Online Discount Pricing Policies Face Increasing Scrutiny

The advertising of goods and services is overseen by a number of regulatory agencies on the federal and state level. The Federal Trade Commission (FTC) is the leading regulator, enforcing its actions through '5 of the FTC Act, 15 U.S.C. '45(n), which prohibits deceptive or unfair marketing acts or practices. Each state has its own version of '5. For example, two provisions of New York's General Business Law ('349 and '350 respectively) prohibit “deceptive acts or practices” and “false advertising” in the conduct of any business, trade or commerce. State attorneys general typically look to the FTC's positions as guidance for enforcement.

Way back in 1964, the FTC issued its “Guides Against Deceptive Pricing” (the “ Pricing Guides”), 16 C.F.R. '233 et seq. The Pricing Guides set forth the parameters under which sellers may lawfully compare their prices to those of their competitors, to manufacturers' suggested retail prices, and to their own former prices. The underlying premise behind proper discounting advertising is that a “discounted” current price or percentage savings should be compared to a bona fide retail price, which is a price that is currently being offered by principal retail outlets that do not conduct their business on a discount basis. According to the FTC:

If the former price is the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time, it provides a legitimate basis for the advertising of a price comparison. Where the former price is genuine, the bargain being advertised is a true one. If, on the other hand, the former price being advertised is not bona fide but fictitious ' for example, where an artificially inflated price was 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.

16 C.F.R. '233.1.

Also, the FTC's Pricing Guides permit a retailer to compare discounted prices to former prices if the seller offered the merchandise on a regular basis for a reasonably substantial period of time. Comparison are permitted to a competitor's price if the product was regularly and openly sold at the referenced price.

A number of states have similarly codified comparative/former price advertising practices, and many of the state rules are similar to the FTC's Pricing Guides. Some, however, have differences. California, for example, requires that the original price be the “prevailing” retail market price for the goods. California consumer protection law further provides:

No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price as above defined within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.

Cal. Bus. & Prof. Code '17501.

Deceptive Pricing Lawsuits

Notwithstanding the transparency of online pricing and consumer empowerment, today's online marketplace presents significant traps for the unwary retailer when comparing its own price to a higher original retail price. If a retail price is required to be the “prevailing” market price, can an online retailer rely on a manufacturer's suggested retail price as a reference price where it seems virtually everyone is offering a discount? Recent litigation demonstrates that retailers need to do more than simply accept such pricing policies.

Indeed, dozens of actions have been brought recently against retailers for deceptive pricing practices. The most noteworthy of the cases was an action brought by California district attorneys against Overstock.com, which was styled People of the State of California v. Overstock.com, No. RG10546833, 2014 WL 657516 (Cal. Super. Ct. Feb. 5, 2014). Overstock used comparative advertising techniques on its website, including the practice of displaying a list price for a product above the price at which Overstock was offering it and then showing a calculation of the “savings” expressed in both absolute dollar and percentage terms. A major cause of Overstock's problems occurred when a consumer purchased two patio sets from Overstock in response to an Overstock listing touting a “list price” of $999 and showing an Overstock price of $449.99 for a “savings” of $549.01 or 55%. When the furniture arrived, however, it came with a WalMart price tag for $247. The consumer confirmed online that WalMart's price was indeed $247. Although Overstock eventually offered a full refund, the angry consumer sent a letter to the Shasta County District Attorney, who joined other California district attorneys in bringing suit. In ruling against Overstock, the court prohibited the practice of selecting the highest price “that may be found anywhere” as a reference price for calculating the discount, unless the context of the price was accurately disclosed. Instead, the court crafted a highly technical framework for supporting comparison pricing, notably not found in the California regulatory structure. Overstock was also fined $6.8 million, twice the size of the next largest penalty for false advertising in California. The decision is now on appeal.

Department store retailer J.C. Penney chose to settle rather than fight. J.C. Penney was faced with a federal class-action lawsuit filed by Cynthia Spann in the Central District of California in 2012. See, Spann v. JC Penney Corp., Case No. CV 12-0215 FMO (RNBx). Spann charged J.C. Penney with falsely advertising “original” prices, “sale” prices and corresponding price discounts for its private branded and exclusive branded apparel and accessories. According to Spann, J.C. Penney's “regular” and “original” price listings (and thus, the implied savings) were false and deceptive because the retailer hardly, if ever, offered or sold its merchandise at those prices.

