United States: The Price Is Not Right: Class Action Risks Of Comparative Price Advertising

Last Updated: May 25 2017
Article by C. Brandon Wisoff

Introduction

"Was that retail 'bargain' you received really a bargain?" That is the question being asked by a recent spate of lawsuits filed against prominent retailers. Most of these actions have been brought as private party class actions, but price discount claims have also attracted renewed regulatory attention in recent years. The facts and circumstances of these cases have varied. Some actions have challenged as false a retailer's assertion that a product is "on sale" or has been "discounted" from the retailer's former or regular price. Others have challenged a retailer's supposedly favorable price comparisons to prices of a competitor's same products or to prices of other "similar" products that are not actually of like grade and quality. Still others have challenged a retailer's supposed "discount" from a list price or MSRP at which the product has never sold. Despite these differences, the gravamen of the claim in each instance is typically the same: the retailer is allegedly misleading consumers into believing they are receiving a bargain when they are in fact paying the price at which the product normally sells.

While the majority of these cases have been brought in California (with the benefit of California's liberal consumer protection laws), cases are appearing nationwide and the publicity surrounding them suggests their numbers will only grow. That is especially true given the proliferation of internet price searching tools and the resulting pressure that retailers feel to compete on price and to respond to "bargains" being offered by their competitors. The risk to retailer clients is substantial: some of these claims have resulted in multimillion dollar settlements and/or regulatory fines. Even where cases are terminated early, defense costs can be significant.

In this article, I first summarize the historical background and legal bases of these "false discounting" claims. I review how the FTC, which had developed deceptive pricing guides and then vigorously pursued such claims in the 1960's, had – most likely for policy reasons – all but abandoned enforcement actions related to pricing by the 1980's. I also mention generally various state law deceptive pricing provisions, most of which derive from the FTC model. I nextdiscuss the recent resurgence of these claims over the last few years, primarily via private class actions, but also by regulatory (primarily state regulatory) enforcement actions. After summarizing some of the cases and their outcomes, I conclude by suggesting a few measures that retailers can take to mitigate the risks.

FTC Guides Against Deceptive Pricing

The FTC developed "guides" against deceptive pricing in the late 1950's and subsequently amended them throughout the 1960's; the current guides still date back to 1967.1 The guides do not have the force of law; they instead "provide the basis for voluntary and simultaneous abandonment of unlawful practices by members of industry." 16 C.F.R. § 1.5. However, "[f]ailure to comply with the guides may result in corrective action by the Commission under applicable statutory provisions." Id. Under Section 5 of the FTC Act, the Commission has authority to prevent "unfair or deceptive acts or practices in or affecting commerce" which are broadly declared as being "unlawful." 15 U.S.C. § 45. As discussed more fully herein, while there is no private right of action under Section 5 of the FTC Act, many state statutes addressing deceptive trade practices and unfair competition contain restrictions similar to those in the FTC guides. In addition, the guides are often cited in private litigation as setting the norms that should be enforced under state consumer protection law. The guides are thus a critical starting point for analyzing the bona fides of an advertiser's pricing claims.

The guides specifically address several forms of pricing claims relevant here, including (1) "former price comparisons," i.e. claimed discounts from an advertiser's own normal price, 16 C.F.R. § 233.1, (2) "retail price" or "comparable value" comparisons, i.e., claimed discounts from what others in the locale are selling the same or similar product, id. § 233.2, and (3) claimed discounts from a list price or MSRP, id. § 233.3. The guides note, however, that "[t]he practices covered in the provisions . . . represent [only] the most frequently employed forms of bargain advertising," and warn that "there are many variations which appear from time to time and which are, in the main, controlled by the same general principles." Id. § 233.5 (emphasis added).

