In September 2014, we wrote “Buyers’ Remorse: Outlet Stores Under Fire,” highlighting a wave of proposed class actions against retailers for alleged deceptive pricing practices at outlet and factory stores. These lawsuits generally allege that retailers use a pricing technique at outlet stores to mislead shoppers by suggesting that items sold at these locations were originally advertised for sale at higher prices in retail store locations. According to this putative class of shoppers, the advertised Manufacturer’s Suggested Retail Prices (MSRP) or “Compare At” prices, together with discounted “Now” prices, portray false savings to consumers since the purportedly discounted items were manufactured for exclusive sale at outlet stores and always sold at the advertised “Now” prices. This alleged false sense of savings purportedly inspires shoppers to purchase more because they think they are getting great deals. In bringing these actions, plaintiffs commonly invoked California’s Unfair Competition Law (UCL), False Advertising Law (FAL), and the Consumer Legal Remedies Act (CLRA).

Nearly two years after the first wave of cases, it is worth taking stock of how these consumer protection claims have been holding up in court. While several actions settled before the courts could weigh in on the merits of the claims, a few of these cases offer insight into how courts are evaluating deceptive pricing claims and what retailers can do to shield against them.

“Compare At” Pricing Alone is Insufficient to Support a Claim for Relief

The biggest hurdle for a plaintiff to overcome a motion to dismiss is meeting the heightened pleading requirements for consumer protection claims sounding in fraud. In Rubenstein v. Neiman Marcus Grp. LLC, No. 14-cv-07155 (C.D. Cal.), the Honorable S. James Otero allowed serial plaintiff Linda Rubenstein two bites at the apple before ultimately dismissing her lawsuit for failing to plead with the requisite particularity that the retailer used misleading advertising techniques for its outlet store, Neiman Marcus Last Call (“Last Call”). In dismissing the original complaint with leave to amend, the court reasoned that, because claims under UCL, FAL, and CLRA are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), a plaintiff must allege the “who, what, where, and how” of the alleged misconduct. The court further explained that these particular claims required the plaintiff to show that reasonable consumers were likely deceived by the listed “Compare To” prices on Last Call’s price tags. In other words, conclusory allegations that the individual plaintiff was personally misled by alleged deceptive pricing were insufficient to meet this “reasonable consumer” test. 

Citing to the Federal Trade Commission’s Guides Against Deceptive Pricing, the court concluded that a reasonable consumer would most likely interpret the “Compare To” language used in Last Call as a “comparable value comparison” indicating that merchandise of “like grade and quality” is sold by Neiman Marcus or other retailers. The court expressly rejected plaintiff’s contention that the price comparison reasonably indicated that Neiman Marcus’ flagship stores previously sold the exact same items at a higher price. This interpretation, according to the court, improperly characterized the “Compare To” language as a “former price comparison” which is generally indicated by language such as “Formerly sold at $___” or “Were $10, Now Only $7.50!”

Plaintiff later filed an amended complaint, arguing that Last Call’s “Compare To” prices, coupled with the appearance of Neiman Marcus’ name in outlet store advertisements, misled reasonable consumers by suggesting that outlet store items were originally sold at the retailer’s flagship stores. The court again dismissed plaintiff’s claims, finding that there was no evidence that Neiman Marcus advertised that Last Call sold merchandise that was previously for sale at its flagship stores. According to the court, the term “Last Call” could just as easily refer to the outlet merchandise from a prior season or the last call for a third-party manufacturer’s clearance items. The dismissal was again without prejudice.

Afforded a second opportunity to amend her complaint, Ms. Rubenstein alleged that, even in the case of “comparable value comparison” as described by the FTC, the federal guidelines required that Neiman Marcus be “reasonably certain” that the listed “Compared To” price is the actual price that merchandise of like grade and quality would be offered by other retailers in the area. According to Rubenstein, Neiman Marcus failed to meet this requirement and therefore violated California’s consumer protection laws. Ultimately dismissing the complaint, this time with prejudice, the court held that this newly asserted theory was not sufficiently pled since plaintiff failed to allege any support for her conclusory contention that Neiman Marcus was not reasonably certain about its items’ market prices. The court explained that, without a showing that merchandise of like grade and quality was not in fact offered by other retailers at the listed “Compare To” price, the court could not discuss how the retailer’s statements were false and misleading.  