In 2015, the court certified a class of all people who purchased from J.C. Penney California locations at least one private or exclusive branded item advertised at a discount of at least 30 percent off of the stated “original” or “regular” price.

A few months after losing the class certification motion, J.C. Penney entered into a settlement agreement in which it agreed to a $50 million settlement fund and significant non-monetary relief. J.C. Penney agreed that, going forward, its advertising and pricing practices would not violate federal or California law, including California's specific price-comparison advertising statutes. Specifically, J.C. Penney agreed that any former price to which it referred in price-comparison advertising would be “the actual, bona fide price at which the item was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of business, honestly and in good faith.” The settlement additionally required the retailer to implement a compliance program consisting of annual monitoring, training and auditing to ensure continued compliance.

Another expensive settlement involved Michal Kors, who settled a false pricing class action lawsuit regarding its made-for-outlet merchandise. See, Gattinella v. Michael Kors (USA), Inc., et al., Case No. 14-civ-5731 (WHP) (S.D.N.Y.). There, Michael Kors was alleged to have utilized an “MSRP” [manufacturer's suggested retail price] and an “Our Price” price comparison on the tags of Michael Kors Outlet products. As part of its $4.875 million settlement agreement, Michael Kors agreed not to use the term “MSRP” and replace it with “Value” on the price tags of products made exclusively for sale in Michael Kors Outlet stores and to display signage in its outlets that explained the meaning of the term.

Lawsuits are not filed only against large brand-name merchants. For example, in March 2016, a class action lawsuit was filed in federal court in New Jersey against the flash-sale wine discount website Wines 'Til Sold Out. See, Cannon et al v. Ashburn Corporation, Wines 'Til Sold Out (WTSO.com), and Newman, No.16-cv-1452 (D.N.J.). In that lawsuit, which is still in its infancy, the plaintiffs allege that the wine retailer misrepresented percentage price discounts by comparing to original prices that either never existed or were not the prevailing market price for the product.

Beware Retailer Backlash

In addition to watching federal and state regulators and class action plaintiffs, retailers must also look over their shoulders for businesses seeking to accuse their competitors of false comparative advertising. Although this practice is not widespread, some merchants file Lanham Act claims in order to discourage retailers from offering their products too cheaply. Perfume maker Chanel uses such lawsuits to police its pricing. In a lawsuit against Verbena Products, Chanel accused an Internet retailer of comparing its selling price of $144 for a Chanel product to $173 if the same product was allegedly purchased directly from Chanel. See , Chanel v. Verbena Products, Case No. 14-cv-08239 (S.D.N.Y). According to Chanel's complaint, Chanel sold the product directly for $82, which meant that Verbena's claim of a 17% discount was false, and that Verbena actually sold the product at a significant mark-up. Chanel sued under the Lanham Act and New York's General Business Act. It is unclear from the record what basis Verbena claimed for the $144 figure, but the case settled a few months later.

Compliance and Disclosure Issues

Given the threat of litigation and/or regulatory enforcement, all retailers, and particularly online retailers, should be cognizant of their advertising and discounting policies. As most states require the comparison price to be one that was actually offered to the public ' “actively,” “openly,” “in good faith” or “with an intent to sell” ' a retailer seeking to prove compliance should take affirmative steps to document the basis for the referenced price. Such steps should include retaining records for the original or compared price and creating advertisements, merchandise price tags, pricing policies, schedules, and sales data that both disclose and demonstrate the validity of its own pricing policies and methods of comparison.

Recognizing the competitive landscape of online pricing, a retailer may not always be able to show that a competitor regularly and openly offers a product at full price for the necessary period of time. Therefore, an online retailer that intends to show savings comparisons should invest in regularly surveying the marketplace to determine prices at which merchants offer the same or similar items.

If the price is based on a discount from the customary markup, the retailer should have a pricing manual drafted demonstrating that the calculation is premised on a consistent pricing policy in which full price goods are regularly and openly sold. These records should be audited to confirm that the pricing practices are proper and supported.

