Mind the Gap: Retail Pricing Remains Hot Topic in Class Action Litigation

ArentFox Schiff

Arent Fox

The Gap, Inc. recently settled a class action lawsuit alleging that the retailer employed a misleading pricing scheme in The Gap and Banana Republic outlets and factory stores. The plaintiffs claimed that the company, which owns both The Gap and Banana Republic brands, used deceptive reference prices to produce “phantom” sales.

The settlement, worth up to $2.28 million in total, resolved four putative class actions pending in state and federal court in California and New Jersey. This development is yet another cautionary tale for retailers to exercise caution when advertising price reductions, as the plaintiffs’ bar continues to closely monitor pricing practices for potential class action opportunities.

The Details

The four putative class actions were filed against The Gap and several subsidiaries between 2016 and 2018. The complaints alleged that The Gap adopted a system of reference prices in The Gap and Banana Republic factory stores and outlets that created the misleading impression that certain items were marked down. Specifically, the plaintiffs alleged that the retailer listed “base” prices on price tags that were designed to indicate the item’s regular, non-discounted price. According to the plaintiffs, though, these items were either never sold at the base price or were only sold at the base price for a handful of days, making the advertised savings illusory. The plaintiffs claimed that the company posted “50% off” signs in stores and presented customers with their “savings” on receipts, both of which were premised on the same base prices.

The Gap sought to dismiss the cases, but soon afterwards the parties began settlement talks. This summer, a California Superior Court judge presiding over one of the four cases approved a settlement agreement that would resolve all four of the pending class actions. Under the settlement terms, The Gap, while admitting no wrongdoing, agreed to offer all class members up to two $6.00 vouchers to be used at any Gap or Banana Republic factory store or outlet. The settlement is worth up to $2.28 million.

Practical Advice

This case is another reminder that retailers must be careful when advertising discounts on items, and especially when doing so through references to “former” or “base” prices. This is an acceptable practice when done accurately, but retailers should exercise caution with an active plaintiffs’ bar monitoring pricing practices for possible discrepancies.

Under the Federal Trade Commission’s Guides Against Deceptive Pricing, a former price referenced to indicate a price reduction is acceptable if the referenced price is an “actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time,” and in the “recent, regular course of business.” 16 CFR § 223.1. Importantly, items cannot be temporarily sold at a higher price just so that they can then be marked down. While state laws largely echo the FTC’s requirements, some prescribe specific rules in terms of how recently and/or long an item must have been offered at the former price.

These considerations are especially important for retailers with factory stores and outlets. While items offered at such locations were traditionally overstock or out of season items originally produced for the brand’s main stores, more and more companies are manufacturing items exclusively for sale at factory stores and outlets. Retailers should be careful not to create the impression that items were previously sold at the brand’s main stores if they were, in fact, manufactured specifically for the factory store or outlet. Placing a visible notice in stores and online can be an effective way to notify shoppers that items were manufactured directly for the factory store or outlet.

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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