Interestingly, shortly after the first and second dismissal of Ms. Rubenstein’s complaint, two similar putative class actions pending in the United States District Court for the Southern District of New York against Michael Kors and Ralph Lauren settled. In Gattinella v. Michael Kors (USA), Inc., No. 14-cv-05731 (S.D.N.Y.), the parties reached a class-wide resolution of claims in which Michael Kors agreed to establish a settlement fund of $4,487,000 and modify the methods by which it markets and labels outlet store items. Branca v. Ralph Lauren Corp., No. 14-cv-07097 (S.D.N.Y.), on the other hand, did not involve a class settlement. The named plaintiff and Ralph Lauren entered a confidential individual resolution. 

Beware: Consumer Surveys and Retailer Pricing Manuals May Get Plaintiffs Past the Motion to Dismiss Stage

While dismissal of the Neiman Marcus action and subsequent settlements appeared to signal an early end to this flurry of litigation, a later decision in a similar case against Nordstrom suggests otherwise. Branca v. Nordstrom, Inc., No. 14-cv-02062 (S.D. Cal.). On October 9, 2015, the Honorable Michael M. Anello declined to dismiss plaintiff Kevin Branca’s second amended complaint after dismissing his prior complaints on grounds similar to those expressed by Judge Otero in the Neiman Marcus case. In the operative complaint, Mr. Branca included two new allegations that, according to the court, bolstered his claims and, in turn, satisfied the heightened pleading requirements and reasonable consumer test that Ms. Rubenstein was unable to meet.

To support the claim that his interpretation of Nordstrom’s “Compare At” prices used at its outlet stores (Nordstrom Rack) was objectively reasonable, Mr. Branca cited an online survey of California shoppers in his second amended complaint. Mr. Branca alleged that an overwhelming majority of survey participants (90 percent of 206 consumers) reported that they believed Nordstrom Rack’s price comparison language indicated the associated items were previously sold at the “Compare At” price at Nordstrom department stores or elsewhere.  Nordstrom vigorously challenged plaintiff’s reliance on this questionable survey, arguing that this undisclosed “expert evidence” did not satisfy the Daubert standard. The court, however, rejected Nordstrom’s argument, reasoning that, at the motion to dismiss stage, it was required to presume the truth of the survey data incorporated into the complaint even without seeing the actual questionnaire or results.  

The court also found that the plaintiff’s reliance on Nordstrom’s Full Line and Rack Supplier Compliance Manual, which was incorporated by reference but not attached to the complaint, sufficiently supported his claim that the retailer’s “Compare At” prices were false and misleading. This Manual, according to Mr. Branca, demonstrated that the “Compare At” price was not associated with a market price since it described “Compare At” as “Higher (original) price” in one place, the MSRP in another place, and then referred to the lower sales price as “Regular Retail.” Although acknowledging the Manual offered no information regarding how the retailer calculated its “Compare At” prices, the court construed the allegations in a light most favorable to plaintiff and determined that the Manual provided sufficient support for the asserted claims at this early stage of the case.

Nordstrom recently filed a Motion for Reconsideration, which the court took under advisement on May 31, 2016. In the motion, Nordstrom asserts several compelling reasons why the court should amend its decision and ultimately dismiss the latest iteration of the complaint, including recent developing case law arising from the Central District of California’s dismissal of similar actions against Ross Stores, Inc. (“Ross”) and DSW Shoe Warehouse, Inc. (“DSW”). The opinions dismissing both of these actions, according to Nordstrom, support the proposition that, without conducting a pre-suit investigation, Mr. Branca cannot truthfully allege that neither Nordstrom nor any other retailer sold the purchased items at the “Compare At” price. In the Ross action, for example, the court explained that plaintiffs could sufficiently plead a deceptive pricing claim by “conduct[ing] a reasonable investigation into their claims . . . [to] allege, for instance, that the items they purchased bore a ‘Compare At’ price of $X but were sold at other retailers for a lower price of $Y . . . [or] that the purchased items were offered for sale exclusively in Defendant’s stores.” Order Granting Defendant’s Motion to Dismiss at 6, Jacobo v. Ross Stores, Inc., No. 15-cv-04701 (C.D. Cal. Feb. 23, 2016) [Dkt. No. 45]. In opposition, Mr. Branca argued that this “pre-suit investigation” requirement was not applicable to his case since the relevant information, particularly concerning pricing and product origin, was in Nordstrom’s possession. Mr. Branca further asserted that such an investigation was unnecessary since the complaint alleges that the purchased clothing was sold exclusively at the outlet store and therefore had no prevailing market price other than the price at which Nordstrom itself sold them.

