May 2013

Richard Nelson and Erica Brand Portnoy write “4 Best Practices to Protect Your Company from Discount and Warranty Fraud” for InsideCounsel


Throughout this series, you have learned that if your company’s products are in high demand, you are an inviting target for sophisticated fraud schemes aimed at finding and exploiting weaknesses in your discount and warranty programs. Even companies with a watchful eye towards spotting these crimes have become victims.

What is discount fraud? Typically, in a discount fraud scheme a “customer” or corrupt channel partner asks for deep discounts on your products based on unique circumstances. However, the representations are false and those products end up with a broker, competing with your honest channel partners for business.

What is warranty fraud? Warranty fraud schemes frequently involve a customer misrepresenting to your company that a product is in need of service or replacement. The customer, however, does not have a failed product, but obtains a new product from your return program and sells it to third parties for profit.

Although the vast majority of new sales opportunities and customer warranty claims are genuine, and lead to or support long-term customer relations, there are situations in which your company has been lied to—and lost valuable product and profit as a result. These practices are against the law and your company has legal rights against the perpetrators of these frauds.

If it is clear that your company is, or may be, the target of these frauds, what next?