Retailers should otherwise take steps to clearly and conspicuously disclose to consumers the basis of the referenced price (such as, what does “Value” mean) and avoid conveying the impression that the referenced price is what the product is being offered for in the marketplace. In crafting such disclosures, online merchants should keep in mind the four Ps ' prominence, placement, presentation, and proximity to the claim. Retailers should also study the Federal Trade Commission's “.Com Disclosure Guide” for guidance on how to provide meaningful disclosures to ensure the accuracy of their advertising. See, “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,” FTC (March 2013).

Is Mandatory Arbitration An Option?

Online retailers have an additional potential line of defense to class-action lawsuits ' incorporating mandatory arbitration provisions into their e-commerce platforms. If structured properly, an arbitration provision can require that the consumer's dispute be adjudicated on an individual (not class) basis before an arbitral body.

The Federal Arbitration Act mandates that arbitration agreements must “be valid, irrevocable, and enforceable ' .” 9 U.S.C. ”1-2. The Supreme Court has made clear that the FAA supercedes state law and that “courts must 'rigorously enforce' arbitration agreements according to their terms.” American Express v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309 (2013); see also, AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1745 (2011). One of the advantages to arbitration is the flexibility of the process. The parties are free to lay down their own ground rules. When those ground rules are incorporated into the parties' contract, they can be just as enforceable as the underlying requirement to arbitrate, including incorporating class actions waivers.

The enforceability of a mandatory arbitration agreement with a class action waiver will likely continue to be the subject of dispute. Major alternative dispute organizations such as JAMS and the American Arbitration Association require certain consumer-friendly provisions as a condition of accepting consumer arbitrations. See, e.g., JAMS Consumer Arbitration Minimum Standards. These provisions include the right to hearings in the consumer's locale and limitations on filing fees.

Despite these pro-consumer requirements, some online retailers have had success in enforcing mandatory arbitration provisions. For example, Amazon.com was sued in California federal court by customers who alleged that the online retailers list prices on a variety of products failed to reflect the prevailing market price. See, Fagerstrom v. Amazon.com, Case No. 3:15-cv-00096 (S.D. Cal.). The federal court granted Amazon's motion to compel arbitration, and dismissed the suit without prejudice. The court relied on the fact that the arbitration terms were clearly stated and were presented in hyperlinks available before a customer completed its purchase. The decision is now on appeal before the Ninth Circuit. See, Wiseley v. Amazon.com, Case No. 15-56799 (9th Cir.).

In February 2016, home goods retailer Wayfair was sued in federal court in California based on allegations that the merchant misrepresented its “original” or “regular” retail prices (Wayfair did not use those terms but struck through a higher price and a displayed a corresponding percentage discount). See, Carson v. Wayfair, Case No. 2:16-cv-00716 (C.D. Cal.). Plaintiffs alleged that the claimed discount was fictitious “because the referenced former retail prices were fabricated and did not represent Wayfair's true 'original' retail prices,” and “the advertised 'original' prices for Wayfair's items were not the prevailing market retail prices within three months next immediately preceding the publication of the advertised former prices, as required by California law.” On April 19, 2016, plaintiffs amended their complaint in an attempt to evade Wayfair's motion to compel arbitration based on mandatory arbitration terms contained in Wayfair's online terms of use. Presumably, Wayfair will renew its motion to compel arbitration.

Online retailers seeking to implement arbitration waivers should not simply “cut and paste” arbitration provisions that other retailers may use. Rather, to have the best chance that a court will find a provision to be enforceable, retailers should take steps to ensure that the provisions are sufficiently consumer friendly so as to comply with the due process concerns that major arbitral bodies express in their consumer arbitration policies. Retailers should also take steps to clearly and conspicuously disclose the policy and incorporate a means for the consumer to consent to the provision, knowing that “one size does not fit all.” Before selecting an arbitral body, retailers should make sure that the arbitration provision complies with the particular arbitral body's rules, including addressing registration requirements.

Conclusion

Today's hyper competitive online retail environment requires retailers to be cognizant of the laws, even antiquated ones, that apply to their pricing practices. Retailers need to understand the environment and work to craft defensible pricing practices that include explaining the basis for comparison clearly, conspicuously and accurately. Retailers should also consider mandatory arbitration provisions that are consumer friendly and consistent with the selected arbitral body's rules.

Andrew B. Lustigman is head of the advertising, marketing and promotions group at Olshan Frome Wolosky. Scott A. Shaffer is a partner in the group. This article also appeared on Law.com.