Can Discount Prices Get Retailers Into Trouble?

California shoppers are filing a flurry of class-action lawsuits against big-name department stores over markdowns allegedly made on “false” original prices.

The lawsuits are putting retailers on high alert about how they discount their merchandise and for how long they sell their goods at full price before putting them on the bargain rack.

The most recent of these cases was filed in early January against Macy’s Inc. and its Bloomingdale’s subsidiary. In the lawsuit filed in U.S. District Court in San Francisco, Kristin Haley said she bought a Lennox ornament in December for $17.99 at a Macy’s in San Rafael, Calif. Haley maintained in court papers she bought the ornament at a 70 percent discount because she thought it was a great bargain after she saw the original price was listed at $60. However, the suit claims that the ornament was never sold for $60 at Macy’s or at any other retailers.

Haley also paid $17.25 for a dress at Macy’s that allegedly had a full retail price of $69. Haley said this was not the prevailing market price and was false advertising.

In the same class-action lawsuit, Sylvia Thompson said she bought a Beautyrest mattress at a Macy’s in Florida for half the original listed price of $5,089. According to the lawsuit, the product did not sell at that original price of $5,089 and because of that Thompson was damaged.

In the Macy’s class-action lawsuit, the plaintiffs are asking for $5 million in damages. Macy’s has yet to file any legal documents defending itself.

These class-action suits may seem frivolous on the surface, but they can get expensive. In November, JCPenney said it would make available $50 million in cash or store credit to settle a class-action lawsuit that accused the retailer of deceiving customers into thinking they were getting big discounts on certain items.

The JCPenney lawsuit was filed in 2012 on behalf of California shoppers who bought private-label and exclusive branded products between November 2010 and January 2012. In the class-action case of Cynthia Spann v. JCPenney, which was filed in Los Angeles, the plaintiffs claimed that JCPenney routinely marked down items from an inflated price that was never really in effect.

Lead plaintiff Spann claimed that on March 5, 2011, she bought three blouses from Penney’s private brand East Fifth because the items were advertised at $17.99, a 40 percent discount from their original $30 price. According to court documents, Spann later found out that the blouses had not been sold for the original price during the three months prior to her purchase.

JCPenney denied the allegations but said resolving the litigation removed any uncertainty and risk, which was in the best interest of the shareholders.

These kinds of lawsuits come at a time when many outlet stores have multiplied but no longer just sell damaged or slow-moving merchandise once sold at the nameplate’s full-priced stores.

“I think these lawsuits are happening now because when outlets and discount stores originally existed, they were selling seconds,” said attorney Staci Riordan, who heads the fashion law team at Nixon Peabody in Los Angeles. “When retailers realized how profitable the outlets were, they started making clothes especially for those stores but didn’t always change their practice of labeling prices.”

Sarah Bruno, an attorney with Arent Fox, has been monitoring these cases for some time. “I think these cases are more compelling than other class-action lawsuits because the deception alleged has a dollar amount attached to it,” she said. “You are more capable of establishing harm when you say you thought you were saving $20 but you weren’t.”

Bruno recommends that retailers develop a system to monitor price changes. “What they have to think through is who is providing them the basis for the pricing and do they have a system in place internally to develop the pricing they are advertising,” she said. “This can be an easy fix, but the process of learning about it can be painful.”

Riordan said retailers can keep reports that show their sell-through and at what prices they were sold. “They need to keep that for a period of time,” she said. “If it is true they sold it at full price, there shouldn’t be a problem. But they should have the records to support that position.”

California’s rules governing pricing are more stringent than federal rules. The Federal Trade Commission stipulates that products have to be sold at regular prices for a “significant amount of time” before going on sale.

In California, stores must sell the items at the “prevailing market price” for a three-month period before putting them on sale. The more specific California regulation is the reason so many of these class-action lawsuits are being filed in California.

In July, Kohl’s was slapped with a class-action lawsuit filed by two women in the San Diego area. Wendy Chowning said she was shopping at a Kohl’s in Oceanside, Calif., where she bought a Jennifer Lopez dress for $21. Its full price was listed at $70. In court documents, Chowning said she thought the prevailing full price of the dress during the three months prior to her purchase “was materially lower than $70” and she was duped by false advertising.

The other plaintiff in the case, Lourdes Casas, said she bought an Apt. 9 men’s shirt at a Kohl’s store in Chula Vista, Calif., for $18.40—the reduced price on the $46 shirt. Casas, in court papers, said she “relied upon and was motivated by Kohl’s advertisements, statements and omissions concerning the value of the shirt and would not have made said purchase absent the advertisements.”

Other lawsuits have been filed in the last few years in California against retailers T.J. Maxx, Burlington Coat Factory and Nordstrom Rack. A U.S. District Court recently rejected Nordstrom’s motion to dismiss the case filed in San Diego.