Retailers should beware this holiday season – and beyond – when advertising sales using a comparison between the “original” and “sale” prices after Macy's, Sears, and JC Penney were sued by the Los Angeles City Attorney for allegedly deceiving consumers by using a false original “reference price.” According to the law suits, consumers were led to believe they were receiving greater savings on the sale merchandise than they actually were, because the items had never been offered for sale at the quoted original or “reference” price.
This practice is considered to induce consumers to make purchases that they would not otherwise make and, as such, violates California’s Unfair Competition Law and the California False Advertising Law. Not only is the court being asked to enjoin the companies from this practice, but also to impose a civil penalty of $2500 per violation, plus an additional $2500 per violation involving elderly or disabled persons, along with reimbursement of the government’s litigation costs. Retailers are urged to review closely their sale advertising policies to ensure that reference prices are accurate and could not be viewed as false or misleading. While the current suits involve violations of California law, federal law also prohibits these practices. Indeed, the Federal Trade Commission’s “Guides Against Deceptive Practices” provide that “where an artificial, inflated price [is] established for the purpose of enabling the subsequent offer of a large reduction—the ‘bargain’ being advertised is a false one; the purchaser is not receiving the unusual value he expects.” A bona fide reference price is one “at which the product was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of his business, honestly and in good faith."
Companies that fail to exercise care in sale price advertising are also at risk of facing private litigation, particularly in California. At least two of the retailers named in the latest lawsuits settled civil class action lawsuits alleging the same activities last year, agreeing to pay $50 million and $6.15 million, respectively. The current suits allege that although the companies represented to federal district courts in those settlements that they would cease engaging in false reference pricing, they are continuing to do so.