Former Prices: A Class Action Trap

Former Prices

Do you promote “former prices” to underscore the bargains you’re offering?  If so, you should be on high alert.  Increasingly, lawyers are targeting these kinds of promotions for sweeping class action lawsuits.

Class action attorneys are forever on the lookout for obscure theories that appear to be getting traction in one court or another.  If they find one, the floodgates open.  A good example of this occurred in the aftermath of the Supreme Court of California’s extreme decision in Pineda v. Williams-Sonoma Stores, Inc., which I’ve discussed here and here.

Now, we’re seeing growing number of class action lawsuits involving former pricing representations.  The threat is real and the consequences potentially extreme.  Such cases present a greater than usual risk because they often seek recovery under both federal and California law.   California’s law is more exacting than federal law, and creates a very real trap for the unwary retailer.  Among the companies targeted so far are Sports Warehouse, Walmart, Guess, and J. Crew.  The FTC is currently investigating Amazon on the basis of similar claims.

Federal Law on Former Prices

The FTC has long-established guidelines on former pricing.

The FTC requires that a former price must be an “actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time.”  Barred are “fictitious” former prices–“for example, where an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction …”

The FTC offers other illustrations:  “An advertiser might use a price at which he never offered the article at all; he might feature a price which was not used in the regular course of business, or which was not used in the recent past but at some remote period in the past, without making disclosure of that fact; he might use a price that was not openly offered to the public, or that was not maintained for a reasonable length of time, but was immediately reduced.”

Because the FTC’s guidance doesn’t offer hard and fast rules–for example, as to what constitutes a “reasonable length of time”–there isn’t an obvious trip wire for the unwary.  Not surprisingly, that’s where California steps in by including a 90-day rule that creates a compliance hornet’s nest.

California’s Former Prices law

California’s law states that, “[n]o price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price as above defined within three months next immediately preceding the publication of the advertisement …”

What, you might ask, is the prevailing market price?   Here’s what the statute says:  “For the purpose of this article the worth or value of any thing advertised is the prevailing market price, wholesale if the offer is at wholesale, retail if the offer is at retail, at the time of publication of such advertisement in the locality wherein the advertisement is published.”  In other words, there is no guidance at all.  The prevailing market price is the prevailing market price.

If a product was sold at a variety of price points during the prior 90 day period, determining which price was “prevailing” could be a thorny question.  Is it based on the number of days advertised a particular price?  The number of units sold at a particular price?  Presumably, a reviewing court might look to the FTC’s guidance to help with that analysis, but California’s courts can (as in the case of Pineda) take extreme positions without concern for the consequences.  After all, before Pineda, few if any would have thought that mere zip codes constituted confidential personal information that couldn’t be collected from consumers.

What May Not Be a Violation Today, Can Be a Violation Tomorrow

Another problem arises.  What if your product pricing complies with the law when first promoted, but, after a period of time lapses, it becomes a violation–in other words, it remains on sale past the 90-prior days window?  A strong argument could be made that the previously legal promotion is now illegal.

California’s statute does have a safe harbor to deal with this — if the “prevailing market price” does not fall within the prior 90-day period (either originally or as a result of aging into a violation), you can avoid violating the statute if the period during which it was the prevailing price “is clearly, exactly and conspicuously stated in the advertisement.”

It should be noted that not having a physical presence in California does not necessarily insulate you from the reach of this law.  That standard applies to state taxation, but not consumer protection laws.

The Bottom Line

This blog entry only touches the surface of sales pricing issues, which can include retail price comparisons, comparable value comparisons, manufacturers’ suggested prices, and the use of terminology like “wholesale prices” or “factory prices.”  Retailers in all channels need to be on high alert given class action attention this area is drawing.

In a later blog, I’ll address litigation risks arising out of “compare at” or “comparable to” price promotions, which also create risks, particularly in light of the civil enforcement action by California counties against a major online retailer.