The Legal Implications of Retailer Price Violations and Fake Discounts

The landscape of promotional pricing has become complex, with retailers employing various techniques to create the illusion of savings. However, some retailers engage in deceptive practices, such as retailer price violations and fake discounts, which mislead consumers and have serious legal implications. These unethical tactics have drawn the attention of regulatory bodies like the Federal Trade Commission and sparked a surge in class action lawsuits, highlighting the need for stricter enforcement of consumer protection laws.

Retailers employ various deceptive pricing strategies to lure customers and boost sales. These practices not only mislead consumers but also have serious legal implications. Let’s explore three common types of retailer price violations:

False reference pricing involves intentionally manipulating original prices to create an illusion of savings. Retailers set inflated reference prices, making subsequent discounts appear more substantial than they genuinely are. This tactic manifests in various forms, such as fictitious markdowns, inflated “original” prices, and dynamic pricing models.

A notable example involves JC Penney, which faced a class action lawsuit in the Southern District of California over its alleged use of false reference pricing. The plaintiff, Maria Carranza, claimed that JCPenney engaged in a scheme to fabricate false ‘original’ prices before offering products at a supposed ‘discount’. The complaint alleged that the products were never sold at the listed reference price as advertised.

Perpetual sale pricing occurs when retailers continuously offer products at discounted prices, creating a false sense of urgency and value. This practice violates regulations that limit the duration of sales.

California law, for instance, stipulates that a seller can only offer a ‘sale’ from an original price for three months. After this period, the seller must either return the product to its full original price or sell it at the discounted price while disclosing the date when the product was last offered at its former price.

Bait-and-switch tactics involve advertising a product at an attractive price to draw customers, with no intention of selling it at that price. This practice is not only unethical but also illegal in many cases. A bait-and-switch occurs when a seller creates an appealing but not genuine offer to sell a product or service they do not intend to sell. The initial advertised offer is “the bait,” and the subsequent redirection to a different, often more expensive product is “the switch.”

These tactics violate the Federal Trade Commission Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” Bait-and-switch advertising can also be grounds for legal action, including common-law fraud, unjust enrichment, and sometimes breach of contract.

The Federal Trade Commission Act (FTC Act) is crucial in regulating deceptive pricing practices. Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce.” This prohibition applies to all entities engaged in commerce, including banks. An act or practice is considered unfair if it causes or is likely to cause substantial injury to consumers, cannot be reasonably avoided by consumers, and is not outweighed by countervailing consumer benefits or competition.

Deceptive practices are defined as representations, omissions, or practices that mislead or are likely to mislead consumers, where the consumer’s interpretation is considered reasonable under the circumstances, and the misleading representation, omission, or practice is material. Violations of Section 5 can result in significant legal, reputational, and compliance risks for businesses.

In addition to federal laws, individual states have implemented regulations to combat deceptive pricing practices. For instance, California has recently passed Senate Bill (SB) 478, which will take effect on July 1, 2024. This law prohibits businesses from advertising a price that is less than the actual price a consumer will ultimately have to pay for a good or service. The law aims to increase transparency in the purchasing process by eliminating mandatory charges. California’s efforts align with the Biden administration’s focus on addressing “junk fees,” which several federal agencies have addressed through advisory opinions, guidance documents, and enforcement actions. The law applies to virtually all California businesses and any activity intended to result in the sale of goods or services to consumers. As of now, no official federal legislation has been enacted or passed into law.

Both federal and state laws provide robust enforcement mechanisms to ensure compliance with consumer protection regulations. The Federal Trade Commission Act empowers the FTC to investigate and penalize companies engaged in unfair or deceptive practices. Violations can result in significant fines, injunctions, and other penalties.

At the state level, California’s SB 478 allows for individual and class-wide claims under the California Consumer Legal Remedies Act (CLRA). Successful plaintiffs are entitled to actual damages or USD 1,000 per violation (whichever is greater), injunctive relief, restitution, punitive damages, and attorney’s fees. The law incentivizes the plaintiffs’ bar to file class action lawsuits alleging violations.

To comply with these regulations, businesses should avoid unfair or deceptive acts or practices and promptly correct any identified issues. This includes ensuring that advertising and promotional materials present both the benefits and potential risks of products and services and that disclosures regarding initial terms, conditions, repricing, and changes are clear and accurate.

Retailers face significant financial repercussions for violating pricing laws. In California, businesses can be hit with substantial fines for inaccurate pricing. Misdemeanor charges can result in penalties of up to USD 1,000 and potential jail time of up to one year. For less severe infractions, penalties can reach USD 100. Some states impose even heftier fines, with North Carolina levying up to USD 5,000 per violation.

Class action lawsuits pose another financial threat. JC Penney settled a USD 50 million lawsuit for allegedly using misleading reference prices. Similarly, Ascena Retail Group paid USD 50.8 million to settle a lawsuit claiming deceptive discount practices at Justice stores. These cases highlight retailers’ substantial monetary risks when using questionable pricing tactics.

Beyond financial penalties, retailers also risk severe reputational harm. Pricing errors can lead to negative media coverage, undermining consumer trust long before fines are imposed. This damage to a company’s reputation can persist well after the financial consequences have been addressed.

Word-of-mouth and online reviews are crucial in shaping a brand’s image. When customers unknowingly purchase counterfeit products or experience issues with pricing, they often blame the authentic company. Negative reviews left online can cement a reputation crisis, furthering the perception that the authentic brand produces low-quality goods.

Legal consequences often compel retailers to implement significant changes in their pricing strategies. Companies must ensure their pricing practices meet specific criteria to comply with federal and state laws and avoid class action litigation. This includes offering items at regular prices for substantial periods before discounting and avoiding artificially inflated prices to create the illusion of future reductions. Retailers may also be required to implement remedial measures to prevent future violations. These forced changes can be costly and time-consuming, requiring extensive staff training and updates to pricing systems across all channels.

For retailers, the consequences of violating pricing laws go beyond monetary penalties. The potential for reputational damage can have long-lasting effects on a brand’s image and customer trust. To avoid these pitfalls, businesses must carefully consider their pricing strategies and ensure compliance with relevant laws. This means being transparent about pricing, avoiding artificial inflation of reference prices, and promptly addressing any identified issues. By prioritizing ethical pricing practices, retailers can build customer loyalty and steer clear of legal troubles, ultimately fostering a fairer and more trustworthy retail environment.

If someone is convicted under Penal Code 350 for selling, manufacturing, or possessing counterfeit goods for sale as a felony, they could face 16 months, two, or three years in county jail. Additionally, individuals may be fined up to USD 500,000.00.

Section 5 of the Federal Trade Commission Act (FTC Act), codified at 15 USC 45, explicitly prohibits any “unfair or deceptive acts or practices in or affecting commerce,” which includes deceptive pricing strategies.