Client Alert Reference Pricing: High Court Ruling Grants Greater Flexibility To Traders

What has happened?

The High Court has declined to impose an obligation on Emma Sleep, the online mattress retailer, requiring it to agree that, for every one product sold at the full price, it will sell only two at the discounted price (a 1:2 fixed volume ratio – FVR). The court considered that volume alone cannot determine whether a reference price is misleading and therefore potentially in breach of consumer protection law. Even a very low FVR might be acceptable, depending on the countervailing circumstances. It means that traders will have more flexibility with this aspect of reference pricing.

How did the claim arise?

The ruling was made in the context of enforcement action by the Competition and Markets Authority (CMA) against Emma Sleep for various breaches of consumer protection law. Emma Sleep admitted most of the claims made against it, leaving the court only to decide the FVR issue. The ruling is therefore a small—but important—victory for the company. While it was made under the old Consumer Protection from Unfair Trading Regulations 2008 (CPUT), there is nothing to suggest that the same reasoning would not also apply under the Digital Markets, Competition and Consumers Act 2024 (DMCC), which now applies.

What is reference pricing?

Reference pricing is a strategy where a seller places a higher comparison price—such as a previous price—next to the current lower price to make the deal seem more attractive. It is sometimes called was/now pricing (“was GBPx, now GBPy”).

What are the CMA’s concerns?

The CMA’s (and ASA’s) concerns about reference pricing include its potential to mislead consumers if only a small fraction of stock is actually sold at the higher price. With this in mind, the CMA introduced the 1:2 FVR requirement in its online mattress sales guidance a couple of years ago, although the implication has always been that the FVR applies more broadly.

What did the court say?

The court has now effectively rejected the imposition of a 1:2, or any other, FVR. Key aspects of the ruling include the following:

• Volume alone cannot determine whether a reference price is misleading. The judge concluded that an average consumer would pay some regard to the number of sales at the reference price but would also consider whether Emma Sleep had a genuine belief that it could make significant sales at that reference price, and that even if Emma’s sales did not satisfy a 1:2 FVR, an average consumer may still conclude the reference price is genuine if Emma had a real belief it could sell significant quantities at that price. This is a significant development in the law on reference pricing and directly undermines any attempt to build a purely quantitative enforcement framework.

• Subjective beliefs are relevant. The judgment introduces an important principle: a trader’s genuine subjective belief that its reference price is realistic is a material consideration for the average consumer assessment. The CMA’s deliberate avoidance of any reliance on subjective intention (likely driven by its reliance on Part 8 procedure) seems to have backfired. The implication is that regulators may need to address the question of a trader’s genuine beliefs more directly, even where the legislative framework is objective in character.

• Was Part 8 procedure the right choice for the CMA? The case was brought under the pre-DMCCA Part 8 enforcement regime, where there is no cross-examination of witnesses and no expert evidence. The absence of those features significantly limited the judge’s ability to make findings adverse to Emma Sleep on contested factual matters. The CMA will not use Part 8 in future consumer enforcement cases—under the DMCCA, the CMA now makes findings of infringement using its own direct enforcement powers, and any trader wishing to challenge those findings must do so on appeal, where there is greater scope for oral evidence and cross-examination—something the CMA is perhaps now more likely to request.

• Market characteristics will be considered. The court accepted that low reference-price sales volumes do not, of themselves, indicate that a reference price is artificial or misleading. Low sales volumes may simply reflect the nature of the market in which a business operates. In the mattress sector, consumers tend to research purchases carefully, defer buying until a promotion arises, and treat a perceived discount as the inducement to commit. The judge found that behavior is a feature of the product rather than evidence of misleading practice. Businesses in sectors characterized by infrequent, high-value or considered purchases (where consumer behavior naturally suppresses the number of sales at full price) should take note that such arguments can carry weight.

• The internal documents did not have the effect the CMA hoped. Despite the vivid and apparently damaging content of Emma Sleep’s documents revealed by way of an information notice request by the CMA, the judge declined to draw the inferences from them that the CMA sought. The internal documentation could be fairly read as an encouragement to explore the boundaries of law and regulation, but not to exceed them. The absence of cross-examination of Emma Sleep witnesses was significant here.

• Proportionality of sanctions under the DMCCA. Under the DMCCA, breach of an enforcement order would expose Emma Sleep to fines calculated by reference to a percentage of its turnover as well as criminal penalties. The judge expressly factored the severity of the potential consequences into his proportionality analysis when declining to impose a fixed volume requirement. This signals that courts will scrutinize the terms of enforcement orders carefully in the DMCCA era (even in a case decided under the old consumer protection law), particularly where the conduct in question does not map cleanly onto a defined legal standard.

What about the claims Emma Sleep admitted?

Before and during the trial, Emma Sleep made various admissions and entered into a court-confirmed settlement relating to other alleged breaches of consumer protection law. Businesses should carefully consider this aspect of the case.

• Reference pricing breaches. Emma admitted that the following breached the CPUT Regulations: (i) offering a new product for sale with a struck-through reference price without previously having offered, or subsequently offering, that product for sale at the higher reference price; (ii) offering a product for sale using a struck-through reference price which was not the price that had been charged immediately before the start of the relevant promotion; and (iii) using a reference price in circumstances in which the product had previously been offered for sale at that higher reference price but was also available at a lower price in a parallel discount promotion as part of a bundle at a lower overall price at the same time. It also admitted that its sales data for certain products/periods was insufficient to substantiate that Emma’s customers were willing in sufficient quantities to purchase the mattresses in question at the undiscounted reference price.

• Reference pricing duration requirements. Emma Sleep also accepted that it should adhere to “Duration Requirements” which preclude it from using a reference price unless the product in question is offered for sale at that reference price for a particular length of time. Specifically, from August 22, 2023, Emma ensured that a reference price had to be offered for a minimum of 30 days. Emma accepts that use of a reference price is misleading if the product in question has not been offered for sale at the reference price for at least as long as it is being offered for sale at the discounted price. The CMA and Emma have agreed the text of an enforcement order relating to Duration Requirements.

• Urgency messaging. Emma Sleep and the CMA also separately entered into a consent order dealing with the CMA’s concerns about Emma Sleep’s use of urgency messaging, namely the use of countdown timers suggesting that products would be available at particular prices only for a limited period of time, misleading “high demand” claims, and associated discount claims, which created false pressure on consumers to make purchases. Emma Sleep acknowledged that aspects of its previous conduct on urgency messaging involved Schedule 13 infringements and undertook not to repeat that conduct.

What does this mean for you?

• The judgment has implications beyond the mattress sector. It confirms that regulators cannot rely solely on sales volume data to establish that a reference price is misleading, and that documented, genuine reasoning behind pricing decisions is legally relevant. Any business using comparative or reference pricing in its marketing should review current practices in light of this decision.

• Businesses should watch out for updated guidance from the CMA on this issue. It remains to be seen whether the CMA will revert to its old requirement that a ‘significant number’ of products must have been sold at the reference price, or whether a more nuanced approach will be required. It will also be interesting to see how the ASA responds, although it has largely resisted any attempt to move to a 1:2 ratio anyway.

• It is important to note that the wider claims against Emma Sleep were largely admitted/settled. Businesses should carefully review the terms of the enforcement order agreed between the CMA and Emma Sleep, when it is published, to help guide them on the CMA’s expectations.

• The wider case illustrates how difficult it can be to get pricing and other claims right. Given that the sanctions for getting it wrong have increased significantly under the DMCC, now is the time for businesses to review all of their practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.