By: Brent E. Johnson
Deceptive pricing laws can be confusing. And California’ deceptive pricing law can be very confusing. Just ask the Los Angeles City Attorney after the recent decision by the California Court of Appeals in The People v. Superior Court of the County of Los Angeles, B292416 (Opinion filed 4/16/19). The underlying lawsuit is an action for civil penalties and injunctive relief brought by the LA City Attorney (with some help from private law firms) against J.C. Penney, Kohl’s, Macy’s, and Sears for violating California’s Unfair Competition law, Cal. Bus. & Professions Code § 17200, et seq., and its False Advertising statute, Cal. Bus. & Professions Code § 17500, et seq. LA’s claim is grounded in Cal. Bus. & Professions Code § 17501, which is commonly referred to as California’s deceptive pricing statute. The gravamen of LA’s complaint is that the retailers “engaged in misleading, deceptive, or false advertising by offering goods for sale online at prices discounted from so-called ‘reference prices’ that purported to reflect [the retailers’] own former prices, but which did not do so.” Rather, according to the LA City Attorney, each retailer “deliberately and artificially sets the false reference price higher than its actual former sales price so that customers are deceived into believing that they are getting a bargain when purchasing products.”
As alleged, LA’s claim is garden-variety deceptive pricing. For instance, the Federal Trade Commission’s regulations on deceptive pricing include this one: “One of the most commonly used forms of bargain advertising is to offer a reduction from the advertiser’s own former price for an article. . . . Where the former price is genuine, the bargain being advertised is a true one. If, on the other hand, the former price being advertised is not bona fide but fictitious—for example, where an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction—the ‘bargain’ being advertised is a false one . . . .” 16 C.F.R. §233.1(a). This regulation overlays perfectly with LA’s claim.
But California’s pricing statute is different from the FTC regulation. Section 17501 states, “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 or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.” If you’re not paying attention, California’s law sounds a lot like the FTC’s regulation, right? Wrong! Focus on the words “prevailing market price” – that’s markedly different from FTC’s “advertiser’s own former price,” as the California Court of Appeals found.
In response to an argument by the retailers that California’s pricing statute violates their First Amendment right to free speech by prohibiting truthful price comparisons, the LA City Attorney asserted that “properly construed, [the statute] applies only to false, misleading, or deceptive advertising of former prices.” LA pointed out that Section 17501 follows Section 17500 – the general advertising section – that deals with “False Advertising in General.” If the general statute is limited to “false advertising,” then certainly the specific pricing statute must likewise be limited. Plus, really, why would the California legislature want to outlaw truthful speech?
The California Court of Appeals disagreed with LA, finding that Section 17501 “by its plain terms, . . . . forbids certain common forms of truthful price advertising – and thus restricts significant amounts of protected commercial speech.” How? Because Section 17501 forbids any price comparison whatsoever except a comparison to the “prevailing market price” within the three months preceding the advertisement or a date specified in the advertisement, on the one hand, and the retailer’s advertised price, on the other hand. Even if the price comparison in the advertisement is 100% accurate, the advertisement violations Section 17501 and exposes the retailer to lawsuits and fines if it isn’t a comparison to the “prevailing market price.” The California Court of Appeals gave a classic example of prohibited truthful speech in its opinion, “[I]f a retailer advertised widely sold brands of Halloween costumes, the prohibition would preclude the retailer from advertising, ‘All Halloween costumes 50 percent off our former prices,’ on the day after Halloween, unless those prices coincided with one of the two requisite market prices.”
FTC’s pricing regulations, of course, have a specific provision for deceptive market price advertisements. 16 C.F.R. §233.2(a) requires that “[w]henever an advertiser represents that he is selling below the prices being charged in his area for a particular article, he should be reasonably certain that the higher price he advertises does not appreciably exceed the price at which substantial sales of the article are being made in the area—that is, a sufficient number of sales so that a consumer would consider a reduction from the price to represent a genuine bargain or saving.” The difference is that FTC allows for truthful market price comparisons and truthful comparisons of the retailer’s current prices with its past prices – but California’s law doesn’t allow for the latter at all.
Despite finding that Section 17501 prohibits truthful speech, the California Court of Appeals overruled the trial court’s granting of the retailers’ demurrer (motion to dismiss) because neither the complaint nor the “meager [legislative] record” showed: (1) What the California legislature’s justification was for prohibiting truthful commercial speech during the Great Depression when it enacted the predecessor to the pricing statute; and (2) Whether the prohibition was effective in accomplishing the legislature’s goals. But good news for the retailers — the Court offered that “[i]n view of the broad sweep of the prohibition contained in the statute, we question whether an adequate justification exists . . . .” We’ll have to wait and see whether LA, which bears the burden on these issues going forward, is able to show that Section 17501 is narrowly tailored to directly advance a substantial governmental interest and, in fact, advances that interest under the U.S. Supreme Court’s decision on commercial free speech restrictions in Central Hudson Gas & Elec. v. Public Serv. Comm’n, 447 U.S. 557 (1980).
It’s important to note that the California Court of Appeals rejected the retailers’ second argument that Section 17501 is “void for vagueness” because it doesn’t give them sufficient notice about what they can and can’t do (mostly, what they can’t do). The retailers’ major complaint was that the terms “market” and “prevalent market price” are too uncertain for them to know if they are engaging in false comparisons in their advertisements — i.e., “What is the relevant market from which the prevalent price is determined?” The Court utilized what is known as the “as-applied test,” which means that whether a law is vague is not determined in a vacuum – it’s determined based on the defendant’s actual conduct. The Court divided the retailers’ products into two categories: (1) exclusive goods (house brands); and (2) non-exclusive goods (name brands). For the first category, the Court held that the relevant market is the retailer’s own prices because nobody else sells the exact same goods, so the “prevalent market price,” as applied, is not vague and, in fact, completely consistent with LA’s complaint allegations. For the second category, the Court held that, due to the efficiencies of the free market, it is likely that the retailer’s own prices are a reasonable proxy for the prevailing market prices for name-brand goods. Therefore, even though LA didn’t even plead that the retailers advertised their name-brand goods with a false comparison to their competitors’ products, the retailers may have – unintentionally — by referring to their own past prices. We’ll continue to report on the progress of this case. In the interim, remember that in California — which includes the internet — Business & Professions Code Section 17501 prohibits price comparisons if the prices compared are not between the retailer’s offered price and the “prevailing market price” during the relevant time period. Unless and until a California court strikes down Section 17501 for violating the free speech rights of retailers, even a truthful price comparison is a violation if it doesn’t meet the strictures of California’s pricing statute.