Guest Commentary: Update on Price Advertising Litigation

By Lindsay Carlson, Adam Biegel and Kimyatta McClary, Alston & Bird LLP



Over the past 18 months, there has been a significant increase in litigation and enforcement activity concerning comparative price advertising in the retail industry. Companies can face substantial reputational and cost consequences if targeted, and should consider examining their price advertising models and prepare to defend these models.



Here is a brief summary of comparative price advertising regulation, and recent enforcement and litigation activity:



FTC: Section 5 of the Federal Trade Commission Act (FTC Act) prohibits unfair or deceptive activities, and focuses on activity that is likely to mislead or harm reasonable consumers.



In 1958, the FTC issued its Guides Against Deceptive Pricing, with an aim toward preventing untruthful or misleading price claims. By the 1990s, however, bipartisan consensus had developed to all but abandon federal enforcement actions against deceptive price advertising, absent bona fide fraudulent conduct, on the rationale that the costs to retailers were substantial but the harm to consumers was insignificant (and in fact might cause harm by hamstringing competition).



Individual states, however, have developed consumer protection laws largely based on or interpreted consistent with the language of the FTC Act and the FTC Guides. Most of the state laws generally prohibit “making false or misleading statements concerning the reasons for, existence of, or amounts of price reductions,” but do not include express requirements regarding comparative price advertising.



COMPLAINTS: Complaints regarding a retailer’s price advertising practices usually originate from one of two sources—competitors or consumers. Competitor complaints regarding national or regional advertising can lead to proceedings before the Council of Better Business Bureau’s (BBB) National Advertising Division. The BBB Code of Advertising is generally consistent with the FTC Act and the FTC Guides.



Consumer complaints typically lead to investigations by state attorneys general or private class action lawsuits. Regarding the latter, a May 2013 ruling in a putative class action against Kohl’s Corp. contributed to a surge in interest in this area.



Previous courts had found that absent an actual economic injury, plaintiffs did not have standing to sue.



In the Kohl’s case, however, the Ninth Circuit broadened the definition of economic injury under California law, holding that when a consumer purchases merchandise on the basis of false price information and alleges that he or she would not have made the purchase “but for” the misrepresentation, the consumer has standing to bring a class action because he has suffered an actual economic injury. Since the Kohl’s case, the plaintiffs’ bar has initiated and litigated several other notable class cases involving reference pricing, pricing disclaimers, and never-ending sales.



OUTLET RETAILERS: Most recently, consumer class action plaintiffs’ attorneys have focused their efforts on litigation against outlet retailers. Historically, manufacturers established outlet branches to sell irregular, damaged, or excess product at discount prices. But the products offered have changed, as shoppers have become increasingly price-sensitive, and interested in “affordable luxury” products bearing highly sought-after brand names at a fraction of their traditional retail prices. Manufacturers have responded to these trends by adjusting their production and pricing models, and sales at outlet and discount stores have skyrocketed.



In response, public officials have started to scrutinize outlet sales practices. On Jan. 30, 2014, four members of Congress sent a letter to the FTC in which they expressed concerns about an increase in merchandise of purportedly inferior quality and specially manufactured for sale in outlets, which they believe was never offered for sale in traditional retail stores. Shortly thereafter, the FTC issued a consumer information release in which it encouraged outlet shoppers to “make sure you’re satisfied with the price you’re paying for what you’re getting.” To date, the FTC has not taken any enforcement action.



Plaintiffs’ class action attorneys then picked up where the public officials left off, filing a series of lawsuits against outlet manufacturers and retailers, starting in late July 2014. These lawsuits allege that the outlets have violated a trio of California consumer protection laws by falsely representing outlet merchandise as being originally sold in traditional stores at higher prices, or being of the same quality as merchandise offered for sale in traditional retail outlets.



Plaintiffs will have several procedural and substantive hurdles to clear in their quest to prove liability. Due at least in part to the availability of removal procedures under the Class Action Fairness Act of 2005, most of the cases will likely be fought in federal courts, which have a reputation for higher pleading standards and standing requirements than most state courts. The cases that survive pleading challenges will rise and fall on the facts, such as the specifics of the labels on the merchandise, marketing and advertisements, and other consumer-facing communications.



Manufacturers and retailers that offer merchandise for sale and utilize price advertising as part of their marketing strategy, and particularly those that make use of outlet stores or regularly engage in discounting of their merchandise from standard retail prices, should take notice and be prepared to document – and if necessary, defend – their sales and advertising practices.



Lindsay Carlson is a partner in the Los Angeles office of Alston & Bird LLP ([email protected]). Adam Biegel is partner in the firm’s Atlanta office ([email protected]), andKimyatta McClary is a senior associate in Atlanta ([email protected]). Alston & Bird is a global law that specializes in intellectual property, complex litigation, corporate and tax.