions. “We’re not attempting to stop the investigation, nor are we encouraging the investigation just for the sake of investigating,” he added.

The area of consumer protection from fraud, in any business dealing, is primarily the domain of state attorneys general, points out Larry Ebner, chief counsel for the NPCA and an attorney who specializes in the pest control industry. Meanwhile, the FTC has historically been responsible for two areas, Ebner said, anti-trust enforcement and consumer protection. Consumer protection involves first an investigation phase, then enforcement actions. In this situation, he added, it is possible the investigation phase could last one year or longer. The enforcement phase, meanwhile, may never occur.

“The investigation phase basically involves the FTC gathering information from different sources to find out whether they think there have been any deceptive business practices,” Ebner said, “either on the part of individual companies or practices that are more widespread throughout the industry.”

According to industry insiders, three major pest control companies and one manufacturer have already been contacted by the FTC with requests for information. The enforcement phase could involve either actions against individual companies, or issuing a set of guidelines for the entire industry to follow.

NPCA EFFORTS. The NPCA has known about the FTC’s interest in the termite control market since this spring, when NPCA officials attended an ASPCRO board meeting. At first, Lederer wasn’t sure what to make of the FTC’s interest. “They said they were trying to better understand the industry,” Lederer recalls, “and then it got very quiet over the summer.” The association maintained communications with the agency, and in the fall the FTC agreed to meet with the NPCA. It was at that meeting the NPCA learned the extent of the investigation, and that a large number of states were also involved. It was a disappointing finding, but, Lederer says, the meeting showed early signs of promise.

“That meeting in our viewpoint was a major, major coup for the industry,” said Lederer. “It’s very unusual that the FTC in the middle of an ongoing criminal investigation would reach out and communicate their concerns. As a result, it’s allowed the industry to get out in front of the issue as opposed to behind it.”

Getting in front of the issue, in fact, is exactly what the assocation has tried to do. Since July, a series of events have been set into motion to help members prepare for the investigation and also counteract any negative publicity. The NPCA has adopted a four-point program of communicating with members, launching an aggressive public relations campaign, providing background information to the agencies, and developing a proactive industry initiative to address concerns raised by regulators.

“Our first obligation is to inform members and provide them with the much-needed information to keep them one step ahead of the investigation,” said Lederer. “We are also working closely with the FTC and state attorneys general to educate them and provide information on the challenges our members face every day with regard to termite treatment.” Third, Lederer said, an industry awareness campaign will address both the short-term needs driven by the investigation, as well as the long term concerns of the industry and its ongoing success. “The whole goal of that program is to prepare this industry to address these challenges and get a good message out before the consumer,” Lederer said.

In fact, the NPCA’s efforts at this crucial time have never been more important, or more scrutinized. How the association handles this issue will likely shape the way Lederer and his administration are viewed in the eyes of PCOs across the nation. “Issues like this don’t come along very often,” commented one industry insider. “They can’t afford to drop the ball.”

So far, the association has had its nose to the grindstone. Besides the informal meeting, it’s already sent two notices to members and has held a “chat” session discussing the issue on its web site. They’ve also met with FTC officials and have offered to conduct a termite control workshop, including an actual termite job, for the appropriate officials. The FTC has not yet responded to the association’s offer to hold training workshops.

Just prior to Legislative Day, the association will also hold a closed-door, industry-only meeting during which it will present a list of “recommended good business practices” in the five areas of pre- and post-construction treatments, contract and warranty language, sales and advertising practices, consumer information documents, and a code of ethics for termite control.

“We think it will provide the much needed information that will address the concerns being raised by the FTC and the state attorneys general,” Lederer said. In fact, the association has already made a few recommendations to members at the informal meeting conducted at the convention. There, members were given several recommendations concerning their contract language and renewals (see sidebar, page 24.)

The association has also retained a highly respected, international public relations firm, Shandwick Public Affairs, to help develop a short-term crisis management program as well as a long-term industry awareness campaign. These initiatives will be directed under the auspices of a new quasi-organization which has been created by NPCA members, the Industry Awareness Council (IAC). This organization, chaired by industry veteran Harvey Massey, has been established as a distinct organization from the NPCA which maintains its own financial records.

The IAC originated as a committee within the NPCA, and is now a separately funded, not-for-profit organization. “We started out with the understanding to raise money to fund an industry awareness campaign through the media,” Massey explained. “When the FTC investigation came about, we immediately huddled and decided that what we need is a first phase of crisis management.”

