On Thursday, March 2, 2017, the parties in Knapp v. Art.com requested preliminary approval of a nationwide settlement in their deceptive pricing case.

Under the settlement, Art.com will automatically send to each class member a ten dollar ($10.00) merchandise credit voucher that can be used toward the purchase of any product on www.art.com, www.allposters.com, or www.posters.com. Vouchers will be valid for eighteen (18) months and are fully transferrable. The class, which consists of approximately two million members, includes anyone in the country who made a purchase from www.art.com, www.posters.com, and/or www.allposters.com using a coupon code during the four-year class period.

As part of the settlement, Art.com agreed not to oppose plaintiff’s requests for $745,000 in attorneys’ fees or a $5,000 incentive award for the named plaintiff, and to pay up to $75,000 in claims administration fees.

Quoting the FTC’s Guides Against Deceptive Pricing almost verbatim, Art.com also agreed to comply with pricing laws, such that any advertised regular price will “be the actual, bona fide price at which the item was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of business, honestly and in good faith.” Additionally, Art.com agreed to implement a compliance program, which will consist of periodic (not less than once a year) monitoring, training, and auditing to ensure compliance with relevant laws, for a period of at least four (4) years.

Background of the Knapp Case

The lawsuit was filed in the Northern District of California on February 16, 2016. As with many other recent cases in the pricing arena, plaintiff alleged that the retailer deceives customers by engaging in “perpetual sales.” More specifically, plaintiff claimed that Art.com’s “% off” sales lead consumers to believe that the sale is going to end and they are receiving a discount from the item’s “regular” price when, in fact, Art.com conducts back-to-back sales so that the “sale” price is effectively the regular price at which the item is always offered for sale.

On May 2, 2016, Art.com filed a motion to dismiss, arguing in part that plaintiff’s claim under California’s “Former Price Law” failed because Art.com’s sales require consumers to enter a coupon code to obtain the advertised sale price, meaning that its sales merely compare “two current prices” — i.e., the coupon price and the non-coupon price — not a former non-sale price and a current sale price. The court rejected this argument and denied Art.com’s motion on June 15, 2016.

Plaintiff filed a motion for class certification on October 14, 2016, which noticed a hearing for February 1, 2017. On November 4, 2017, Art.com filed a motion for summary judgment, noticing a hearing for February 8, 2017. Art.com’s motion argued in large part that plaintiff is not entitled to restitution because he admitted in his deposition that the item he purchased was worth at least the amount he paid for it. Art.com also introduced evidence that Aaron Brothers, one of its competitors, was selling the same item purchased by plaintiff for nearly 50 percent more than what plaintiff paid for it on Art.com.

The parties attended mediation on November 10, 2016 (two days after Art.com filed its motion for summary judgment), and filed a notice of settlement on November 16, 2017. The motion for preliminary approval was filed on March 2, 2017, and the hearing is set for April 12, 2017.

Compared to Other Pricing Settlements

As many retailers are now well-aware, settling deceptive pricing claims can be expensive. Settlements in California as to J.C. Penny ($50m), Kohl’s ($6.1m), and Burlington Coat Factory ($29.8m), and nationally as to Tween Brands ($50m) and Michael Kors ($4.875m), have involved substantial sums.

In Knapp, the plaintiff’s motion for preliminary approval touts the parties’ agreement as a $20 million settlement (based on the 2 million class members and $10 voucher value). The total cost for Art.com will likely be considerably less, given that the settlement does not provide for a fund — thus, Art.com will only be responsible for the vouchers actually redeemed by class members. Further, by offering customers merchandise credit, Art.com may help underwrite the settlement with new sales. It is hard to know how this new settlement, assuming approval, will compare with others in the same space. Variables include the size of the company, the numbers of stores and customers, and the nature of liability evidence. We suspect, however, that Art.com used its summary judgment to good effect in negotiations.

The (Sometimes Rocky) Road to Final Approval

Retailers should keep in mind that reaching a settlement agreement and getting a court to approve it are two different things. When settlements get rejected, it can become much harder to defend a case on its merits, and the price tag for settlement can go up.

As an example, the proposed settlement in the Horosny v. Burlington Coat Factory pricing case has been denied preliminary approval three times by another judge in the Central District. Despite agreement by the parties, the court refused to approve any settlement that did not have some cash component. Burlington initially agree to send all class members a $7.50 merchandise credit certificate, which would have no expiration date and would be fully transferrable; Burlington noted that this certificate would fully cover the cost of more than 2.5 million items in its stores. (See our May 2016 Retail Pricing Alert, here.) The court rejected this settlement, explaining that it would be unfair for members to redeem the certificates by purchasing more merchandise from Burlington, rather than having a check that they could spend anywhere.

Burlington revised the settlement agreement to provide that class members could redeem the $7.50 certificate for $5 cash by travelling to a Burlington store. The court again rejected the settlement, saying that class members should not be required to travel to the store to receive something of value.

In response, the parties amended the agreement to provide that the certificate “may be redeemed for $5.00 in cash [at a Burlington store] or by submitting a Cash Redemption Form.” The court granted preliminary approval of the settlement on January 26, 2017 — 11 months after the parties filed a notice of settlement. It is still possible, however, that the judge may deny final approval if he concludes that too few class members have made claims, or if the Cash Redemption Form has acted as a barrier to consumers receiving value from the settlement.

Conclusion

Class action litigation over allegedly false reference pricing is still relatively new, and it is premature to assess the cluster of settlements reached so far as setting a “market value” for resolving these kinds of cases. As more cases reach class certification, dispositive motions and trial, we suspect that defendants will win more of these cases. That will be helpful in tempering the expectations of class counsel.