This article has been written by Sai Manoj Reddy. L, pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.

Introduction

We are all familiar with 50%, 60%, and sometimes 90% discounts while shopping online or offline. We also see ‘buy 1 get 2 free offers’ and other similar methods like striking off a higher price with a red line and showing a discounted price. All these are tactics used by the sellers to attract more consumers and make more sales. In India, we do not pay much attention to all these tactics and still buy the products and there is no legal framework for the regulation of these tactics in India. There is a concept called ‘deceptive pricing’ or ‘bargain advertising’ in the US which is illegal under the US Federal Rules. There are many types of deceptive pricing explained in the Federal Rules and also what constitutes deceptive pricing and what does not. The explanation is very elaborate as to where the Federal Rules draw a line and states certain criteria to be followed by the sellers when they are using some kind of marketing tactics.

In this article, we will see what deceptive pricing is with illustrations and some of the famous class action lawsuits on luxury clothing companies and some other companies where the courts have ordered millions of dollars as a settlement from their companies to all the affected consumers.

What is deceptive pricing?

Deceptive pricing is a method in which companies/traders/sellers use deceptive means for selling goods and services by naming the prices in a different manner such as “original price”, “former price”, or “regular price”. The sellers show such pricing quotes for many shopping seasons to mislead prospective customers and make them think that they’re paying less money or getting great discounts for products they purchase. The Federal Trade Commission of the USA strictly prohibits companies from using such deceptive pricing practices to lure consumers and create a bad environment in advertising and selling goods and services.

Legal provisions on deceptive pricing

Part 233 of the Federal Regulations of USA deals with “Guides Against Deceptive Pricing” where it is explained elaborately what amounts to deceptive pricing and what does not. Under this section there are four types of deceptive pricing explained which are as follows:

1. §233.1 Former price comparisons

This is one of the most commonly used forms of bargain advertising. In this method, the advertisers/sellers offer a reduction of price from the advertiser’s own former price for an article. The above section explains what falls under former price comparisons and what does not in the following manner:

“If the former price is the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time, it provides a legitimate basis for the advertising of a price comparison. 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; the purchaser is not receiving the unusual value he expects. In such a case, the “reduced” price is, in reality, probably just the seller’s regular price.”

2. §233.2 Retail price comparisons; comparable value comparisons

Another commonly used form of deceptive pricing is to offer goods and services at prices that are lower than those being charged by other competitors for the same merchandise in the advertiser’s/seller’s trade area (the area in which he/she does business). This may be done either on a temporary basis or a permanent basis, but in either of the cases, the higher price that has been advertised must be based upon a fact, and should not be fictitious or misleading.

There are certain criteria under this section that when a seller is advertising that he is selling the goods at a decreased price as compared to the other competitors then the price quoted should be a real price based on the survey of different stores selling at that higher price. Merely because some stores in suburbs are selling an article at a higher price does not make it the price for the entire trade area. If the seller can prove that the higher price that he is quoting is backed by actual surveys then it does not amount to deceptive pricing, if not then it falls under deceptive pricing.

3. §233.3 Advertising retail prices which have been established or suggested by manufacturers (or other non-retail distributors)

There is a concept called the manufacturer’s suggested price or list price in the US which is not the original price that has been set by the manufacturer. On many occasions, the consumers were made to believe by the sellers that this price is the original price at which the article is generally sold. The sellers then reduce the price from that manufacturer’s suggested price or list price to make consumers believe that they are getting great discounts but in reality, it is not the case. Normally the list or suggested retail prices do not in fact correspond to prices at which a substantial number of articles are sold, thus the advertisement of a reduction on such prices is nothing but misleading the consumers.

4. §233.4 Bargain offers based upon the purchase of other merchandise

Normally we see a lot of buy 1 get 2 free or half-price sales etc. which sounds really great to a consumer but in reality the sellers are not actually giving anything for free. This is a marketing gimmick to attract more consumers and make more sales. The above section explains this method of deceptive pricing as stated below:

“The forms which such offers may take are numerous and varied, yet all have essentially the same purpose and effect. Representatives of the language frequently employed in such offers are “Free,” “Buy One—Get One Free,” “2-For-1 Sale,” “Half Price Sale,” “1¢ Sale,” “50% Off,” etc. Literally, of course, the seller is not offering anything “free” (i.e., an unconditional gift), or 1⁄2 free, or for only 1¢, when he makes such an offer, since the purchaser is required to purchase an article in order to receive the “free” or “1¢” item. It is important, therefore, that where such a form of offer is used, care be taken not to mislead the consumer.

Accordingly, whenever a “free,” “2-for-1,” “half-price sale,” “1¢ sale,” “50% off” or similar type of offer is made, all the terms and conditions of the offer should be made clear at the outset.”

