You feel pretty good heading to work wearing that designer outfit you picked up at a bargain price over the weekend at the local outlet center. But what if that deal you got wasn’t a deal at all? Questions have increasingly been raised about the potentially deceptive marketing practices related to the quality and source of products sold by fashion retailers in their outlets or factory stores. Further, concerns over outlet pricing is not only an American problem. This past month, the British tabloid Daily Mail conducted its own investigation into outlet retailer practices in England, warning consumers to beware of lower quality merchandise manufactured purely for outlet stores.
Back in the day, outlet stores were a place where manufacturers could sell discontinued products or inventory left over from last season. However, outlet stores are now big business, growing from an estimated $12 billion in 1997 to $25 billion this year. Increasingly, national clothing retailers are creating separate, lower-quality product lines to be sold exclusively though their outlets.
This issue has caught the attention of some federal lawmakers. Earlier this year, four members of Congress called upon the FTC to investigate potentially misleading marketing practices by outlet retailers. In their letter, the members of Congress noted that they did not take issue with the potentially lower quality of the outlet merchandise. Nor does it seem should they; after all, many consumers may be more than willing to purchase lower-quality brand-name merchandise at a steep discount. Instead, the senators voiced concerns about the potential for outlet shoppers to be misled about whether the outlet product lines were ever sold (or intended for sale) at a regular retail store, and whether the products were ever sold at the advertised “retail price” used as reference pricing at the outlet stores. (Reference pricing, in case you’ve actually never been to an outlet store, occurs when a product’s “retail price” or “list price” is advertised next to the discounted outlet price.) The letter inquires whether outlet store reference pricing is deceptive when “made for outlet store” merchandise has never been sold at regular retail locations—making the “retail price” impossible to substantiate.
The FTC has provided little guidance regarding practices at outlet malls in response to the letter, aside from a short entry posted on its consumer information blog in March. The blog post informed consumers about the potential for lower-quality products at outlet stores and suggested that consumers ask the staff at the store if they are unsure whether a product is “made for outlet only.”
The FTC rarely, if ever, these days enforces its pricing guides, but many states have similar laws and some of them actively enforce in this area. The FTC’s Guides Against Deceptive Pricing, 16 C.F.R. 233.1, expressly warns against potentially deceptive reference pricing in the form of “false bargains.” The Guides state that “[i]f 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.” Of course, as most anyone who reads this blog knows, whether a claim is false or misleading depends on the context. However, even if no explicit price comparison is made, does the mere fact that a product appears in an outlet store imply that it was previously sold elsewhere, given consumers’ understanding of what “outlet stores” are? Some retailers have now started being more transparent about their outlet-specific brands to avoid the possibility of such confusion.
The bottom-line for retailers is to keep alert for any developments in the FTC’s approach to outlet or factory store marketing, and to be transparent about product lines that vary between retail stores and outlets. It is perhaps most important to be transparent about the list price from which outlet discounts are marked and to avoid using a list price at which the product is never actually sold. It may be a good idea for major fashion retailers with outlet stores to review pricing practices to ensure legal compliance.
* Wes Sudduth is a Venable summer associate and not admitted to practice law.