A second, image development campaign will focus on researching the industry, and the campaign will be rolled out during the third-phase, Massey said. The council expects to spend half a million dollars to fund the crisis management portion of the plan, Massey said. The final two phases could cost several million dollars. The campaign is to be funded by voluntary contributions from NPCA members, suppliers and distributors. Because it is a separate organization, contributions to the IAC are fully deductible. Membership is open to any interested parties and not simply NPCA members.

Right now, it’s too soon to tell what kind of broad changes, if any, have occurred in the industry as a result of the investigation. But whatever the investigation, and the ensuing fallout leads to, one thing is certain: the termite control market is headed for yet another major upheaval. Perhaps Lederer summed it up best: “The most important thing that our industry needs to understand is that this issue isn’t going to go away. It could represent a tremendous opportunity for the industry or a major black eye, depending on how we address it.”

There is nothing to fear except fear itself.” Franklin D. Roosevelt, the United States’ 32nd president and a bastion of strength during World War II, made this statement during the nation’s darkest hours of despair. It rallied the troops and provided the inspiration necessary to endure the greatest threat to our nation’s and the world’s freedom.

The Federal Trade Commission and state attorneys general’s investigation into the pest control industry’s trade practices is nothing to scoff at and potentially is the greatest challenge our industry has faced in the past 25 years. Regardless of whom is found guilty of deceptive practices, it will have far reaching implications for the entire industry. The truth of the matter is that most pest control companies can take comfort in the fact that they have nothing to fear except fear itself.

If this investigation proceeds, there is no question that many companies will be scrutinized. Their contracts, advertising, warranties/guarantees and service practices will be examined. The good news is that the vast majority of companies in the industry are not using deceptive trade practices; the companies that are, finally will be brought to task, and, for the first time in many years the termite management playing field has a chance of being leveled. Let’s examine those companies which have something to fear.

Some companies continue to provide pretreats for $0.05 per square foot, or $75 per home. For years I have heard these companies claim they are doing it to develop leads for other services. Bull! Depending on the product, the cost of material to perform an average pretreat (30' x 50' slab-on-grade house with 2-foot-deep footings) at minimum label rates is approximately $150 to $392. I don’t know of any company that spends $75 to $317 to develop a lead and throws in the labor and all other associated costs. The bottom line is that in most parts of the country, there is very little risk that termites will show up (swarming and/or mud tubes) in the first five years after construction, whether or not the house is pretreated. When less than label rate is questioned, the companies conveniently hide behind FIFRA(ee). This unscrupulous practice has forced many companies out of the pretreat business. This practice not only shortchanges the customer, but is unethical in terms of fair trade practices, not to mention other PCOs.

The warranty/guarantee for termite damage is another area of business which certainly will be investigated. My concern over this issue heightens when I read contracts that state that a company is responsible only for damage that occurs after the homeowner repairs all the damage in their home prior to treatment. Anyone with experience in termite control work knows that this is often impossible. Another example is the contract that states the company is responsible for damage which occurs subsequent to treatment. This is a double-edged sword for the customer and the PCO because, as any experienced industry observer knows, establishing time and extent of damage is extremely difficult. Contract renewals or reinspections are other areas that are not taken seriously by companies who perform termite treatments. Most contracts that I have seen indicate the company will perform an annual inspection to determine evidence of termite activity. Yet some companies, albeit a relatively small number, perform “drive-by” inspections or attempt to conduct the inspection and, unable to contact the customer, simply charge the renewal fee. Several documented attempts should be made to perform the inspection, and if it cannot be performed, the customer should be notified.

I have had the displeasure of having been drawn into two investigative news report sting operations on termite control. In both cases, at least one company made up the rules as they went along, intimidating customers by stating that federal or state law required homes to be treated for termites when they are found in the mulch around the house. (One company referred to it as the “three foot rule.”) Some companies indicate they are going to establish a “continuous and uniform” termiticide barrier around the house; however, the truth is that it’s virtually impossible to create a continuous and uniform barrier around a structure given all the variables involved in a treatment (i.e. soil type, certain construction practices, etc.).

NPCA has made some good recommendations concerning the issue of revising contract language and verbal promises made to customers. But in most of my litigation work on termite management, the companies with problems fail to listen to their customers and fail to address their needs. Thus, the keys to all of these issues are clear: COMMUNICATE with your customers and DOCUMENT those communications.

