United States: Everything's On Sale (Or Is It?): Lessons For Retailers Looking To Avoid Class Action Lawsuits

Jon G. Shepherd is a Partner in our Dallas office and Brian J. Goodrich is an Associate in our Washington DC office.

Almost every company selling consumer products has a sale on something at some point. And some companies offer everyday low pricing or a variant of that practice. But other companies market – or at least seem to market – their products using a perpetual sale price, either substantially discounting their prices or advertising buy one, get one free and similar offers. Many companies use "compare at" slogans to demonstrate how much of a bargain the consumer is getting. Without taking proper precautions, however, companies falling into the latter groups could be subject to consumer claims for false advertising, unfair competition, and the like.

Plaintiffs' success in these types of false advertising claims has varied in different jurisdictions. Plaintiffs' success in these lawsuits has depended to a certain extent on states' prevailing standing doctrine and the strength of their consumer protection regime. Some plaintiffs have struggled to show that any harm occurred, as, according to some, the consumer receive the benefit of their bargain. California, however, recently accepted the theory that a plaintiff may be able to demonstrate standing if they successfully argue that they would not have bought the item but for the sale and the seemingly irresistible bargain and value they were receiving. While that result may have been a product of the robust consumer protection regime in California to a certain extent, retailers should be wary that other jurisdictions may follow suit. 

Increase in Legal Challenges to Retailers' Pricing Policies

There has been an increasing number of lawsuits challenging large retailers' pricing policies. Several large retailers, such as Jos. A. Banks Clothiers, are currently enmeshed in class action litigation in California concerning sale-price misrepresentation issues. Other companies, including Kate Spade & Co., Overstock.com, Neiman Marcus Group Ltd LLC, and The Gap, Inc., have been sued based on allegations that their compare to or compare at price advertisements are unlawful. At least one retailer chose to settle outside of court over allegations that the retailer held items out as marked down from an original price that was never, in fact, charged.   

California is a particularly favorable jurisdiction for such claims because its False Advertising Law, which is expressly incorporated into its Unfair Competition Law, contains a specific prohibition against advertising a price as a former price of any advertised thing if the retailer actually was not charging that former price. More specifically, California's False Advertising Law (FAL) states:

California does not stand alone.  Similar claims have been pursued with varying levels of success in other jurisdictions, including Illinois (Jos. A. Banks, Omaha Steaks) and New York (Michael Kors).

Other states, such as Texas, are less hospitable to these types of claims. Retailers operating in Texas have one advantage that California retailers do not: Texas does not contain an analog to California's FAL. That does not mean there is clear sailing for Texas retailers, however, because both California and Texas, as well as many other states, prohibit making false or misleading statements of fact concerning the reasons for, existence of, or amount of price reductions. Non-California retailers also need to remain cognizant of the statutory prohibitions against unconscionable conduct and common law misrepresentation claims. The Federal Trade Commission also has the power to pursue false or misleading price comparison advertising.

Options for Retailer Defendants

Of course, that consumers can file lawsuits does not mean that those lawsuits will be successful. Some false advertising claims have failed because the plaintiff did not adequately plead at the complaint stage or prove at the summary judgment stage actual damages. Typically, a retailer will argue that because the inherent value of the product is the same whether or not the original price represented by the retailer was accurate, the purchaser suffered no economic harm because the consumer obtained the product she expected at the price she expected to, and did, pay. Put slightly differently, the retailer argues that no harm exists because the purchaser obtained the benefit of his bargain: the retailer offered a product for sale at a certain price and the purchaser paid that price and received the product. Indeed, the retailer could argue that the actual value of the product exceeded the price the consumer paid. Although these arguments have been rejected in California, other jurisdictions appear more receptive to them. 

Additionally, while not all courts agree that advertising practices such as perpetual markdowns or "compare at" prices harm consumers that buy the advertised products, courts do agree that reliance on those advertisements is required for a plaintiff to allege harm.  Retailers may be able to defeat plaintiffs' claims if they can show that either the consumer did not prove they were personally deceived, or that the consumer did not understand "compare at" to refer to the price the item was previously sold at.

Additionally, given that these claims typically are brought as class actions, a retailer can defeat class certification by demonstrating common questions do not predominate given that, among other things, (1) the alleged misrepresentation was not made to or seen by all class members, (2) different advertisements were used (i.e., prices changed) during the proposed class period, (3) reliance issues would preclude class certification, and the like. Of course, the retailer always can demonstrate that the ad was truthful and fully complied with all legal requirements.

Lessons for Retailers

As the Ninth Circuit said in Hinojos, price advertisements matter.¹ This principle is belied by the increase in false advertising litigation over the past few years involving markdowns and price comparison sales techniques. Kate Spade & Co. became the most recent target of a deceptive advertising lawsuit in November 2015; the retailer was hit with a proposed class action in the Northern District of California alleging violations of both the California FAL and Texas Deceptive Trade Practices Act.

Retailers need to remain cautious of using one-size-fits-all advertisements as what may be perfectly acceptable in Texas could subject the retailer to a class action seeking treble damages in California (and elsewhere). Retailers should carefully review their price advertising to ensure that they have selected appropriate language, such as compare to MSRP or compare similar or previously priced at and the like. Retailers that offer products at sale or reduced prices should ensure that they first sell those products at the regular or original price for a period of time prior to commencing the markdowns. Retailers that use compared to price advertisements should ensure that they have valid support for the chosen compared to price they select. Retailers should periodically review their price advertising to ensure continued compliance with the relevant laws and adjust their prices or advertisements as necessary. And finally, retailers should retain the information supporting their selected prices for at least as long as the statute of limitations applicable to each advertisement.

Footnotes

1. Hinojos v. Kohl's Corp., 718 F.3d 1098, 1107 (9th Cir. 2013). 

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.