5. §233.5 Miscellaneous price comparisons

The practices mentioned in the above sections are the most frequently employed practices of deceptive pricing. However, there are many other variations and types of deceptive pricing and some of them are:

1.   The sellers should not sell or advertise a retail price as a “wholesale” price.
2.   The sellers should not advertise that they are selling goods at “factory prices” when they are actually not selling at the same price a person can get the article directly from the manufacturer.
3.   The sellers should not offer seconds or imperfect articles at a reduced or discounted price without disclosing that the higher prices of similar articles refer to them being perfect without any defects.
4.   Sellers should not put up a discounted sale if they are not going to increase the prices at a later date.

Along with the above-mentioned types of deceptive pricing, there are some more types of deceptive pricing which are not mentioned in the above statue-like: 

6. Drip pricing

This practice is generally used by the travel and hospitality sectors where the sellers only show a part of the price to the consumers and made them think that is the final price, but in reality, the price shown is excluding all the taxes and other charges like booking fees, resort fees, etc., which will only be visible to the consumer at the final stage of payment. That is why this method is called drip pricing as the price shown on the advertising is dripped.

7. Strike through pricing

This method is also called cross-out pricing which is mostly seen in supermarkets and cloth stores where the prices are presented in such a way that the higher price will be crossed off and a lower price will be shown to the consumers to make them believe that there is a good discount on the articles. In reality, the crossed-off price is actually the suggested price of the manufacturer and not the retail price which is nothing but misleading the consumers. 

How to tackle deceptive pricing?

A lot of times consumers overpay for certain products thinking that they are getting great discounts, but in reality, they are getting cheated by the deceptive pricing. When you notice that a particular seller is using a deceptive pricing tactic you have to start collecting the evidence to prove that there is deceptive pricing. Some of the evidence can be the advertisements, brochures, photos of prices in the stores, etc.

After that, you can ask for a refund from the seller by showing all the evidence to him and explaining the situation and if he refuses to refund, which is in most cases you can approach the Federal Trade Commission, USA to make a complaint or alternatively gather the similarly affected persons and file a class-action lawsuit against the seller or company.

Famous cases on deceptive pricing

Micheal Kors

Micheal Kors is a luxury clothing brand based in the USA. It was accused of creating an “illusion” of deep discounts by using tags containing made-up “manufacturer’s suggested retail prices,” or MSRP, and offers to sell the products at lower prices, termed “our price.”

A class-action lawsuit was filed against this deceptive pricing tactic in 2014 and the company has agreed to a settlement of $4.88 Million to pay all the affected consumers who fell for this deceptive pricing.

Ross stores

Ross Stores is one of the biggest discount clothing stores in the USA and it is headquartered in California. The main allegation against Ross Stores is “labeling the products that the company sells in its California stores with false and/or misleading comparative prices which purport to be charged by other merchants for the same products.”

A class-action lawsuit has been filed in 2018 and the company has agreed to settle for $4.88 million to pay all the affected consumers.

Neimen Marcus

Neiman Marcus is a luxury departmental store company headquartered in Dallas, Texas. It is alleged that the company has duped a lot of consumers by using price tags listing a price “Compared To” a fake higher price in an attempt to make consumers think that they were getting a bargain at the company’s Last Call outlet stores.

The company has agreed to settle the class-action lawsuit filed against it in 2018. The company has agreed to pay $2.9 million to all the affected consumers.

 Kohl’s Departmental Stores

This is one of the largest departmental stores in the USA. It is accused of deceptive pricing where the products have featured two prices: one is a selling price and the other is a significantly higher price represented to be the product’s “regular” or “original” price. According to the complaint, Kohl’s led consumers to believe that they were receiving a substantial discount by simultaneously displaying the two prices.

The class-action lawsuit was filed in 2016 and the company has agreed to settle the suit by agreeing to pay $6.15 million to all the affected consumers.

Conclusion

Deceptive pricing is an unfair marketing tactic that has been used by many companies and retail sellers where the consumers are made to believe that they are getting great discounts. As we have seen above, there are many class-action lawsuits filed against these companies, and millions of dollars are being paid to the affected consumers. The courts in the USA are trying their level best to curtail such deceptive pricing practices. We see a lot of this in India as well but there is no regulation of such practices in India as of now. One of the main reasons is that our legal system is very slow and proving such big corporations are doing something wrong is almost impossible in our legal system. All we can do is hope that the Indian Government notices such practices and passes special legislation regulating them and constitutes a tribunal for speedy disposal of such cases.

 References

• https://www.ecfr.gov/cgi-bin/text-idx?SID=3f8a1d9cf7c29ab84b95c975dcd05ff2&mc=true&node=pt16.1.233&rgn=div5
• https://sendpulse.com/support/glossary/deceptive-pricing
• https://www.consumerwatchdog.org/news-story/deceptive-pricing-unlawful-trickery-or-skillful-selling
• https://www.reuters.com/article/us-michaelkors-settlement-idUSKBN0OS2AU20150612
• https://www.retaildive.com/news/ross-to-settle-49m-lawsuit-over-deceptive-price-tags/538768/
• https://www.jdsupra.com/legalnews/deceptive-pricing-suit-costs-neiman-73353/
• https://www.manatt.com/documents/newsletters/2016-6#Article5

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