We all love a good bargain, but sometimes a good deal seems too good to be true. In 2011, Cynthia Spann went bargain-hunting at a California J.C. Penney, and walked out convinced that she had saved over 30%. However, she later discovered the products she bought at a “bargain” price had never really been sold at full price. As we have written previously, pricing and discounting claims are a frequent target of FTC enforcement actions, competitive challenges at the National Advertising Division, and plaintiffs’ attorneys. After learning about the alleged false discounting, Spann brought a class action on February 8, 2012, alleging violations of California’s Unfair Competition Law, California’s False Advertising Law, and California’s Consumers Legal Remedies Act. On May 18, 2015, the United States District Court for the Central District of California granted certification of the class action, serving as a timely reminder for retailers and businesses everywhere that businesses must carefully monitor pricing practices to ensure compliance with state and federal law regarding false and deceptive pricing.
According to Spann’s complaint, J.C. Penney’s false advertising campaign was “massive, years-long, pervasive[,] [and] consistent across all” private and exclusive brands of apparel and accessories. The essential aspects of the advertising campaign are familiar to many American shoppers: J.C. Penney stores and websites would feature both an “original” or “regular” price and a substantial dollar/percentage discount, reinforcing the message that the customer had received a bargain by including a line for “Total Savings Today” on receipts. As the FTC notes in its Guides Against Deceptive Pricing, this is a totally legitimate form of advertising as long as the original/regular price is genuine; that 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.” However, if “the former price being advertised is not bona fide but fictitious”—in other words, if an “inflated price was established for the purpose of enabling the subsequent offer of a large reduction”—then “the ‘bargain’ being advertised is a false one.” California law is also rather clear on this topic: “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.”
Spann’s complaint alleges that J.C. Penney’s internal pricing guidelines, price pacing flow charts, and retail and advertising charts show the pervasiveness of comparative pricing. In particular, only thirteen out of more than a thousand items were ever offered at the regular price (and even then for only seventeen days, and at a buy-one-get-one promotion), and only .2% of products ever sold at the regular price, while 98.7% of J.C. Penney’s revenues came from items that were discounted by 30% or more. Interestingly, J.C. Penney’s 2012 CEO, Ron Johnson, who was behind the widely publicized switch from price-comparison advertising to “fair and square” pricing, was videotaped at an investor event stating that “nothing was bought at regular price,” and “three-quarters of everything sold in the store was at a 50% off or greater discount.” After the switch, earnings and revenues dropped, Mr. Johnson was fired, and J.C. Penney returned to comparative pricing within less than a year, in a (literally) textbook case of the American desire for discounts.
After two earlier motions for class certification were denied, the court granted the third, recognizing a class consisting of everyone who purchased one or more items in California, between November 5, 2010 and January 31, 2012 that were a) from a private or exclusive JCP brand; b) advertised at a discount of at least 30% off of a stated “original” or “regular” price; and c) who haven’t received a refund or credit. In granting the motion, the court addressed the novel question of how to define the “prevailing market price” for a privately branded item, considering whether the market is limited to the items themselves, so that the retailer selling that item is its own market, or whether the market extends to other stores that sell similar items? It is an unprecedented question in California, and after distinguishing cases cited by the parties, the court turned to principles of statutory interpretation to analyze California’s False Advertising Law, concluding that the relevant market “consist[ed] of defendant’s stores.” J.C. Penney filed an appeal to the Ninth Circuit on June 1, 2015.
What is the takeaway from this class certification? Americans love a bargain, but you can’t advertise a discount unless you have actually sold the item at full price—and if it’s a private label, you can’t get around that requirement by showing that unrelated stores sell similar things for higher prices. Always make sure when making pricing claims that you have the substantiation to back them up if the FTC or a plaintiffs’ attorneys comes knocking.
*Emma Marshak is a Venable summer associate and not admitted to practice law.