Former Price Promotions, Current Legal Risk

Former price promotions, you say? Plus ça change, plus c’est la même chose. This isn’t just a quote from Jean-Baptiste Alphonse Karr or a line from Circumstances by Rush. It’s also a fitting description of the risks associated with California’s thorny and potentially unconstitutional Business & Professions Code § 17501. The combination of this statute and avaricious lawyers is a truly toxic brew.

A poster child for legislative overreach—or, let’s be honest, legislative insanity—Sec. 17501 continues to cause serious and undeserved harm to retailers. Proof that the threat is alive and well? Eight years after J.C. Penney’s $50 million settlement in 2015 the company has been sued again over the claim that it violated Sec. 17501, and it’s not alone. J.C. Penney’s persistent vulnerability to these lawsuits — whether the claims are valid or invalid — likely has more to do with California’s law being a masterpiece of bad writing and legislative excess than any conceivable harm to consumers. Or maybe it’s the fact that complying with this statute is tricky if not impossible.

Former Price Promotions: A Hypothetical

Imagine you’ve been selling boxes of 500 paper clips online for a year at $10 each. You decide, in honor of Bert and Ernie, to put them on sale for 20% off. Simple, right?

Not in California.

According to Sec. 17501, the “former price”—in this case, $10—must be the “prevailing market price within the three months next immediately preceding the publication of the advertisement.” Setting aside the fact that this phraseology would make Kierkegaard blush, it sounds simple enough: after all, you’ve been selling these paper clips at a price of $10 for an entire year. That clearly means that $10 was the prevailing price for well over 90 days, right?

Not so fast!

In California, unless the product you’re selling is sufficiently unique to you—and just how “unique” is left vague, but more on that, below—the “prevailing price” isn’t determined solely by your price.

Instead, it’s based on the prices charged by others for the same product “in the locality wherein the advertisement is published.” And if you sell online, what exactly is the “locality” of publication? Is it the United States? The world? Or could you argue that you don’t advertise in any locality since your ad exists solely in the extraterritorial World Wide Web? (Good luck with that.)

Making matters worse yet, the 90-day period is rolling. What qualifies as the prevailing price for a promotion published on March 1 might not qualify for promotions on March 2, 3, or 4. Each date has its own 90-day look-back period.

To address this, one option is to “exactly and conspicuously” state in the advertisement “the date when the alleged former price did prevail.” But implementing this solution might make your ad resemble a legal disclaimer rather than a promotional offer. Plus, you’ll still need to figure out the prevailing price for that historical period.

What if your regular price for paper clips isn’t aligned with anyone else’s price? Suppose no one else sells them at an even dollar amount, and prices range from $1.99 to $18.22?

Could you sidestep this California law governing former price promotions by advertising “20% off our price that we usually charge for 500 paper clips, which is a lot more than most of our competitors”? It’s a true statement that’s likely to cost you sales, after all. Surely California (or plaintiffs’ lawyers) wouldn’t object to that, right?

Unfortunately, they would. The statute’s “clarifying” regulation make it clear that the “former price” must be the prevailing market price, regardless of how you label it or what you call it. Terms like “original price” or “our price” won’t save you, nor will leaving out all reference to a former price. Just saying “20% off” can violate the statute absent proof that the discount is taken from a proven “prevailing price.”

But Our Products are Unique!

If your product is sufficiently unique—whether by features or branding—you may be able to rely on your own offered prices to determine the prevailing price. Of course, there’s no guidance offered on this judicially invented “safe harbor.” And since the California Supreme Court has not yet weighed in, the safe harbor could shrink or vanish entirely. Poof!

If this potential escape hatch survives, and you’re able to prove a sufficient degree of uniqueness for your products, you must still identify the price at which the product was most frequently offered during the prior 90-day period.

For instance, selling paper clips at $10 per box for 46 out of the last 90 days should suffice. But this is California, where interpretations often evolve on the fly in the courts and where the state’s Supreme Court decided that zip codes (!) constitute personally identifiable information based on a terribly written statute after two Court of Appeal decisions said the opposite, so don’t expect any guarantees. (Fortunately for Williams Sonoma and its zip code problem, that case was later decertified as a class action.)

Former Price Promotions: Navigating Compliance

As you might have guessed, finding a compliance solution for your company is tricky. The simplest approach is to avoid advertising based on former prices altogether. But this not only puts you at a competitive disadvantage, it deprives your customers of valuable information they need to make informed purchasing decisions based on truthful information. Good luck trying to make the argument that your advertisement was in fact truthful to lawyers seeking to vindicate the public’s rights through a class action lawsuit.

At a minimum, you should still ensure your advertisements are accurate. If the former price is the “original price,” say so. While this might not fully satisfy California’s stringent requirements, a wholly truthful (if technically noncompliant) advertisement that errs on the side of disclosure makes you a less appealing target for litigation. That’s what Amazon agreed to do in a consent order it reached with a bunch of California DAs.

Additionally, be cautious about how frequently products are offered at a discount. Both the FTC’s guidance and California’s flawed statute aim to prevent perpetual sales and promotions based on inflated “former prices” which inadvertently or by design create the illusion of a very limited time discount.

Of course, you should consult with your attorney to review your specific circumstances and develop a tailored compliance strategy. And while you are at it, think about including an arbitration agreement in your online terms to protect against class action lawsuits and mass arbitrations. While arbitration agreements are far from perfect—Amazon, for example, abandoned them in the consumer context—they can still be a valuable component of a broader risk mitigation strategy not just for Sec. 17501, but for California’s other crazy laws, like that crazy, overreaching drip pricing statute.