The FTC guides expressly address and provide commentary with examples concerning "former price comparisons," which are described as "[o]ne of the most commonly used forms of bargain advertising," i.e., the "offer of a reduction from the advertiser's own former price for an article." 16 C.F. R. § 233.1(a). While it is certainly risky to claim a discount from a former price at which substantial sales were not actually made, the guides note that "[a] former price is not necessarily fictitious merely because no sales at the advertised price were made." Id. § 233.1(b) They warn, however, that in such cases the advertiser "should be especially careful . . . that the price is one at which the product was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of his business, honestly and in good faith – and, of course, not for the purpose of establishing a fictitious higher price on which a deceptive comparison might be based." Id. Each factor is important: thus, comparisons to prices that were not openly offered in the recent past for a reasonable period of time in the ordinary course of business are suspect. Id. § 233.1 (d). The guides also warn that comparisons to former prices may be scrutinized regardless of whether the advertisement expressly uses such words as "Regularly," "Usually," or "Formerly" to describe the former price. Id. § 233.1 (e). They also caution against misleading discount claims concerning trivial reductions, such as advertising that an item has been "' Reduced to $9.99,' when the former price was $10." Id.

The guides also expressly address "retail price comparisons" and "comparable value comparisons." Id. §233.2. A "retail price comparison" is where an advertiser "offer[s] goods at prices [claimed to be] lower than those being charged by others for the same merchandise in the advertiser's trade area." Id. § 233.2(a) (emphasis added). A "comparable value comparison" is "[a] closely related" claim where an advertiser "offer[s] a reduction from the prices being charged either by the advertiser or by others in the advertiser's trade area for other merchandise of like grade and quality." Id. § 233.2 (c) (emphasis added). Both types of pricing claims are treated similarly. For "retail price comparisons, the advertiser should "be reasonably certain that the higher price he advertises does not appreciably exceed the price at which substantial sales of the article are being made in the area." Id. § 233.2(a). For "comparable value comparisons," the advertiser should "be reasonably certain, just as in the case of comparisons involving the same merchandise, that the price advertised as being the price of comparable merchandise does not exceed the price at which such merchandise is being offered by representative retail outlets in the area." Id. § 233.2(c). Of course, "comparable value comparisons" carry the additional warning that the other comparable merchandise should "in fact, [be] of essentially similar quality and obtainable in the area." Id.

Finally, the guides expressly address price comparisons to a manufacturer's "list price" or "suggested retail price," i.e., MSRP.2 The guides note that a claimed discount from MSRP can be misleading, reasoning that "only in the rare cases are all sales of an article at the manufacturer's suggested retail or list price." Id. § 233.3(c). They go on to state that "this does not mean that "all list prices are fictitious and all offers of reductions from list, therefore deceptive." Id. § 233.3(d). The guides reason that even if a list price is not the actual price for all sales, it may still be the actual price for many sales "at least in the principal retail outlets which do not conduct their business on a discount basis." Id. The guides thus conclude that an advertised discount from MSRP "will not be deemed fictitious if [the MSRP] is the price at which substantial (that is, not isolated or insignificant) sales are made in the advertiser's trade area . . . ." Id. "Conversely, if the list price is significantly in excess of the highest price at which substantial sales in the trade area are made, there is a clear and serious danger of the consumer being misled by an advertised reduction from this price." Id. In addition to offering a few illustrative examples, the guides do recognize that one "who does business on a large regional or national scale cannot be required to police or investigate in detail the prevailing prices of his articles sold throughout so large a trade area." Id. § 233.3(g). However, they also warn that every advertiser must "in every case act honestly and in good faith in advertising a list price, and not with the intention of establishing a basis, or creating an instrumentality, for a deceptive comparison in any local or other trade area." Id. 233.3(i).

As can be readily seen, the guides talk in general undefined terms like "substantial sales," "reasonably substantial period of time," "recent past," "comparable merchandise," and "good faith." While this flexibility is perhaps needed for regulatory enforcement decisions, use of the guides for standard setting in private litigation has led to much uncertainty, and thus risk.

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