Win Customers, Avoid Lawsuits: Minimizing Reference Price Litigation Risk

Total Retail

False reference price and deceptive pricing class actions are a growing concern for retailers, with lawsuits multiplying faster than ever. Broadly speaking, these lawsuits allege that retailers that routinely offer items at sale prices or that run regular “limited time” offers are engaging in deceptive advertising. The lawsuits allege the purpose of overfrequent sales is to manipulate consumers into spending money they wouldn't have otherwise spent; either because they feel the need to buy items before prices go back up, they're dissuaded from shopping around for a better deal, or because “fake sales” give consumers an inflated idea of the value of products. While such lawsuits have existed for years, recently, the rise of internet advertising by the plaintiffs’ bar has driven an increase in the frequency and size of these class actions.

This article delves into the legal labyrinth retailers navigate when pricing strategies mislead consumers. We’ll explore what plaintiffs argue, the success rates of these lawsuits, and how retailers can avoid getting caught in the legal crossfire.

What is a False Reference Price Class Action?

According to the Federal Trade Commission, a false reference price advertisement occurs when sellers:  . . . offer a reduction from the advertiser’s own former price . . .  [where] the former price being advertised is not bona fide but fictitious — for example, where an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction . . . . ; [then] the purchaser is not receiving the unusual value he expects. In such a case, the "reduced" price is, in reality, probably just the seller’s regular price.

16 C.F.R. § 233.1(a).

Plaintiffs in deceptive pricing lawsuits often focus on tactics that create a false perception of value. Here are some common arguments:

  • MSRP Deception: Plaintiffs argue that inflated or fictitious MSRPs are used to make sale prices appear like significant discounts. Plaintiffs claim this misleads customers into believing they're saving more than they truly are. For example, a retailer might advertise a television with a slashed-out MSRP of $1,000, but if that MSRP is rarely or never offered, the discount is illusory.
  • Inflated Reference Prices: This tactic involves artificially inflating the original price of an item before a sale. Plaintiffs argue this creates a steeper discount illusion, and the actual selling price may not be much different from what it typically is. For instance, a shirt might be marked down from $40 to $20, but if the $40 price was only in effect for a short period or never actually offered, the “sale” price is misleading.
  • Limited-Time Sales Deception: Plaintiffs also target phony sales that create a sense of urgency . Plaintiffs argue this tactic pressures customers into impulsive purchases by making them believe they are missing out on a limited-time opportunity. For example, a retailer might advertise a “flash sale” for 24 hours, but if the same price is frequently available, the sense of urgency is deceptive.

Piggybacking on the FTC’s guidance and these theories, the plaintiffs’ bar has spent years developing a playbook for pricing class actions. Plaintiffs tend to assert claims under state deceptive trade practices statutes — such as California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act; Washington’s Consumer Protection Act; and New Jersey’s Truth-in-Consumer Contract, Warranty and Notice Act — as well as common law theories of breach of contract and breach of warranty.

The Plaintiff’s Arsenal: Social Media Attorney Advertising, Multi-Jurisdiction Litigation, and Big Settlements

These kinds of class actions have been around for years. So, why the sudden increase in litigation?

One reason may be the rise of attorney advertising on social media as a client recruitment tool. These ads target users on popular social media platforms with fancy graphics and eye-catching headlines like “Did you purchase a widget from Company X? If so, you may be entitled to compensation.” The advertisements are remarkably sophisticated and make hiring the law firm frictionless: all it takes is a few clicks — if the user glosses over some fine print — for the user to sign an engagement letter to sue a brand.

Plaintiffs’ attorneys tend not just to sign up one client; they enroll dozens or more. The attorneys employ a multi-jurisdictional strategy, designed to inflict maximum pain on the defendant-business. For example, a firm might use two plaintiffs to bring separate class actions against the same company in federal court in California and Washington. The lawsuits will all assert similar claims but have different class definitions (one with a California class and the other with a Washington class), forcing the business to fight two fronts at the same time.

Additionally, the plaintiffs’ bar has obtained favorable settlements recently, which have had a snowball effect, with large settlements encouraging more law firms to join the fray. In one settlement involving gift cards conferring a maximum benefit of $119 million to the class, the class counsel received a $2.4 million fee award. In another settlement where the company agreed to distribute an estimated 11 million $10 gift cards with free shipping (additionally valued at $7.45 per person, for a total value of $17.45 million), the attorneys didn't receive the entirety of their request but still took home $3 million.

With large paydays and a tool that allows lawyers to form client relationships with ease, it's not surprising that more plaintiffs’ attorneys are jumping into the fray.

The Jury’s Verdict: A Mixed Bag for Retailers

While deceptive pricing lawsuits are on the rise, the outcomes for retailers can vary widely. While some cases have resulted in large settlements, as discussed above, others have resulted in victories for the defendants.

Courts have been skeptical of consumer fraud actions if companies disclose the basis of their pricing, such as where a website disclosed that the strikeout price was the “MSRP” and not a former price comparison, as the plaintiff had claimed. Sellers have also notched early victories where pricing allegations are too vague or where plaintiffs' attorneys have failed to conduct a sufficient pre-suit investigation and rely on conclusions about “fake pricing” without showing (the legal) receipts.

Plaintiffs’ damages theories are also largely untested. One court in the Ninth Circuit affirmed summary judgment for the retailer because the plaintiff had no viable damages model. In that case, the plaintiff had admitted the product received had some value and so the plaintiff wasn't entitled to a full refund under California law. Plaintiff’s experts also didn't provide competent evidence about the amount the plaintiff had paid vs. the value the plaintiff had received, which was necessary to prove that the plaintiff had sustained damages or was entitled to restitution. No pricing case has made it through trial and it's unclear whether plaintiff’s attorneys can prove their clients were actually harmed by false discounts.

However, even where the company is able to prevail, the lawsuits can be very expensive for retailers. The cost of litigation, combined with potential settlements, can be a significant threat to a business.

Building a Strong Defense: Avoiding the Legal Maze

Overall, the mixed bag of verdicts underscores the importance of having strong defenses against deceptive pricing accusations. The potential consequences of losing a deceptive pricing lawsuit can be severe, so retailers should take steps to mitigate litigation risk. Among other things, retailers can employ some of the following strategies:

  • Transparency in Everyday Pricing: Clearly advertise your everyday prices and avoid misleading markups. Customers appreciate honesty and predictability. This discourages claims of deception.
  • Genuine Discounts: Base sales on usual and recent selling price, not inflated reference prices. This builds trust and encourages repeat business.
  • Honesty in Scarcity: Do not advertise limited-time sales unless quantities are truly limited. Customers who miss out due to false scarcity can become frustrated and file complaints.
  • Document Pricing Strategies: Businesses should maintain clear records of their pricing history to defend against accusations of inflated reference prices.
  • Monitor Pricing Practices: Regularly review advertising and pricing strategies to ensure they are compliant and avoid any misleading elements.
  • Update Terms: Make sure terms of use are updated to discuss pricing issues and contain up-to-date terms relating to class actions.
  • Compliance: Businesses are encouraged to consult with counsel to ensure compliance and avoid legal pitfalls.

Following these steps can help retailers navigate the legal labyrinth of deceptive pricing and minimize litigation risk. By prioritizing honest advertising practices, retailers can build trust with customers, avoid costly lawsuits, and ensure long-term success.

"Win Customers, Avoid Lawsuits: Minimizing Reference Price Litigation Risk," by Harrison Brown, Ana Tagvoryan, and Erica R. Graves was published in Total Retail on May 14, 2024.