Retailers face legal challenges over advertising prices

Retailers have had a tough year when it comes to advertising prices. In January, a California court issued a multimillion dollar penalty against Overstock.com, after determining that the company advertised discounts in a misleading manner. Since then, retailers across a range of industries have been dragged into costly lawsuits and regulatory investigations involving similar issues. If you’re wondering how something as mundane as advertising the price of an item could lead to so much trouble it’s because the issue is more complicated than most people think.



In the case of Overstock, it typically lists two prices for items on its site: the selling price and a “compare at” price. When the company launched in 1999, the majority of products it sold were from manufacturers, retailers, and jewelers who were liquidating excess or outdated inventory. For those products, the previous selling price could function as the “compare at” price. Today, however, many of the products Overstock sells are new and haven’t been sold to the public before. That makes finding a “compare at” price more challenging.



Although Overstock’s process for determining comparison prices changed over the years, the prices typically reflected “high street prices,” as opposed to a “prevailing marketing price” or a competitor’s lowest price. In some cases, Overstock’s buyers attempted to get partners to raise their suggested retail prices so that Overstock could advertise a higher comparison price and, therefore, a higher discount. The State of California thought this practice was misleading, and filed a lawsuit against the company in 2013.



The court agreed with the State, and found that Overstock’s use of “compare at” labels could be misleading in some cases. Without a disclosure explaining how a price had been determined, the ads could suggest “a comparison to real prices for the identical product,” when that often wasn’t the case. As a result, the court imposed an injunction designed to prevent the company from estimating comparison prices without more clearly disclosing the basis of those prices. In addition, the company had to pay a $6.8 million penalty.



A month after the Overstock decision, four members of Congress sent a letter to the Federal Trade Commission asking them to investigate pricing practices in outlets. The letter stated that many outlets engage in “deceptive reference pricing.” For example, “it is a common practice at outlet stores to advertise a retail price alongside the outlet store price — even on made-for-outlet merchandise that does not sell at regular retail locations. Since the item was never sold in the regular retail store or at the retail price, the retail price is impossible to substantiate.”



Although the FTC has been fairly quiet on this issue, plaintiffs’ attorneys have taken notice. For example, a plaintiff filed a class action against Neiman Marcus, alleging that the retailer’s outlet pricing practices are unlawful. Items in Neiman Marcus Last Call stores bear price tags with a sale price, the words “compared to,” and a higher price. According to the complaint, the “compared to” language gives the impression that items were sold in Neiman Marcus stores at the higher price. In reality, the plaintiff alleges, the “clothing is actually not intended for the sale at the traditional Neiman Marcus stores . . . but rather strictly for the Last Call Store.”

Other retailers — including Nordstrom and the Gap — have been hit with similar lawsuits, all asking for monetary damages and an injunction that would force the companies to change their pricing practices. Although it’s too early to predict how these lawsuits will turn out, the plaintiffs are clearly hoping that California’s victory in the Overstock case will give them enough leverage to secure a victory or a favorable settlement.



The FTC’s Guides Against Deceptive Pricing generally state that in order for an item to be offered on “sale,” the former price must be “the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time.” Various states have laws that are more specific and may dictate, for example, exactly how long a product can be on sale before it must return to a regular price. Over the past few years, there has been an increase in challenges involving these types of laws.



In June, for example, the New York Attorney General announced a settlement with Hobby Lobby over its sale practices. The AG’s office started tracking Hobby Lobby ads that promoted 30% off and 50% off sales, and discovered that the company advertised certain products as being on sale for more than 52 consecutive weeks. The AG determined that these “never-ending” sales violate New York laws. As part of the settlement, the retailer agreed to change its advertising practices, contribute $138,600 in supplies to public schools in Upstate New York, and pay $85,000 in civil penalties and costs.



Plaintiffs’ attorneys have gotten in on the action, too, and have filed lawsuits against various retailers over their pricing practices. In addition to suits involving the frequency of sales, some suits have also focused on sale disclosures. For example, in a lawsuit filed this May, a plaintiff accused Gap of advertising sales that are subject to numerous — but often unclear — exclusions. According to the suit, Gap failed to disclose what items were excluded or otherwise in made the disclosures in “barely noticeable lettering.”



These types of challenges have increased dramatically in recent years, and retailers of all types have had to defend their pricing strategies in court or in the offices of attorneys general. Given the legal landscape, it’s likely that this trend will continue. Retailers need to pay close attention to these cases and pricing laws, particularly when they advertise discounts, sales, or other price reductions. Everyone likes a sale, but if you aren’t careful with how you structure it, your company could end up paying a high price in the end.

Gonzalo E. Mon is a partner in Kelley Drye & Warren’s Advertising and Marketing Law practice. You can reach him at [email protected] or 202-342-8576.