Advertising Law Alert - COVID-19 Pricing, Payment, Refund, and Return Issues
By Kyle-Beth Hilfer and Ariana J. Sarfarazi
Promotional pricing is always tricky, but pricing and related policies during a pandemic can be particularly fraught with legal risk.
Even amidst the COVID-19 crisis, there are spring birthdays, Mother’s Day and Father’s Day celebrations, and graduation presents (even if no graduation ceremonies). Retailers are offering payment plans and promotional price structures to entice customers. They may tout pricing that is “up to” a certain percent off the original price. At the same time, refund and returns policies have become more generous.
Regulators have pursued numerous bad actors for the obvious scourge of price gouging (a subject not covered by this article). It is only a matter of time before regulators also turn their attention to deceptive pricing, payment, refund, and return policies. Marketers should take care not to breach the maze of federal and state pricing regulations and statutes designed to protect consumers.
How to Offer Payment Plans
In mid-April, the Federal Trade Commission (“FTC”) announced a $175 million proposed settlement with Progressive Leasing, a company offering virtual rent-to-own credit deals advertised in third party stores. Consumers believed they would pay only the advertised, retail, cash, or “same as cash,” “no interest” price to purchase the merchandise. In fact, under the terms of payment plans, consumers often had to pay more than twice the initial retail price.
The FTC stressed that the case’s lessons apply beyond the rent-to-own industry. In general, disclosures must be clear, prominent, and conspicuous. Brands should consider what the consumer will understand from the disclosures. For advice on use of hyperlinks, scroll bars, and other fine-print methods of disclosure, the agency cited the DotCom Disclosures Guides. These guidelines establish best practices for how to make disclosures in advertising offers online.
How to Set Comparative Sale Prices
The FTC has also issued Guides Against Deceptive Pricing (“DP Guides”). The DP Guides prohibit pricing that is too good to be true or not real in order to incentivize consumers to purchase. For example, it is deceptive to offer an item for a short period of time at an unreasonably high price, only to then lower the price and call it a “discount”. Instead, the DP Guides require that a “regular” price for comparative purposes be both a reasonable price and one that is in place for a substantial period of time. Only then can the seller cite to a “former” or “regular” price to advertise a sale.
On the state level, some states, like New York, regulate deceptive pricing through their general false advertising statutes. New York City’s administrative code goes further to adopt language similar to the DP Guides. The City also has many other rules about pricing. These include regulations about the font size of prices in ads, multi-product price advertising, and the use of specific words to describe prices.
In addition, more than half the states have stand-alone deceptive pricing statutes. Some state statutes (e.g., in Virginia and Illinois) closely track the language of the DP Guides. States including Connecticut, Massachusetts, and Wisconsin (and New Jersey in certain instances) follow the “28/90 rule”, requiring that sellers offer the item at the regular price for at least 28 days out of the immediately preceding 90 days on a rolling basis. In other states, there are more specific requirements. In California, for example, the former price of an item must have been the prevailing price of the item in the immediately preceding three months before it was discounted.
How to Use “Up To” Pricing Structures
Marketers will frequently rely on “up to” pricing structures, for example, “up to 30 percent off the lowest marked price”. Nonetheless, “up to” terminology can be confusing and deceptive to the consumer if it does not meet certain criteria. Regulators have consistently demanded clear, prominent, and proximate disclosures that explain the offer. In addition, in some instances, they have provided guidance on the number of consumers who might benefit from an “up to” offer.
- The FTC standard is that all or almost all consumers are likely to achieve the maximum “up to” results.
- The National Advertising Division of the Better Business Bureau recommends that an “appreciable number” of consumers should be able to claim the benefit of the percentage discount.
- Almost 25% of states require at least ten percent of the items be at the maximum savings.
- New York City’s administrative code requires that at least 15% of the items be at the maximum reduction. It also has many other detailed requirements about “up to” pricing ads.
Even when a state, like New York, has no specific statute on “up to” pricing, it might pursue a deceptive advertising claim if the advertisement is unsubstantiated under broader false advertising statutes. In addition, if the disclosures are inadequate to explain the offer, the brand may find itself in legal trouble under the same regulatory standards.
Relaxed Refund and Return Policies
In addition to altering their pricing structures, many brands are loosening their refund and returns policies. They want to be more generous with consumers who they know are financially stressed right now. Brands should take care, however, to be consistent in disseminating information about these changes. In early March, StubHub offered consumers two options for cancelled events: a full refund or a coupon for 120% of the original ticket price. When more consumers opted for the coupon than anticipated, StubHub changed the terms of its offer. Consumers launched a class action lawsuit against StubHub recently arguing that the promoter had retroactively changed its policies, breaching its contract with customers, and violating California advertising laws. The action seeks refunds for class members in excess of $5 million.
Promotional Price Litigation
Promotional prices have formed the basis for consumer class actions and state regulatory actions again and again. These lawsuits generally allege that the seller’s price comparisons violate state law and FTC guidelines because the merchandise (1) was not offered at the time required (such as 28 days) or for a substantial period of time or (2) was never actually offered at the higher or former price as advertised. A long list of major brands, have faced liability for deceptive advertising based on their promotional pricing practices. Outlet or bargain-based stores, which rely heavily on promotional price advertising to attract sales, are particularly vulnerable to challenge.
Some state courts have questioned whether the plaintiffs could show injury even with false pricing comparisons. California state courts, however, have more consistently favored plaintiffs in these promotional pricing challenges. Plaintiffs prevailed against under California state law merely because the advertised discounts conveyed false information about the goods and the consumers completed the purchases. Overstock.com paid a $6.828 million civil penalty for using untrue and misleading price comparisons and not comparing identical items in creating price structures.
Even if these promotional pricing cases do not go to trial, the settlements are often expensive:
- C. Penney suffered a $50 million settlement when faced with allegations that its former “original” prices were higher than had been utilized in the preceding three months (as required by California’s statute).
- Ascena Retail Group, Inc. paid a $50.8 million settlement in Pennsylvania to resolve claims that items marked on “sale” at Justice stores were in fact using the regular retail price
- Ascena also agreed to a $6.1 million settlement in California to resolve deceptive discount claims at Ann Taylor and LOFT outlet stores.
- Luxury brand Michael Kors reached a $4 million settlement to resolve claims that it deceptively marketed goods as substantially discounted by using fake Manufacturer’s Suggested Retail Prices.
Regulators have warned against exploitation of consumers with deceptive marketing during this pandemic. Particularly in a national campaign, it is crucial to understand the myriad state laws. Without the proper substantiation, your payment plans or promotional prices could leave you on the hook for “deceptive” advertising practices under federal or state law. Similarly, while returns and refunds during Covid can add up to a bundle of money, you should check your terms of service to ensure you do not violate a pre-existing contract with consumers.
If you have questions about how to set your promotional pricing or alter your policies, contact Kyle-Beth Hilfer or Ariana J. Sarfarazi or your CLL attorney.
Email | 212.790.9200
Kyle-Beth Hilfer has over thirty years’ experience providing legal counsel to advertising, marketing, promotions, intellectual property, and new media clients.
Ariana J. Sarfarazi
Email | 212.790.9293
Ariana handles a wide range of legal matters, including general corporate and commercial law, Customs and international trade law, and litigation and early dispute resolution.