Sidebar

Several state associations, such as Florida and Arizona, have recommended their members review the suggestions developed by the NPCA. The following tips are based on recommendations presented by the NPCA in a recent message to members.

  • Pest control companies should consider whether any of their home customers may be confused about the extent of the warranty provided when they purchase a termite treatment. Make sure every reasonable effort is taken to ensure that your customers know and understand the extent and limitations of the warranty that you are providing.
  • If you state in agreements with customers that your company will re-inspect annually, then do so. Document the inspection and maintain accurate records.
  • You should review your promotional literature and speak with sales personnel to ensure all written and oral claims about the termite control services that you offer are accurate and can be substantiated.

Use full label rate when conducting pretreatments.



Source: Nisus Corp./University of Kentucky
  • Consent Order: The FTC obtains voluntary compliance from a company, thus the company ceases the offending practices, without charging the company with violating the law and levying punitive actions.
  • Administrative Complaint: In effect the FTC files a lawsuit against the company, and a trial is held. If the company is found to be in violation, punitive actions, such as fines, can be taken.
  • Trade Regulation Standards: Standards or rules for a particular industry that have the force of law. Once these are set, companies not following the Trade Regulation Standards are in effect violating federal trade laws.

WHAT CAN THE FTC DO? Historically, an FTC investigation begins with information gathering and then progresses to an enforcement stage. During the investigation phase, the agency can request a variety of information. Their investigative authority allows them to obtain such things as purchasing records, sales records, real estate documents, promotional literature and even depositions. The agency can also hold investigational hearings and conduct interrogations under sworn testimony.

When it comes to enforcement, the FTC also has many options. If the FTC believes a company or companies are conducting practices that are deceptive, the agency may attempt to “obtain voluntary compliance by entering into a consent order with the company,” according to the FTC. “A company that signs a consent order need not admit that it violated the law, but it must agree to stop the disputed practices outlined in an accompanying complaint.” For instance, if the FTC determined a PCO’s termite contracts were deceptive, they could ask the PCO to voluntarily change his or her contract, while not punishing the PCO for violating any consumer protection law. When it comes to the potential punishment the FTC can levy, consent orders are the least punitive and least unpleasant option.

The FTC also can issue an “administrative complaint” against a company, which in effect is like filing a lawsuit against the company. If such a complaint is levied, “a formal proceeding that is much like a court trial begins before an administrative law judge: evidence is submitted, testimony is heard and witnesses are examined and cross-examined.” If the company is found to be in violation, they can be ordered to cease the deceptive practices. After being found “guilty,” other punitive actions can also be taken against the offending company to redress wronged consumers.

Decisions in these administrative trials can be appealed all the way to the U.S. Supreme Court, although it is not likely a trial would make it this far along the judicial hierarchy.

Finally, if the FTC “finds evidence of unfair or deceptive practices in an entire industry,” it can set standards for the particular industry that have the force of federal law. These industry standards are called Trade Regulation Rules. While some industry insiders have indicated that the FTC may be exploring such an option in its investigation of the termite control industry, most agree this would be an unlikely step.

Though the FTC may stop short of issuing Trade Regulation Rules for the termite control industry, there are other “non-punitive,” industry-wide measures they may take. For instance, since 1992 the commission has published it’s “Green Guides,” which provide consumers and advertisers guidance when judging the legitimacy of marketing claims such as “environmentally preferable,” “non-toxic” and “ozone friendly.”

In 1993, the FTC’s Bureau of Consumer Protection, the same division involved in the investigation into termite control, issued a consumer guide, Lawn Service Contracts: fast facts, regarding lawn service and lawn service contracts. The 1,000-word document answered questions such as: How do you choose a lawn care service? and What should you look for in your contract? The document suggested consumers, “find out if the work is guaranteed…know what the guarantee includes and excludes, and how long it lasts,” and “know what specific services and lawn problems are covered and what are not.” These are precisely the kinds of issues believed to be under consideration in the investigation into termite control. While these types of consumer publications do not have the force of law, they can have the affect of altering an entire industry.

Only time will tell which, if any, actions the FTC may select to levy upon the termite control industry or individual termite control companies, but you can be sure the industry will be waiting anxiously on the edge of its collective seat until such action is taken.