Last month, we discussed how Guess had been added to the list of major clothing retailers who have been hit with class action lawsuits alleging false and misleading practices at their outlet and factory store locations.  Now, Michael Kors has decided to settle one such lawsuit for just under $4.9 million. 

The complaint against Kors alleged that clothing sold in Kors’s outlet stores were labeled with two prices:  the Manufacturer’s Suggested Retail Price (MSRP) and “OUR PRICE,” which represented a deep discount from the MSRP.  However, according to the plaintiff, these MSRPs were “a sham.”  At least some of the clothing offered was manufactured for exclusive sale at outlet locations, meaning that the discounted items were never sold, or intended to be sold, at the MSRP.  Thus, the “OUR PRICE” discount was allegedly a “phantom markdown.” 

The suit against Kors was filed under California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act.  In support of its claim, the Kors plaintiff cited the FTC’s guidelines on manufacturer suggested retail prices.  These guidelines state that retailers must not create “a deceptive comparison” between the suggested retail price and the actual retail price, for example, by having manufacturers suggest intentionally inflated prices so retailers may advertise “fictitious price reductions.”          

Kors’s settlement may impact similar lawsuits against major retailers across the country, including The Gap, Banana Republic, Ralph Lauren, Saks Fifth Avenue, and Guess.  In addition to a $4.9 million cash settlement, Kors agreed to replace the term MSRP with “Value” on all of its outlet price tags, as well as display a sign in all outlet stores explaining the meaning of “Value” to customers.  Alternatively, Kors must remove “reference price” comparisons from any item exclusively sold at Kors’s outlet locations.

Although the Kors suit looks to end with a settlement, at least two other retailers, Nordstrom and Neiman Marcus, have had success in court.  Both retailers successfully argued that the “Compared To” price listed on their outlet price tags did not imply that the items were previously sold for a higher price, meaning plaintiffs had not adequately pled that they were misled.  The Nordstrom plaintiff has since filed a second amended complaint, but the Neiman Marcus plaintiff’s second complaint has already been dismissed, this time without leave to amend.  That case is now being appealed to the 9th Circuit.

Retailers hoping not to become embroiled in similar class action lawsuits should be careful how they label their products, particularly when using price comparisons.  Under California’s False Advertising Law, a “former price” cannot be listed unless that price was the “prevailing market price” for at least three months immediately prior to the alleged discount, unless the last date of the former price is “conspicuously” listed.  As for the FTC, the guidelines make clear that retailers should avoid listing “suggested retail prices” if they do not correspond with a “substantial number of sales” at that price.  For more on the FTC’s pricing guidelines, visit here, here, and here.