Spann v. JCPenney and People of California v. Overstock.com

A recent class certification decision in California involving challenges to a retailer’s price comparison advertisements should prompt retailers to carefully evaluate their sale advertising practices. Whether comparing to “regular” or previous prices, or to the sale prices of competitors, comparison price advertising is increasingly being challenged in court.

In Spann v. JCPenney, the United States District Court for the Central District of California last month certified a class of JCPenney customers who had purchased items advertised as discounted from JCPenney’s “original” price for the same item. Spann v. JCPenney, No. SA CV 12-0215 FMO, 2015 WL 3478038, at *24 (C.D. Cal. May 18, 2015). The plaintiff alleged that the vast majority of these items were never actually sold at the purported higher, “original” price, and thus the purported “sale” prices were false or misleading. The court in JCPenney noted that the practice of comparing one’s own current price to one’s own previous price, or to the price of a competitor, is a widespread sales tactic that can be effective in inducing customers to make purchases. In fact, JCPenney itself previously touted that it was eliminating price comparisons from its advertising in favor of “square deal” pricing, and saw a precipitous corresponding drop in its sales volume. Less than a year later, it reinstated its comparisons to its own “original” prices.

The plaintiff in JCPenney brought claims under California’s consumer protection statutes, specifically, the Fair Advertising Law (“FAL”), Bus. & Prof. Code § 17500; the Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200; and the Consumer Legal Remedies Act (“CLRA”), Civ. Code § 1770, under each of which liability may be established on a showing that the defendant’s conduct was “misleading” or “likely to deceive” consumers. In certifying the class, the JCPenney court found that the issue of whether the advertising was misleading predominated over any individual issues. The court rejected JCPenney’s argument that the “prevailing market price” would have to be separately established for each of its products by comparison to similar products sold by competitors, because the products at issue were either manufactured just for JCPenney or were advertised as “available only at” JCPenney. Thus, the court held, “prevailing market price” for each item should be determined by examining only JCPenney pricing data. In other words, the relevant comparison “market” for JCPenney branded and exclusive products is limited to JCPenney stores.

In support of her claim, the plaintiff referred to JCPenney’s internal pricing policies and records, and argued that few, if any, of the items were ever truly offered or sold at the “regular” or “original” price. The plaintiff also relied on JCPenney’s “Price Pacing Flow Charts,” which showed that it “routinely set both a regular price, and an initial discounted price even in advance of each product’s first offering.” According to the plaintiff, these charts show that “only thirteen of the thousand-plus items [offered during four fiscal quarters during the Class Period] were ever offered at the advertised regular price; and those were for a total of only 17 days and coupled with a BOGO discount.” As for the particular seven items purchased by the plaintiff, four items had never sold at regular price, and all but one transaction was represented to be discounted at 30 percent or more.

The court also concluded that the plaintiff’s three alternative theories of damages –(1) complete restitution of the amount paid by class members; (2) restitution of the difference between the amount paid by class members and what they would have paid had JCPenney actually offered a discount from its regular price; and (3) restitution in the amount that JCPenney profited from sales of products based on the price comparisons – each allowed for classwide proof without running afoul of the Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). Notably, all of these damages theories rely on restitution of all or a portion of the price paid by consumers; thus, it was not necessary for plaintiffs to demonstrate any actual harm – e.g., that they would not have purchased the items from JCPenney but for the misleading advertising.

The Spann decision follows a similar decision in January 2014 in California state court inPeople of California v. Overstock.com (Alameda Superior Court trial decision, January 3, 2014). Overstock, an action brought by state officials, considered the related but separate issue of advertised comparisons to competitors’ prices. There, the court determined that using unqualified advertising language such as “compare at” is misleading, and thus in violation of the FAL, UCL, and CLRA, unless the retailer uses “a range of prices that reflect what may be commonly found to be offered for sale by competitors (“compare at $X to $Y”) or make[s] an effort to identify and use the prices it finds” at one or more comparable competitors. Where comparison prices were arrived at by means other than empirical comparison to actual, current market prices, the advertising language must disclose sufficient additional information to make the consumer aware of the nature of the comparison. The Overstock court suggested retailers should use language such as the following:

  • Where comparison prices were arrived at by formula (e.g., a multiplier of the wholesale price): “compare estimated value”
  • Where the comparison was to the price of a nonidentical item: “compare similar”
  • Where comparison prices are arrived at by comparison to the highest retail price available in the area: “compare highest retail”
  • Where comparison prices are arrived at by comparison to an original prevailing price that has since been discounted: “compare original retail”
  • Where the comparison price is arrived at by comparison to the manufacturer’s suggested retail price: “compare MSRP”

Regardless of the method used, however, the Overstock court emphasized that any comparisons must be legitimate, bona fide comparisons to either actual sales or offers of sales by a competing retailer.

Importantly, the Overstock court held that no element of actual “harm” suffered by the consumer was necessary to create liability under these statutes; the misleading comparisons created a presumption of harm. For violating these standards by making misleading comparisons to unrepresentative prices, the court imposed a civil penalty of over $6.8 million and granted injunctive relief to the plaintiffs. Overstock has appealed the decision to the California 1st District Court of Appeals, and the parties are awaiting a date for oral argument.

Statutes and regulations prohibiting misleading price comparisons are not new. The Federal Trade Commission has had guidelines in place for the use of price comparisons in advertising since the 1960s. 16 C.F.R. § 233.1. The takeaway from JCPenney andOverstock for any retailer operating in California is that courts are becoming more receptive to arguments that consumers are deceived by comparisons to fictitious or unsupported reference prices.

Of course, California is not the only concern. Litigation over this type of advertising has taken off in recent years, as evidenced by the multiplicity of similar alleged state and nationwide class actions filed against numerous other retailers. When advertising a “sale” or price comparison, a retailer should be prepared to substantiate that the item is actually on sale or that an actual comparison was performed to determine the comparison price.