A flurry of recent class action lawsuits is forcing clothing retailers to rethink their marketing tactics for outlet stores. In the last few months, lawsuits have been filed against a who’s who of major clothing retailers — The Gap, Banana Republic, Saks Fifth Avenue, Michael Kors, and Neiman Marcus — stemming from allegations that the companies are misleading consumers about the quality of merchandise sold in outlets.

Background

Retail outlets have come under sharp scrutiny since four members of Congress asked the Federal Trade Commission (FTC) to launch a federal investigation into the stores’ marketing practices. The letter from Congress alleged that merchants have been selling lower quality items produced specifically for outlet stores without properly informing consumers. Such practices would violate the FTC’s Guides Against Deceptive Pricing, which require any price comparisons to be made between merchandise that is of similar quality. This means that if a retailer makes a claim such as “Brand X Shoes — 50% off retail price!” the Brand X shoes have to be the same quality and grade as those sold at the retail price.

Recent Class Actions

The recent lawsuits were all filed in the last two months and allege similar claims. According to the plaintiffs, retailers deceive consumers by suggesting that the merchandise sold at deep discount in outlet stores is the same quality as the merchandise sold in traditional stores. In reality, according to the plaintiffs, the outlet store merchandise is a lower quality product that is manufactured specifically for sale in outlets and is never intended for sale at “regular” prices in traditional stores. Thus, when retailers claim that outlet prices have “been reduced,” or are some percentage below the retail price, the retailers are misleading consumers.

What is the Takeaway

As outlets become increasingly popular, scrutiny on retailers is only likely to grow. Companies should ensure that they have a solid basis for any comparative price advertising claims. Companies should also be extra cautious when using descriptive terminology such as “Regularly,” “Usually,” or “Formerly,” or when asserting that discounted merchandise is of a comparable quality to non-discounted merchandise. Notably, outlets aren’t the only retailers under scrutiny. A California state court decision earlier this year is another indication that class action attorneys are paying close attention to retail pricing practices and waiting for retailers to trip up.