Reed Smith Client Alerts

Authors: Kathyleen A. O'Brien

Type: Client Alerts

1. Class Action Lawsuits Have Been Filed Against Retailers That Operate Outlet Stores Based on Their Alleged Pricing Claims

Plaintiffs’ class attorneys have a new target in sight and it is outlet shopping. In the past 90 days, class action lawsuits have been filed in California and New York against seven major retailers (Nordstrom, Levi Strauss, Ralph Lauren, Michael Kors, Neiman Marcus, The Gap, and Saks) that operate outlet stores, in addition to traditional retail stores in the state of California. In each lawsuit, the named plaintiff purports to represent a class of California consumers who he or she claims were misled by allegedly false and deceptive advertising. More specifically, the lawsuits allege claims for false advertising, unfair competition and violation of California’s Consumer Legal Remedies Act based on the assertions that the plaintiffs were led to believe that the products they purchased at the outlet stores were steeply discounted from their “suggested” retail prices or “compared to” prices when, in reality, those products were never intended to be sold at the traditional retail stores, were created exclusively for the outlet stores, and were of inferior quality.

This litigation comes just a few months after a group of congressional Democrats wrote a letter to FTC Chairwoman Edith Ramirez expressing their concerns that the surging popularity of outlet malls may have fueled some deceptive marketing practices, and urging the FTC to use its authority under section 5 of the FTC Act to “investigate deceptive and unfair marketing practices at outlet stores” and to “punish offenders.” In March, the FTC published a blog piece offering tips on how shoppers can identify true bargains.

2. Are There Any Guidelines for Making Comparative Pricing Claims?

a. The FTC Guides Against Deceptive Pricing

Although the FTC has not promulgated any new regulations or guidelines that specifically deal with outlet discount claims, the “FTC Guides Against Deceptive Pricing” (“the Guides”) offer general guidance on comparative pricing, which is helpful here. 16 C.F.R. §§ 233.1 through 233.5. For example, the Guides address discount claims based on the advertiser’s own former price for the same product. If the former price is the “actual, bona fide price at which the … [product] was offered to the public on a regular basis for a reasonably substantial period of time, it provides a legitimate basis for a price comparison.” If, on the other hand, “the former price being advertised is not bona fide but fictitious … the 'bargain' being offered is a false one.” 16 C.F.R. § 233.1(a). In addition, the Guides warn that the advertiser should avoid any implication that a former price is a “selling price,” not an “asking price,” unless “substantial sales” at that price were actually made. 16 C.F.R. § 233.1(b).

The Guides also address price comparisons in which the advertiser represents that he is selling below the prices being charged by others in his geographic area for the same merchandise. When comparing his price with the prices charged by others for the same product, the advertiser should be “reasonably certain that the higher price he advertises does not appreciably exceed the price at which substantial sales of the … [product] are being made in the area.” 16 C.F.R. § 233.2(a).

b. The Council of Better Business Bureaus’ Code of Advertising Recommendations

Advertising trade groups also offer recommendations on comparative pricing. For example, in its Code of Advertising, the Council of Better Business Bureaus (“CBBB”) recommends that when advertisers offer a price reduction or savings by comparing their selling price with their own former selling price, the former price “should be the actual price at which the advertiser has been currently offering . . . the merchandise immediately preceding the sale, on a regular basis, and for a reasonably substantial period of time.” Additionally, “[i]n the event few or no sales were made at the advertised comparative price, the advertiser should make sure that the higher price does not exceed the advertiser’s usual and customary retail markup for similar merchandise . . . and is one at which the merchandise was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of business, honestly and in good faith.” Finally, the CBBB recommends that if a reduction is advertised with the word “originally” and the original price is not the last previous price, that fact should be disclosed by stating the last previous price. For example, “Originally, $400, formerly $300, now $250” or “originally $400, intermediate markdowns taken, now $250.” See Code of Advertising, Council of Better Business Bureaus, available at http://www.bbb.org/council/for-businesses/code-of-advertising/, last visited
Oct. 16, 2014 (“Code of Advertising”).

Similarly, the Better Business Bureau advises that when an advertiser makes a claim similar to “priced elsewhere at $____,” he must be “reasonably certain that the higher price ascribed is one at which substantial sales are made in the relevant geographic area,” and that phrases such as “valued elsewhere at $____ or sold retail at $____ require that the prices quoted should not be from isolated and unrepresentative sales while the bulk of sales are actually at lower prices.” Code of Advertising. This is true whether the quoted price is that of a competitor, or a suggested price such as the Manufacturer’s Suggested Retail Price (“MSRP”) or a “List Price.”

c. The People v. Overstock Guidelines

A California case that came out earlier this year, People v. Overstock.com, 2014 WL 657195 (Feb. 19, 2014), also addresses when an MSRP or “List Price” might be considered a fictitious price. In 2010, a group of California district attorneys brought an action against Overstock.com alleging that its price comparisons based on “Advertised Reference Prices” or “ARPs,” were false or misleading. According to the complaint, Overstock.com instructed its employees to either choose the highest price they could find as an ARP or to construct ARPs using a formula that applied an arbitrary multiplier to Overstock.com’s wholesale cost when making price comparisons. The court held that Overstock.com’s practice was fraudulent and misleading, and ordered that Overstock pay civil penalties in the amount of $6,828,000.

The court set forth the following guidelines in advertising price discounts:

  • If Overstock.com uses an MSRP as the ARP, then it also needs to disclose that practice.
  • If Overstock.com uses an unqualified term such as “Compare it,” then the ARP must reflect a good faith effort to determine the “prevailing market price” of the identical product. The following criteria satisfy this standard:
    • If ARP is represented as a range of prices; for example, it is common in the geographic area for an item to sell at $40 or $50, you could list the ARP as $40-50.
    • If ARP is a price from one of the five largest Internet shopping sites as identified by any third party/industry source, and that method is identified by a hyperlink to the ARP; for example, if you are selling a tennis racket, and a third-party source has identified Amazon as one of the five largest shopping sites, you could list Amazon’s price for the same tennis racket as the ARP.
    • If ARP is a price from one of the three largest shopping sites for the category of product being sold as identified by any third party/industry source, and that method was identified by a hyperlink to the ARP; for example, if you are selling a tennis racket and a third-party source has identified the Sports Authority as one of the three largest shopping sites for tennis rackets, you could list the Sports Authority’s price as the ARP, along with a hyperlink that explains the methodology used by the third party to determine that Sports Authority is one of the three largest shopping sites for tennis rackets.

The FTC Guides, the CBBB Code of Advertising Recommendations and the Overstock case all provide retailers with guidance on how to substantiate comparative pricing claims. What is clear from all of these sources is that retailers must be able to show that any advertised price “savings” is based on real price comparisons, and to explain how that “savings” was calculated. Guesswork or reliance on fictitious pricing is not sufficient.

In light of this request for FTC action and the new wave of class action litigation targeting comparative price advertising by outlet stores, it would be prudent for retailers to proactively review their comparative pricing claims, particularly with respect to outlet stores, and to consult with experienced counsel on how best to substantiate those claims to reduce legal risk.

 

Client Alert 2014-278