Earlier this year, consumers filed class action lawsuits against retailers Zulily and Burberry in federal court in New York alleging unfair and deceptive sales practices in connection with their respective marketing of merchandise. The lawsuits allege that Zulily advertised clothes on the internet that were on "sale" from alleged "retail" prices that never actually existed, and that Burberry advertised a sham "suggested retail price" on clothes in outlet stores from which it deeply discounted to an advertised "now" price. Across the country in California, consumers filed a similar lawsuit in federal court against Dooney & Bourke, alleging false advertising in connection with its advertisement of "market" prices, and corresponding phantom "savings," on bags and fashion accessories offered in Dooney & Bourke factory stores. As we continue to see an increase in civil lawsuits asserting deceptive pricing claims, manufacturers and marketers should pay careful attention to the Federal Trade Commission's (FTC) Guides Against Deceptive Pricing, 16 CFR § 233.
THE FTC'S GUIDES AGAINST DECEPTIVE PRICING
The Federal Trade Commission Act (the Act), 15 U.S.C. § 45, prohibits deceptive or unfair practices in advertising, and the FTC is the primary federal agency that enforces advertising laws and regulations. The FTC's Guides Against Deceptive Pricing ("the Guides") provide guidance and examples on how these standards for truthfulness apply when companies utilize various forms of bargain advertising, such as making claims about price comparisons and offering "sale" prices. The FTC can take action against companies making claims inconsistent with the Guides, including issuing cease and desist orders, requiring corrective advertising, and imposing civil penalties.
Consumers in private civil actions frequently reference the Guides to highlight the type of conduct considered deceptive by the FTC, and which could also support state law claims for unfair and deceptive practices. For example, consumers often rely on FTC Guide 233.3, providing that advertisements may be misleading "[t]o the extent that list or suggested retail prices do not in fact correspond to prices at which a substantial number of sales of the article in question are made." See 16 CFR § 233.3. This particular Guide essentially says that it would be misleading, for example, to offer an item of merchandise at the "reduced price" of $10 if it has never been sold at a stated "suggested retail price" of $20. Consumers try to rely on alleged FTC Guide violations like this as evidence of a deceptive or unfair act under relevant state laws.
AVOIDING DECEPTIVE BARGAIN ADVERTISING
Manufacturers should pay attention to the following direction offered by the Guides with respect to bargain advertising:
- Former Price Comparisons: Advertisers should not offer a reduction from their own former price for a product unless the former price is the actual, bona fide price at which the product was offered for sale on a regular basis for a reasonably substantial period of time.
- If the former price is fictitious, such as where an inflated price was set to enable the subsequent offer of a large reduction, the "bargain" is a false one.
- Sales need not actually have been made at the former price, but the product needs to have been openly and actively offered for sale at that price in an honest and good faith manner.
- It could be deceptive to advertise a former price at which a product was never offered at all, or which was only offered at some remote period in the past, or which was not openly offered to the public, without disclosing that fact in the advertisement.
- If the former price is not specifically stated, but the advertisement simply says "sale," the ad could be deceptive if the amount of reduction from the former price is so insignificant as to be meaningless (i.e., such as where the ad states that a product has been "reduced to $9.99," without disclosing that the former price was $10).
- Retail Price Comparisons and Comparable Value Comparisons: Advertisers should not offer products at prices advertised as being lower than those being charged by others for the same products in the area unless the advertised higher price is based on fact. In other words, the advertised higher price cannot be a sham.
- There must be a sufficient number of sales being made of the product in the area at the higher price to justify a consumer understanding that the reduction from that price was a genuine bargain.
- It may be misleading to advertise that other retailers charge a retail price that is higher if only a few retailers are offering that price, but the majority of the retailers selling the product do not charge the higher price. Such an advertisement suggests that the higher retail price is the prevailing price in the relevant shopping area, which may be deceptive.
- Advertisements offering reduced prices compared to those charged by others for similar merchandise (of like grade and quality) must follow the same principles. There must be a reasonable number of retailers in the relevant area actually offering comparable products at the higher price; otherwise, the advertisement may be deceptive.
- Advertising Retail Prices Established by Manufacturers: A manufacturer's list price, or suggested retail price, must correspond to prices at which a substantial number of sales of the product are made, or the advertisement of a reduction can be misleading.
- This principle applies to any means by which manufacturers' suggested retail or list prices are advertised (i.e., mass-media advertising by the manufacturer itself, direct mail advertising, etc.).
- Typically a list price is a price at which articles are sold in the principal retail outlets that do not conduct their business on a discount basis. List prices are likely not deceptive if they are the price at which substantial sales are made in the area in which the advertiser does business.
- Before advertising a manufacturer's list price as a basis for comparison with its own lower price, a retailer competing in a local area must determine that the list price is in fact the price regularly charged by principal outlets in the local area.
- However, a large scale manufacturer conducting business on a large regional or national scale cannot be required to investigate in detail the prevailing prices of its products in such a large area. If such a manufacturer advertises a list price in good faith, and the list price does not appreciably exceed the highest price at which substantial sales are made in the large area, the manufacturer's advertisement will likely not be considered deceptive.
- In every instance, manufacturers, distributors and retailers must act honestly and in good faith in advertising a list price, and not with the intention of creating a basis for a deceptive comparison in any local or other trade area.
- Bargain Offers Based Upon Additional Purchases: Advertisers often offer bargains in the form of additional merchandise given on the condition of the purchase of a product at a particular advertised price. Language commonly used in such offers includes "Buy One-Get One Free", "2-for-1 Sale", and "Half Price Sale", among others. If the seller increases the regular price of the product required to be bought, or decreases the quantity and quality of the product, the consumer may be deceived. To avoid deception, all of the terms and conditions of the offer should be made clear at the outset.
Miscellaneous Price Comparisons: The same general principles set forth above apply to other forms of bargain advertising as well. The bargain offer must be genuine and truthful.
- Retailers should not advertise a retail price as a "wholesale" price.
- Retailers should not represent a product as being sold at "factory" prices if they are not selling at the prices paid by those purchasing directly from the manufacturer. Retailers should not offer imperfect merchandise at a reduced price without disclosing that the higher comparative price refers to the price of the merchandise if perfect. Retailers should not offer an advance sale under circumstances where they do not in good faith expect to increase the price at a later date, or make a "limited" offer that is not in fact limited.
Before engaging in bargain advertising, manufacturers and retailers should consider the following:
- Is the bargain offer genuine and truthful?
- If a former price is advertised, was the product actually offered for sale at the former price on a regular basis and in good faith?
- If an advertised price is compared to a higher price of a competitor's product, is the competitor's higher price stated in the advertisement based on fact?
- If a manufacturer's list price or suggested retail price is advertised, have a substantial number of sales of the product been made at that price?
- Are all of the terms and conditions of a bargain offer clearly disclosed?