More retailers being sued for false reference prices

Last month, Hobby Lobby Stores, Inc. joined the list of retailers accused of using false reference prices to sell their products.

On May 1, Christina Chase filed a class action complaint in the Southern District of California against Hobby Lobby, claiming that the company's "Marked" prices are "total fiction." Chase v. Hobby Lobby Stores, Inc., 17-CV-0881 GPC BLM. She alleges the company only uses the fictitious reference prices to convince consumers they are getting a deal, as the items are regularly sold at a certain percentage off the Marked price. Chase claims "this practice is a fraudulent scheme intended to deceive consumers into: 1) making purchases they otherwise would not have made; and/or 2) paying substantially more for merchandise consumers believed was heavily discounted and thus, worth more than its actual value."

The complaint alleges violations of California's Unfair Competition Law (UCL), False Advertising Law (FAL) and Consumer Legal Remedies Act (CLRA).

California's consumer protection laws appear advantageous for plaintiffs alleging false reference pricing. As the 9th U.S. Circuit Court of Appeals held in Hinojos v. Kohl's Corp., 718 F.3d 1098 (9th Cir. 2013), a plaintiff like Chase can survive a motion to dismiss by pleading that "(1) the defendant made a false representation about a product, (2) the consumer purchased the product in reliance on the misrepresentation, and (3) he would not have purchased the product otherwise."

Courts recently have applied this standard to deny motions to dismiss in false reference pricing cases like Stathakos v. Columbia Sportswear Co., 15-cv-04543-YGR (N.D. Cal. May 2, 2016), Azimpour v. Sears, Roebuck & Co., 15-CV-2798 JLS (WVG) (S.D. Cal. Apr. 26, 2017), and Shimono v. Harbor Freight Tools USA, Inc., EDCV16-1052-CAS (MRWX) (C.D. Cal. Oct. 24, 2016).

Outside California, the standard for pleading an actionable claim is higher, requiring plaintiffs to have paid a "price premium" due to the alleged misrepresentations. In Belcastro v. Burberry Ltd., the court explained: "New York law does not permit a plaintiff to allege 'actual damages' based solely on his claim that he would not have chosen to purchase the good but for the defendant's misrepresentation or that he believed he was getting a better bargain than turned out to be the case. 'Actual damages' requires a connection between the misrepresentation and the price that is charged by the defendant or the quality of the good." 16-CV-1080 (VEC) (S.D.N.Y. Feb. 23, 2017).

The Belcastro court held that the same was true under Florida, Illinois and Massachusetts law. Ohio law is also so aligned. See Ice v. Hobby Lobby Stores, Inc., 1:14CV744 (N.D. Ohio Sept. 29, 2015) ("[W]ithout some allegation concerning the true value of the good purchased, plaintiff failed to allege actual damages."). In these jurisdictions, a plaintiff must plead that the item purchased was objectively of lesser value or quality than the price paid. This more stringent standard may be the reason false reference pricing cases are an ever-growing trend in California.

But surviving a motion to dismiss does not necessarily lead to an award of damages. In Chowning v. Kohl's Department Stores Inc., Chowning sued Kohl's for false reference pricing. CV 15-08673 RGK (C.D. Cal. Mar. 15, 2016). Kohl's moved for summary judgment that Chowning had not met her burden of articulating an appropriate measure of restitution. The court agreed, holding that all four of Chowning's proposed restitution models - Full Refund, Disgorgement of Profits, Actual Discount and Price/Value Differential - failed. In so holding, the court observed: "Defendant appears to have stumbled across a gap in statutory coverage with its price comparison-advertising scheme. That is, a retailer can continue to advertise with false 'original prices' and remain immune from paying restitution as long as the retail value of the items is higher than the price charged. ... The UCL and FAL authorize only restitution and injunctive relief. The fact that a defendant may have found a way to escape liability from monetary damages under the statutes as currently written is a matter best left to the legislature."

The court subsequently denied class certification, leaving Chowning with her individual claim for nonrestitutionary money damages under the CLRA. Chowning voluntarily dismissed the claim and has appealed the court's grant of summary judgment to the Ninth Circuit.

With this potential flaw in California's statutory scheme exposed, it is hard to predict what will come next for plaintiffs in California false reference pricing cases. Other trial courts may not have an opportunity to weigh in, as false reference pricing cases often settle before summary judgment. See Horosny v. Burlington Coat Factory of California, LLC, 2:15-cv-05005-SJO-MRW (C.D. Cal. Jan. 26, 2017) (settled for $29.85 million); Russell v. Kohl's Department Stores, Inc., 5:15-cv-01143-RGK-SP (C.D. Cal. Oct. 13, 2016) (settled for $6.15 million); Spann v. J.C. Penney Corp., 8:12-cv-00215-FMO-KES (C.D. Cal. Sept. 30, 2016) (settled for $50 million); Gattinella v. Michael Kors USA Inc., 1:14-cv-05731-WHP (S.D.N.Y. Feb. 11, 2016) (settled for $4.875 million); see also Rael v. The Children's Place, Inc., 3:16-cv-00370-GPC-JMA (S.D. Cal. May 12, 2017) (settlement in chief reached May 12, 2017); Preira v. Zulily, LLC, 7:16-cv-01342-NSR (S.D.N.Y. Sept. 27, 2016) (settled for injunctive relief, with the remainder of the settlement terms being confidential).

Until the issues highlighted by the Chowning court are resolved, class action plaintiffs pursuing claims of false reference pricing may find they, once again, will not get the bargain they were hoping for.