October 8, 2014

Fashion Faux Pas? Lawsuits Challenge Pricing and Practices at Outlet Stores

Seller Beware: Consumer Protection Insights for Industry

Even in the age of online shopping, outlet malls and brick-and-mortar factory stores have remained hot shopping destinations and successful options for luxury and mainstream designers alike. But several major retailers—including Nordstrom, Michael Kors, and The Gap—have recently been hit with class action lawsuits alleging that they employ deceptive and misleading practices at their retail outlet and factory store locations. We've counted eleven such class action lawsuits have been filed in state and federal courts in California and New York since July of this year.

The lawsuits are focused on a specific theory of alleged wrongdoing: that at the outlet store, the retailer will offer items not previously offered for sale at the non-outlet location and that price tags of these items "purport[] to offer discounts off of fabricated former prices." For example, in a recent complaint filed against Nordstrom in the Southern District of California, plaintiff contends that the original price advertised on the tags "were a sham" because "Nordstrom sells certain goods manufactured by third-party designers for exclusive sale at its Nordstrom Rack stores and other outlet stores, which means that such items were never sold—or even intended to be sold—at the 'Compare At' prices advertised on the price tags." These products, plaintiff alleges, "are never offered for sale at the Nordstrom main line retail stores and are typically of lesser quality."

Like Nordstrom, luxury department store retailers Saks Fifth Avenue and Neiman Marcus are facing lawsuits, now pending in federal court in Los Angeles, that make similar allegations regarding their outlet stores, Off 5th and Last Call. Name-brand retailers such as The Gap, Levi Strauss, Ralph Lauren, and Michael Kors are facing such lawsuits as well.

Notably, the representative plaintiff in the lawsuit against The Gap, Linda Rubenstein—the same plaintiff suing Saks Fifth Avenue—acknowledges in her complaint that the "made for outlet" items are labeled differently than items from the non-outlet stores, with "three consecutive squares" on the inside tag of the garment. However, the plaintiff alleges that "[u]nless the ordinary shopper is diligent in their retail store research what the three squares mean, Defendant's deceptive practices will not be discovered."

Of course, many shoppers no longer expect outlet stores to be stocked only with out-of-season or slightly defective merchandise, and as a result, obtaining class certification on these claims may prove to be difficult. Under California law, plaintiffs will also have to show that the posted "compare at" or "original" price exceeded the "prevailing market price" for similar items in that locality—yet another significant hurdle to class certification. But in any event, practices of the outlets and factory retailers are under increasing scrutiny, especially given increased pressure from Members of Congress on the FTC to investigate outlet practices, as well as the FTC's encouragement in a blog post to consumers to be more aware of industry practices.

For our past coverage of retail pricing issues and FTC pricing guidelines, click here and here.

© Arnold & Porter Kaye Scholer LLP 2014 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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