Don’t Discount Deceptive Pricing Class Actions

By Perry Cooper

Nordstrom, DSW, Neiman Marcus, and J.C. Penney are among the many retailers that have faced class actions alleging they use deceptive “compare at” figures on price tags.

Customers bringing these suits have suffered a few setbacks in federal appeals courts recently, but that hasn’t slowed the wave of deceptive price class actions filed across the country.

Suits in California, New York, and Illinois have survived motions to dismiss, obtained class certification, and won headline-grabbing monetary settlements, defense attorney Kathyleen A. O’Brien told Bloomberg BNA.

Those settlements have included multimillion-dollar payouts and changes to some retailers’ pricing practices. One settlement with J.C. Penney Company Inc. was valued at up to $50 million in money damages alone. Two July rulings from the First Circuit affirming dismissals of suits against Nordstrom Inc. and Kohl’s Corp. are “more likely to inspire plaintiffs’ attorneys to file future lawsuits in jurisdictions in which they have already obtained some favorable rulings rather than to deter future filings altogether,” O’Brien said. She is a partner at Reed Smith LLP in Los Angeles who specializes in advertising and marketing.

A plaintiffs’ attorney who has brought deceptive pricing suits against Nordstrom and other stores agrees that the decisions won’t wipe out these claims.

The First Circuit’s decisions were narrowly drawn around Massachusetts law, Hassan Zavareei of Tycko & Zavareei in Washington told Bloomberg BNA. “Our cases (including our California case against Nordstrom) are pled differently and are proceeding under different state laws, so I do not believe this narrow decision has any adverse impact on those lawsuits,” he said.

Here’s a look at how this trend has evolved, and steps retailers can take to try and prevent such suits from being filed in the first place.

Beginning of the Trend

“Many discounts fall into a category known as reference pricing, which is also known as price anchoring,” according to Truth in Advertising Inc. The consumer advocacy organization explains reference pricing as when a retailer compares the current price of an item to an “original” or “list” price.

“But those original prices may never really have existed or may be inflated to mislead consumers into thinking they are getting a bigger bargain than they actually are, a deceptive tactic known as fictitious pricing,” TINA’s website says.

Class actions challenging this deceptive pricing structure have been around for about a decade, but have been ramping up in the last few years.

Brandon Wisoff attributes that increase to high-profile state enforcement actions in California and New York against Overstock.com Inc. and Walgreen Co. Wisoff is a partner with Farella Braun & Martel LLP in San Francisco who has experience representing both plaintiffs and defendants in complex class action, securities, commodities, antitrust, financial institution, and consumer unfair business practices litigation.

But the real turning point was a 2013 Ninth Circuit decision in a deceptive pricing suit against Kohl’s, Wisoff said in a paper published in May. There, the court held that when a consumer relies on misrepresentations in buying a product that he or she wouldn’t have bought otherwise, the consumer hasn’t received the benefit of the bargain even if the product is worth the price that was paid.

This signaled to the plaintiffs’ class action bar “that these kinds of actions were clearly in play, at least at the pleadings stage,” Wisoff said.

California Inspiration

Since the Ninth Circuit ruling, California has become the hotbed for these suits.

“While a number of federal district courts in California have dismissed price comparison suits at the pleading stage, in other cases, the plaintiffs have achieved some notable victories at the pleading stage and beyond which have likely fueled additional litigation,” O’Brien said.

The Ninth Circuit gave the plaintiff’s bar a boost in April when it reversed the district court’s dismissal of a suit against the Neiman Marcus Group Inc.'s Last Call Outlet, she said. The customer sufficiently alleged economic injury and economic reliance on the “compared to” prices to satisfy Article III and statutory standing, the court held.

Suits in California and other jurisdictions have led to big-dollar settlements in cases that have proceeded beyond the pleading stage, O’Brien said.

J.C. Penney agreed to pay up to $50 million and modify its sales practices. Kohl’s made about $3.6 million in gift cards available to class members and set aside another $2.5 million in costs and fees. Michael Kors USA Inc. agreed to pay $4.88 million to class members and modify its price tags at outlet stores.

Other Circuit Court Rulings

Two circuit courts have weighed in more recently, both coming down against the customers.

The First Circuit affirmed dismissal July 26 of suits against Nordstrom and Kohl’s in two cases brought under Massachusetts law. The pricing schemes are deceptive under Massachusetts law, but don’t cause a compensable injury, the court said.

The customers in the First Circuit cases sought full reimbursement of the purchase price because the stores had tricked them into believing that what they bought was a bargain.

“Notably, the First Circuit did not disturb the district court’s findings that Nordstrom Rack’s pricing scheme constituted unfair or deceptive practices under the Massachusetts Consumer Act,” plaintiffs’ attorney Zaveerei said. “Instead, the court found that the plaintiff had not alleged a legally cognizable injury.”

The Sixth Circuit ruled against a customer Aug. 16 who challenged Wish.com marketplace’s use of crossed-out price visuals. The customer sought to recover 90 percent of the value of a $27 pair of speakers that he purchased because visuals on the website falsely suggested the original price was as high as $300.

“He got what he paid for: a $27 item that was offered as a $27 item and that works like a $27 item,” the court said.

The rulings are specific to the facts, the laws the claims were brought under, and the plaintiffs’ theories of damages. That leaves plaintiffs’ attorneys room to find ways to distinguish their cases from these rulings.

Best Practices for Retailers

While some companies like J.C. Penney and Michael Kors agreed to make changes as part of their settlements, retailers don’t seem be changing their pricing practice to any large degree as a result of the abundance of deceptive pricing suits.

Plaintiffs’ lawyer Zavareei says he still sees questionable pricing practices at outlet stores. The only retailers he’s seen that have changed their practices are those forced to do so as part of a settlement, such as Michael Kors, he said. Zavareei represented the customers in that suit.

Defense attorney O’Brien suggests a number of steps retailers who make comparative pricing claims can take to reduce risks:

•  Ensure that personnel understand and follow the Federal Trade Commission Guides Against Deceptive Pricing as well aseach state’s specific “rules” for making price comparisons;
•  Chose comparison prices based on adequate data showing when and where products were sold at the higher prices identified, and retain records that show how personnel selected and verified those prices;
•  Comply with the laws of the states in which they operate if comparing discounts to their own former prices;
•  Update comparison prices on a regular basis to ensure continued accuracy;
•  Carefully vet comparative pricing language to ensure that it is clear and specific; and
•  Provide prominent disclosures on labels, signage, web pages, and other point of sale communications with potential purchasers.

To contact the reporter on this story: Perry Cooper in Washington at pcooper@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

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