Plaintiffs recently filed several putative class actions in New York and California against prominent retailers including Michael Kors, Neiman Marcus, The Gap, Saks Fifth Avenue, Levi Strauss, Nordstrom and Ralph Lauren. They allege deceptive marketing practices at retail outlets and factory stores based on a theory that these stores should be restricted to selling items that were manufactured for non-outlet retail locations. Otherwise, these lawsuits claim, consumers are deceived because they assume that a single product line flows through branded retail stores before making its way to outlet and factory store shelves. Outlet and factory stores, which are increasingly popular with prominent designers and consumers alike and generated an estimated $25 billion in 2013, offer savvy consumers access to high-end brands and the latest fashion trends. These lawsuits ignore the significant benefits that these stores offer to the public, mischaracterize the present retail environment, and make flawed generalizations regarding retail companies with distinct business models. The reality of modern-day outlet shopping is wholly inconsistent with the plaintiffs’ stance that customers at outlet and factory stores expect only out-of-season, damaged or excess goods previously offered at full-price retail stores.

These cases likely were prompted by a January 2014 letter from four members of Congress to the Federal Trade Commission (FTC), in which the Congress members requested that the FTC initiate an investigation into potentially “deceptive and unfair marketing practices at outlet stores.” The letter provided that “some analysts estimate that upwards of 85% of the merchandise sold in outlet stores was manufactured exclusively for these stores,” and that “[o]utlet-specific merchandise is often of lower quality than goods sold at non-outlet retail locations.” The authors expressed a “concern” that “outlet store consumers are being misled into believing they are purchasing products originally intended for sale at the regular retail store.” They also suggested to the FTC that “[m]any outlets may . . . be engaged in deceptive reference pricing,” where they provide for an “advertise[d] retail price alongside the outlet store price – even on made-for-outlet merchandise that does not sell at regular retail locations.”

Background

The first action in this wave of cases was filed in July 2014 against Michael Kors in the Southern District of New York. The plaintiff alleges Michael Kors deceived its outlet store customers by “misrepresent[ing] the existence, nature and amount of price discounts on products manufactured exclusively for Kors Outlet by purporting to offer steep discounts off of fabricated, arbitrary, and false former prices,” in violation of California law. She claims that the MSRPs used by Michael Kors on its price tags are “a sham,” and “fictional creations designed to enable Michael Kors’ phantom markdowns” in its outlets. The plaintiff argues that “[t]he very term ‘outlet’ conveys to reasonable consumers that products are comprised of merchandise formerly offered for sale at full-price retail locations.” She asserts claims for violations of California’s Unfair Competition Law (UCL), False Advertising Law (FAL) and the Consumer Legal Remedies Act (CLRA) on behalf of a putative California class. Suits against other retailers invoking the same claims promptly followed.

On August 7, 2014, Neiman Marcus was named in a similar action filed in California Superior Court in Los Angeles. The plaintiff in that case claims that she “and other Outlet Store shoppers,” were . . . looking to obtain benefits from [Neiman Marcus’] discounted stores [“Last Call” stores], which included buying the alleged same exact clothing after season and/or excess closing that Defendant’s traditional stores once carried, but for a discounted price.” The plaintiff contends that Neiman Marcus “labels its Last Call clothing with a tag that shows a markedly lower price from the ‘Compared To’ price which corresponds to the price that appears to be used in traditional Neiman Marcus retail stores,” and that because “Last Call clothing is actually not intended for sale at the traditional Neiman Marcus Stores,” these price tags are “false and misleading.” She also purports to state similar claims on behalf of a putative California class. The same plaintiff filed suit against The Gap on August 18, 2014, in California Superior Court in Los Angeles. The plaintiff uses the terms “outlet stores” and “factory stores” interchangeably in her complaint and claims that these stores are intended to house “after season” clothing or “clothing that had little popularity and did not sell.” She assails the company’s purported practice of labeling its Factory Store merchandise with a “tag hidden on the inside of the garment that has three consecutive squares on it . . . [that] indicate that the clothing is specifically made for the Factory Stores at a lesser quality.”

The same plaintiffs’ counsel filed a putative class action against Saks Fifth Avenue in Los Angeles on August 19, asserting claims in connection with Saks’ sales at its “Saks Off Fifth” stores. Just three days later, an action was filed against Levi Strauss & Co. in the San Francisco Superior Court. On September 2 and 3, 2014, putative class action complaints were filed against Nordstrom in the Southern District of California and Ralph Lauren in the Southern District of New York, respectively, claiming that the companies engage in deceptive pricing and marketing practices at Nordstrom Rack and Polo Ralph Lauren outlet stores.

How Retailers Can Minimize Exposure

We anticipate that additional cases will be filed against retailers with an outlet store presence. We advise retailers to assess their marketing and pricing practices at outlet and factory stores in light of state laws perceived as friendly to class actions, including in California, Pennsylvania, Illinois and New Jersey. Companies should review their labels, price tags and the derivation of any listed MSRPs. Additionally, sales personnel should be carefully trained to provide accurate information to customers about the outlet experience and the origin and nature of merchandise offered.

These lawsuits will face some significant challenges in the courts. As an initial matter, the notion that outlet stores should be limited to selling only “year-old clothes or clothes with slight imperfections” ignores the nature of the modern outlet shopping experience. These cases are largely based on faulty assumptions and could serve to discourage retailers from expanding their brands and presence in response to substantial customer demand. Furthermore, the proposition that all outlet and factory store shoppers are somehow uniformly confused as a “class” in the manner alleged in these complaints is flawed and will present a significant obstacle at class certification.