August 2013: Class Action Litigation Update - Retail Pricing: The New Class Action Beachhead.

“Labels matter.” With those two words, penned in Kwikset v. Superior Court, 51 Cal. 4th 310 (2011), the California Supreme Court opened up a new frontier for class actions against product manufacturers and retailers. Any product attribute represented on a label or in conjunction with the sale of the product is fair game for a class action lawsuit, whether it pertains to a product’s origins (“Made in U.S.A.”), ingredients (“all natural”), or, most recently, pricing (“on sale”). The first wave of cases to follow Kwikset concerned food labeling, a genre which quickly has become a staple of class action litigation. The next wave may be starting to take shape as a result of the Ninth Circuit’s recent decision in Hinojos v. Kohl’s Corp., No. 11-55793, 2013 U.S. App. LEXIS 10185 (9th Cir. May 21, 2013).

The sales practice at issue in Hinojos was offering a product “on sale” when in fact the “sale” price did not necessarily reflect a discount. Mr. Hinojos bought some luggage and clothing at Kohl’s at their offered sale price, represented as a discount from the “original” or “regular” price. He then sued, alleging that Kohl’s routinely sold the luggage at the so-called sale price and that the “regular” price did not reflect prevailing market prices for the goods. He alleged that he would not have purchased the merchandise had he known the sale price did not represent a true discount. He brought suit under California’s triumvirate of consumer statutes: Business & Professions Code § 17200, the Consumers Legal Remedies Act, and the False Advertising Law.

As in Kwikset, the central issue was standing—whether Mr. Hinojos had suffered the loss of money or property that has been required to bring suit under the Unfair Competition Law since the California electorate passed Proposition 64 in 2004. Kohl’s argued that Mr. Hinojos suffered no loss because there was “no difference in value between the product ‘as labeled’ and the product ‘as it actually is,’ because the products . . . are one and the same.” Id. at *4. As Kohl’s explained it, “when a merchant misrepresents the ‘regular’ price of his wares, it does not misrepresent the innate value of those wares so the misled consumer has suffered no economic injury; he gets the product he expected to get at the price he expected.” Id.

The Ninth Circuit emphatically disagreed. In a clear reference to Kwikset, the Court summed up its decision with the words “price advertisements matter.” Id. at *6. Drawing from an experience common to all—shopping—the Court pointed out that consumers love a bargain and, as a result, retailers have “an incentive to lie to their customers by falsely claiming that their products have previously sold at a far higher ‘original’ price in order to induce customers to purchase merchandise at a purportedly marked-down ‘sale’ price.” Id. at *1. It concluded that the California legislature had prohibited such practices because they are “misleading—and effective.” Id. According to the Court, there was “obvious economic injury” in this circumstance because the consumer was duped into believing the purchased product had a “higher perceived value and therefore has a higher resale value.” Id. at *5.

The decision sweeps broadly in that the Court rejected Kohl’s argument that Kwikset applies only to false statements about the “composition, effects, origin, and substance” of products. In disputing Kohl’s reading of Kwikset, the Court provided examples of other common marketing representations that it intimated were deceptive if not true, including such time-honored claims as: “not available in stores,” “available for a limited time only,” and “more doctors recommend our product than any other brand.” All of these statements are an entrenched part of marketing products in this country.

In the end, Hinojos is a case about standing only. Still, standing is a foot in the door and with the Court’s help, Mr. Hinojos has opened that courthouse door wide enough for a broad array of new false advertising claims to enter.