Attorneys warn of rise in ‘fake discount’ lawsuits

Baseball is great, but we all know America’s true pastime is finding a good deal.

That’s why advertising discounts and sales is such a powerful pitch retailers employ to attract and convert customers. Like other marketing tactics, however, advertising discounts can have serious legal implications if not done correctly.

In the past 12 months, class actions over “false reference prices” or “fake discounts” have doubled. While initially the class actions were primarily targeted at the largest retailers (e.g., JCPenney, Neiman Marcus), increasingly mid-sized companies are being sued as well (e.g., The Shade Store, Threadless, Evry Jewels).

These claims arise when retailers advertise a product at a “sale” price compared to a higher “regular” or “original” price. The lawsuits claim these higher prices are fictitious, as the products were never sold at the “regular” price. Plaintiffs’ lawyers claim that retailers are misleading consumers by implying they are receiving a deal at the discounted price, when in fact they are just paying effectively a perennially discounted price.

While cases have been filed based on several states’ laws, these lawsuits are most commonly tied to California’s plaintiff-friendly consumer protection laws, including the Unfair Competition Law, the False Advertising Law and the Consumers Legal Remedies Act. Defendants in these suits often have a significant e-commerce business or generate significant sales via wholesale or outlet stores.

Given the potentially massive exposures and devastating public relations for the defending company, the incentive for plaintiffs’ lawyers to file suit is high. Thus, attorneys are using savvy marketing and outreach efforts to recruit prospective plaintiffs, making almost every customer a
potential plaintiff.

Given the increase in false reference price class actions along with growing damages, it is crucial to take steps to avoid them, and proactively mitigate the damage exposure if you get sued.

False reference price laws and lawsuits

The specific law most retailers are tripping over is that “no price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price...
within three months next immediately preceding the publication of the advertisement...”

The typical complaint relies on allegations about consumers’ natural inclination for a bargain and paints a picture of someone who only purchased an item because they mistakenly thought it was on sale.

Most of these cases are filed in California, with San Francisco and Los Angeles being the hot spots. Increasingly, these suits are popping up throughout the country, most notably in New York and New Jersey, but also in Oregon, Washington, Illinois and Florida.

What is a bad sale?

Perhaps the most notable aspect of these cases — how long is too long for a product to be on sale — remains undecided. Generally, a plaintiff will allege that a product is always on sale or that it was never offered at the referenced original price. But the reality is not so black and white.

Surely, some retailers have run afoul of this law with “permanent” sales, but for the rest, what is the extent to which a reference price must be in effect? Is it more often than not? Is it a supermajority, i.e., 66-75% of the time? Is it more than 90% of the time? The law does not specify and we have not seen a court make a bright line ruling.

Case resolutions

The majority of these cases go through a couple of rounds of pleading — a second, sometimes a third, version of a complaint — before settling. Usually, these cases settle on an individual, not a class basis, yet the exposure including litigation costs are significant.

Examples of publicly filed settlements included damages based on:

•10% of purported sale price, i.e., based on the discounted amount;
•2-3% of total sales of offending products; and
•14% of revenue from sales of offending products.

Although these percentages may seem relatively small, the aggregate effect can be substantial. In other words, the larger the retailer, the larger the likely settlement demand.

Defense strategies for retailers

As a permanent sale would violate these consumer protection laws, retailers should offer each discounted item at the “regular price” for periods during each 90 days. Retailers may rotate which items are on sale at any given time to attract customers with discounts, yet vary the specific items being discounted by time period.

In the current environment, retailers still might get sued, but to the extent retailers can show periods of time the item was not on sale, this creates a viable defense, which often can be asserted in response to a pre-suit demand letter (which is a fairly common practice by plaintiffs lawyers). Accordingly, internal records of sale (and non-sale) periods should be maintained. 

While class actions are commonly brought against retailers with perennial discounts on individual items or across the board percentage discounts, we are not aware of class actions filed against retailers offering perennial volume discounts, commonly marketed as “BOGO” (Buy One, Get One). Thus, as retailers must offer sales to attract and convert customers, they may want to deploy volume discounts as opposed to perennial single item sales.

Retailers should also seek to avoid significant exposure to deceptive pricing cases by incorporating class action waiver and/or arbitration provisions into the terms of service that govern a transaction. This is most easily done with internet sales, but can be accomplished in brick-and-mortar retail, too — most prominently through the terms and conditions of a membership or rewards program.

The rising number of consumer class actions over allegedly “fake” sale prices presents a significant challenge for retailers. Even retailers who do not have a physical presence in California can nonetheless be sued by a California consumer who purchased something online.

As a result, it is important to understand this complex legal landscape and to develop effective but legal pricing strategies. While litigation cannot always be avoided, taking preventative measures can provide retailers with a defense and significant leverage in settlement.