Beware of Phantom Price Markdowns: Ruling Against Hobby Lobby Highlights Risk

Bryan Cave Leighton Paisner

Over the past several years, there has been a rise in class action lawsuits against retailers for allegedly deceptive price comparison advertising. Many of these lawsuits have alleged that retailers advertised “phantom” discounts from their own “former” or “original” prices, or “retail” or “list” prices at which the products were never actually offered for sale.

As we recently reported, fashion retailer Ann Taylor recently settled for $6.1 million a false discounting class action in New York federal court alleging that prices at its outlet stores were listed as “marked down” from prices that never applied to the items.

In another recent example, last week a California federal court denied Hobby Lobby’s motion to dismiss a proposed class action lawsuit alleging the retailer used a fake marked price to create the false perception that products were being sold at a discounted rate. In Chase v. Hobby Lobby Stores, Inc., the plaintiff alleged that she believed she was getting a 50 percent discount on a photo frame due to an in-store sign stating “Photo Frames 50% OFF the Marked price.” U.S. District Judge Gonalo P. Curiel held a reasonable consumer could have been misled by the sign despite inclusion of disclaimers that the advertised price “ALWAYS” applied, and “*DISCOUNTS PROVIDED EVERY DAY; MARKED PRICES REFLECT GENERAL U.S. MARKET VALUE FOR SIMILAR PRODUCTS.”

State Price Advertising Laws

California has seen the bulk of recent advertising-based claims against retailers under the state’s broad consumer protection laws.  California’s False Advertising Law (“FAL”) generally prohibits “unfair, deceptive, untrue, or misleading advertising.” (Cal. Bus. & Prof. Code § 17500.)  Although the FAL addresses deceptive advertising in several contexts, it specifically addresses price comparisons in Section 17501, which states, in relevant part:

“No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price as above defined within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.”

The Ninth Circuit Court of Appeals and other courts have interpreted the statute broadly, noting that “[t]he statute . . . encompass[es] not only advertising which is false, but also advertising which, although true, is either actually misleading or which has a capacity, likelihood or tendency to deceive or confuse the public.”(Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152, 1162 (9th Cir. 2012).)

Almost all other states have some form of deceptive advertising or consumer protection laws that may be applicable to price advertising claims.  The Federal Trade Commission (FTC) has issued regulatory guidance on the topic in the FTC Guides Against Deceptive Pricing. Several courts in California and other states have considered the FTC Guides in determining whether a particular practice is unreasonable, misleading, or deceptive. Although the FTC Guides may not have the force of law in certain jurisdictions with respect to state-law claims, retailers and marketers should look to the Guides as a reasonable starting point when their marketing plans.

The FTC Guides Against Deceptive Pricing

The FTC Guides separates pricing advertising into five separate categories: (1) former price comparisons; (2) “retail” or “comparable value” comparisons; (3) advertising “list” prices established by manufacturers or nonretail distributers; (4) “bargain offers” based on the purchase of other merchandise; and (5) “miscellaneous price comparisons,” a catchall category, including, without limitation, advance sales or “limited” time offers.

Former Price Comparisons – 16 CFR § 233.1

Former price comparisons are a form of bargain advertising generally defined as “offer[ing] a reduction from the advertiser’s own former price for an article.”  A reduction of the advertiser’s former price is a “legitimate basis for the advertising of a price comparison,” if the former price was: (1) an actual, bona fide price (not a price established for the sole purpose of a later reduction); (2) offered to the public; (3) on a regular basis; and (4) for a reasonably substantial period of time.

According to the Guides, a former price is “not necessarily fictitious merely because no sales at the advertised price were made,” however, in such a case the marketer must have offered the price “honestly and in good faith”—and “not for the purpose of establishing a fictitious higher price on which a deceptive comparison might be based.”

Section 233.1 goes on to set forth examples of fictitious price comparisons, which include:

  • Using a former price that was never offered for the article at all;
  • Using a former price that was not used in the “regular course of business”;
  • Using a former price that “was not used in the recent past, but at some remote period in the past,” without disclosing that fact;
  • Using a former price that was not “openly offered to the public,”
  • Using a former price that was not “maintained for a reasonable length of time, but was immediately reduced.”

With respect to the last example, the Guides do not define what the FTC considers to be a “reasonable length of time.”  Some states, such as California, have defined it as three months or longer.  Retailers should look to the state statutes and common law of their respective markets for additional guidance.

Lastly, the Guides cautions that if a former price is set forth in the advertisement generally without reference to a specific former price, such as an ad that merely states “sale,” the reduction in price must be “sufficiently large [so] that the consumer, if he knew what it was, would believe that a genuine bargain or saving was being offered.”

Retail Price Comparisons; Comparable Value Comparisons – 16 CFR § 233.2

Another common form of advertising addressed by the Guides is “retail” or “comparable value comparisons.”  A retail comparison is defined as a “form of bargain advertising . . . offer[ing] goods at prices lower than those being charged by others for the same merchandise in the advertiser’s trade area.”  For a comparative value price to be legitimate it must: (1) be based upon fact, and not fictitious or misleading; and (2) the higher price must not exceed “the price at which substantial sales of the particle are being made in the area,” meaning that there must be “a sufficient number of sales so that a consumer would consider a reduction from the price to represent a genuine bargain or savings.”

A closely-related form of advertising is “comparable value comparisons,” defined as 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.” Such advertising is not deceptive if: (1) “it is made clear to the consumer that a comparison is being made with other merchandise”; (2) the merchandise is actually of similar quality and obtainable in the area advertised; and (3) the price of the comparable merchandise “does not exceed the price at which such merchandise is being offered by representative retail outlets in the area.”

Retail Prices Suggested by Manufacturers – 16 CFR § 233.3

The FTC Guides also addresses the use of a manufacturer’s list price, or suggested retail price, alongside the retailer’s for a particular product.  The FTC Guides cautions that there has been “a widespread failure to observe manufacturers’ suggested or list prices, and the advent of retail discounting on a wide scale, have seriously undermined the dependability of list prices as indicators of the exact prices at which articles are in fact generally sold at retail.”  Thus, if a list or suggested retail price does not actually “correspond to prices at which a substantial number of sales” of the product are made, then comparing the retailers’ price with the list price may be deceptive.

For a comparison of the retailers’ price and the list price to be legitimate, the list price should be “the price at which substantial . . . sales are made in the advertiser’s trade area,” and this general principle applies “whether the advertiser or manufacturer is national or regional.”

Bargain Offers Based Upon The Purchase of Other Merchandise – 16 CFR § 233.4

The FTC Guides recognizes “bargain offers,” occurring when “advertisers choose to offer bargains in the form of additional merchandise . . . on the condition that he purchase a particular article at the price usually offered,” as a legitimate form of advertising.  An advertiser may not, however: (1) increase the regular price of the article that is required to be bought; (2) decrease the quantity or quality of the article; or (3) attach strings other than that the article be purchased.

Advance Sales, “Limited” Time Offers, and Other Categories ‒ 16 CFR § 233.5

The final section of the FTC Guides is a catchall section stating that, although there are many variations of pricing comparison and advertising techniques/methods, on a global basis, “the same general principles,” apply.  Notably, this section specifically cautions advertisers against making a “limited” offer “which, in fact, is not limited,” or “offer[ing] an advance sale under circumstances where [the advertiser] does not in good faith expect to increase the price at a later date.”  This section is often cited in litigation challenging retailers’ alleged “perpetual sale” of merchandise.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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