Reference Prices: Are You at Risk?

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Reference Prices: Are You at Risk?


Untitled 2Reference prices advise consumers that they are getting a bargain. The California Court of Appeal, however, just upheld a $6.8 million penalty on the grounds that a company’s use of list prices and comparison prices constituted a deceptive trade practice.  Amazon is also apparently under investigation for its use of list prices.  If past is prologue, we can expect a flood of class action lawsuits to follow.  Thankfully, the Court of Appeal’s decision, in a case brought by eight California counties, offers some useful guidance for reducing your risks.  

Years of Wrestling With Reference Prices

The retailer struggled to establish an appropriate methodology for establishing reference prices.  It went so far as to establish a “pricing validation team” in 2008 to verify that items it sold were “actually sold elsewhere at ‘compare at’ prices submitted by buyers or fulfillment partners, and to re-verify those prices every 90 days.” It generally used the highest verified price in the marketplace as a comparison.

At the same time, discovery in the case revealed internal communications in which employees criticized the company’s reference prices practices as misleading.  There were also external communications revealing discussions with suppliers are about raising their MSRP, or charging more for products sold through other channels, to permit the retailer to present a greater discount to its own customers.  Throughout this period, the retailer received numerous complaints from customers that its reference prices were inflated.

The retailer, the Court of Appeal noted, had no process in place to ensure that all comparison prices were verified.  In addition, the company’s policies allowed the reference prices to be set by finding “the highest price for which an item was sold in the marketplace,” with no determination as to whether substantial sales had been made at that price, and by arbitrary multipliers.  The company also had no internal guidance for determining whether a product was “similar” for comparative pricing purposes, and consumers “were never informed when a similar, rather than identical product was used for a comparison price.”

Charges were brought under California law for unfair business practices and false advertising concerning pricing, and price reductions, among other things.  Most states have similar consumer protection laws.

Guidance From The Courts

The trial court imposed a $6.8 million penalty and entered an injunction prohibiting the retailer from from advertising reference prices (1) on any basis other than an actual price offered in the marketplace; (2) based on a similar, but not identical, product, without disclosure; and (3) based on the highest price found anywhere without regard to whether they reflected a substantial volume of recent sales, without disclosure.

These are sound guidelines for any retailer, and are consistent with the FTC’s guidance on price-based promotions.  As the FTC explains, the retailer “should be reasonably certain that the higher price he advertises does not appreciably exceed the price at which substantial sales of the article are being made in the area — that is, a sufficient number of sales so that a consumer would consider a reduction from the price to represent a genuine bargain or saving.”  There are different ways to satisfy this requirement, but it behooves every retailer to have a carefully crafted, written policy to guide the setting of reference prices to meet this requirement, and for periodic verification of that price.  What may be a valid reference price today may not be three months from now.

The injunction further barred the use of the term MSRP (or anything similar) unless a “clear and conspicuous hyperlink defined the term and stated that it may not be the prevailing market price or regular retail price.”  It also required 90 day reverification for all reference prices, with disclosure to consumers of the date of verification.  Documentation “such as a screenshot” was required to be maintained as documentation for a reference price.

The Court of Appeal, upholding both the penalty and injunction, agreed that a “list price” must be found published in a catalog, price list, or advertisement.

Using list prices from “standard industry data” was appropriate.  Unfortunately, such data may not be available except for standardized products like books, movies, music, games, and software.

This is also consistent with FTC guidance. A list price “will not be deemed fictitious if it is the price at which substantial (that is, not isolated or insignificant) sales are made in the advertiser’s trade area (the area in which he does business). Conversely, if the list price is significantly in excess of the highest price at which substantial sales in the trade area are made, there is a clear and serious danger of the consumer being misled by an advertised reduction from this price.”

Consistent with the FTC’s guidance, the Court of Appeal explained that “compare” or “compare at” language, without disclosures or explanations, suggested a comparison to real prices for the identical product, requiring qualifiers “that would signal the use of a formula (e.g., ‘compare estimated value’) or a similar product (e.g., ‘compare similar’).”  Absent such disclosures, consumers would view the reference price as a reflecting a “regular/average price.”

Next Steps 

Given this “heads up” from the California courts, it is critical that retailers consult with their lawyers to ensure that their use of reference prices is appropriate and consistent with the basic principles outlined by the Court of Appeal and the FTC.   The best defense to a class action demand is proof of compliance with the law based on sound internal policies and procedures.

 

 

 

 

 

 

 

 

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