Nordstrom’s second ground for reconsideration relates to the consumer survey that Mr. Branca expressly relied upon, but declined to attach for transparent reasons, in his papers. Nordstrom contended that, contrary to Mr. Branca’s representations to the court, the results of the now disclosed survey did not support his claim that reasonable consumers believed Nordstrom’s “Compare At” prices referred to the price of the item sold elsewhere. Attaching the questionnaire and survey results to the Motion for Reconsideration, Nordstrom argued that the survey was specifically designed to elicit the precise results alleged by Mr. Branca and deliberately avoided questions that would have produced meaningful data about subjective consumer beliefs (that would have, in turn, undermined his claims). Plaintiff denied Nordstrom’s assertions and argued that issues regarding the reliability, design and methodology should be addressed during expert discovery. 

As of the date of this article, the court has not issued an order and opinion regarding Nordstrom’s Motion.

Named Plaintiff’s Standing to Assert Claims Arising from Unseen Advertisements and Unbought Items

The Nordstrom action also provides insight into how courts may analyze challenges to a named plaintiff’s standing to assert claims on behalf of class members. For instance, Judge Anello analyzed whether a named plaintiff had standing to assert claims under the UCL, FAL, and CLRA insofar as they arose from advertisements the named plaintiff did not actually see or rely upon when making his or her purchase. The court firmly rejected standing under these circumstances. Looking to the elements of Branca’s claims and applicable Ninth Circuit case law, Judge Anello explained that plaintiff’s standing to assert claims only extended to those arising out of advertisements he actually relied upon when purchasing items from Nordstrom’s Rack. As such, because plaintiff never alleged that he relied upon the Nordstrom’s Rack website, store name, or any other advertising besides the listed “Compare At” prices, the court found he lacked standing to assert claims arising from anything other than the outlet store price tags.

The court also addressed whether a named plaintiff had standing to assert claims based on outlet store items he or she did not purchase.  Acknowledging that there was no controlling authority on this issue, the court looked to other federal district courts in California before holding that differences across outlet store items was of little importance since Branca’s claims related to the “consistent format of tags, i.e., the juxtaposition of two prices, one higher than the other, the term ‘Compare At’ and a percentage, labeled ‘% Savings.’” Order at 9, No. 14-cv-02062 (S.D. Cal. Oct. 9, 2015) [Dkt. No. 30]. The court distinguished Mr. Branca’s case from a class action against Ghirardelli Chocolate Company in the United States District Court for the Northern District of California where the court determined that the named plaintiff lacked standing. In that case, there were substantial differences between the composition of the chocolate products, the accompanying labels, and the target customers. According to Judge Anello, Mr. Branca’s case was more analogous to cases brought against Jamba Juice and Dreyer’s Ice Cream, where the respective courts found that, despite differences in the products, the product labels that the class claims relied upon remained consistent from item to item.

Take Away

While retailers have experienced some level of success with this first wave of litigation, the pending action against Nordstrom demonstrates that plaintiffs are paying close attention to the pleading deficiencies raised by the court and attempting to cure those concerns by pointing to the retailers’ own pricing policies. Indeed, in a more recent action against Burberry filed in the United States District Court for the Southern District of New York, the plaintiff has relied on a 1992 empirical marketing study to support his claim that customers reasonably believed that discounted items sold at Burberry outlet locations were previously sold at the referenced higher prices in traditional shops.

Plaintiffs are also taking advantage of consumer protection statutes in states other than California. For example, in a consolidated action against Coach, one of the four complaints asserts deceptive pricing claims under New Hampshire law. The other three actions, however, assert claims under the consumer-friendly statutes of California.     

As plaintiffs’ counsel maintain interest in pursuing these actions – and leveraging the class action device to drive up the value of the cases and potential settlements – retailers must not get tripped up under various state consumer protection statutes and should continue to closely monitor this trend of class action litigation, particularly the latest suits against Nordstrom, Coach, and Burberry. Retailers also should be especially careful when advertising discounted prices and work to draft defensive advertising and pricing policies that clearly explain the basis of pricing techniques used at its outlet stores. These policies should be conspicuously reflected in all marketing mediums, including websites, in-store signage, and promotion materials. It is notable to the authors that several stores have recently added prominent displays in their store locations to reflect that “Compare At” pricing, for example, reflects estimated prices for comparable merchandise in retail store locations.