Beware of the Sale: Complying with Promotional Pricing Guidelines

Practical Law Legal Update w-012-9800 (Approx. 5 pages)

Beware of the Sale: Complying with Promotional Pricing Guidelines

by Practical Law Commercial Transactions

Class Action Litigation

The number of lawsuits challenging promotional pricing practices as deceptive has increased in recent years. The lawsuits, mostly consumer class actions, generally allege that a seller's price comparisons violate state law because merchandise was either:

Not offered for a substantial period of time or the required, specified period of time at the higher reference price.
Never offered for sale at the higher reference price.

These cases are fact-specific, and the outcome can vary by jurisdiction. The outcome often depends on the state statute at issue and the applicable pleading requirements.

Once a company has been sued for alleged deceptive pricing practices, the case often ends in a costly settlement. Recent examples include:

A $50 million settlement for a suit filed against JC Penney in the Central District of California, for allegedly advertising a sale on blouses referencing original prices that were higher than had been used in the past three months.
Two settlements made by Ascena Retail Group, Inc., owner of Justice brand and Ann Taylor, which include:
- A $50.8 million settlement of a lawsuit filed in the Eastern District of Pennsylvania, alleging that items at Justice stores marked on sale were instead using the regular retail price; and
- A $6.1 million settlement of a lawsuit filed that alleged Ascena used deceptive discount claims at Ann Taylor and LOFT factory Outlet stores.
A $4.9 million settlement of a lawsuit alleging that Michael Kors marketed its goods using supposed substantial discounts of fake Manufacturer's Suggested Retail Prices (MSRP) for products exclusively sold in its stores.

Although many of these cases settle out-of-court, some courts have found for the seller in specific instances, determining that the plaintiffs had not adequately demonstrated actual injury resulting from the transaction at issue. Illustrative cases have led to judgments along this line of thinking in several US Courts of Appeals, including:

The First Circuit, which affirmed a lower court's dismissal of a class action that alleged fraud committed by advertising false comparison prices. The case was dismissed because the court found no economic injury, explaining that the goods were worthy of the price the plaintiff paid.
The Sixth Circuit, which affirmed a lower court's dismissal of alleged unfair and deceptive practices in violation of Ohio's Consumer Sales Practice Act (CSPA). The case was dismissed because the court found the plaintiff failed to allege actual damages, which is a necessary element of a class action under the CSPA.
The Seventh Circuit, which affirmed the dismissal of a putative class action which alleged the retailer advertised its normal prices as temporary price reductions. The case was dismissed because the court found the plaintiff failed to adequately plead the suffering of an actual pecuniary loss resulting from the transaction.

Unlike the above instances, courts in California have generally found for the plaintiffs. California courts have generally found that plaintiffs have adequately alleged economic injury under California law when claiming that:

The advertised discounts conveyed false information about the goods.
The plaintiffs would not have purchased them absent the misrepresentation.

For an example, see Hinojos v. Kohl's Corp., (C.D. Cal. Dec. 1, 2010).

For a more in-depth discussion of the above cases, see Practice Note, Promotional Pricing: Class Action Litigation.

The FTC Guidelines and Complying with Federal and State Law

The Federal Trade Commission (FTC) is the primary federal agency responsible for regulating sales promotions. It does so by prescribing rules under the Federal Trade Commission Act (15 U.S.C. § 41) (FTC Act), investigating suspected violations of the Act, and bringing lawsuits against those companies conducting illegal activity. (For more information see Practice Note, FTC Consumer Protection Investigations and Enforcement).

The FTC's Guides Against Deceptive Pricing generally require that a seller offer an item at a price for a reasonable, substantial period of time in good faith, and in the regular course of business, before advertising that price as the former or regular price (16 C.F.R. § 233.1). The FTC considers it deceptive to offer an item for sale at a higher price for a short period of time in order to support a claim that an item is discounted when the price is then lowered. This practice is prohibited.

Additionally, most states have consumer protection statutes that prohibit sellers from making false or misleading statements of fact concerning the reasons for, existence of, or amount of a price reduction (for example, Cal. Civ. Code § 1770(a)(13)). Several states also expressly regulate the length of time an item must be offered at a regular price and amount of time it is on sale (for more information, see Practice Notes, Promotional Pricing: Specific State Laws and "Up To" Discounting Law and Practice: Promotional Pricing: State-by-State Requirements).

Limiting Liability

Generally, to comply with federal and state laws and to avoid similar exposure to class action litigation, when advertising discount prices or the former base price of a discounted item, counsel should ensure:

The former price listed is the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time.
The seller does not represent that a price advertised as a former selling price, was actually only a former asking price, unless substantial sales were made at that price.
If the former price or price reduction is not shown, the sale price should not be so insignificant as to be meaningless. The price reduction should be sufficiently large enough that the consumer would believe they were receiving a genuine bargain if they knew the amount of the price reduction.
A list or suggested retail price shows the price at which substantial sales are made (same or similar price at which a number of sales have been made by principal retail outlets in the area).
Prices are not:
- artificially inflated to create an opportunity to promote a future price reduction.
- offered that were not used in the regular course of business, in the recent past.
- used that were not openly offered to the public, or that were not maintained for a reasonable length of time before being reduced to a sale price.
Employees in charge of promotional pricing have the proper training and are told to cascade promotion policies to all interested parties.

Practical Implications

With the rise of class action suits involving promotional pricing, counsel must ensure they stay on top of the current trends, especially in jurisdictions they are most likely to be sued. The complex regulatory scheme surrounding promotional pricing, involving both federal and state regulators, has made the use of deceptive sales pricing ripe for litigation. As noted above, how the courts treat companies engaged in alleged deceptive sales promotions often largely depends on the jurisdiction. Counsel should think about developing a promotion policy that takes into account both the federal guidelines and state specific rules.

For more general information about how the FTC regulates advertising, see Practice Note, FTC Enforcement of Advertising Claims.

For more specific information on how federal and state governments regulate promotional pricing, see Practice Notes, Promotional Pricing and "Up to" Discounting Law and Practice.

For a continually updated list of our advertising and marketing resources, see our Advertising and Marketing Toolkit.

Beware of the Sale: Complying with Promotional Pricing Guidelines | Practical Law