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California Law Section 17501 on comparison pricing ruled “unconstitutionally vague” but Section 17500 claims still viable

Two recent decisions from California present contrasting pictures of comparison pricing challenges. In one a California trial court holds California law section 17501 governing comparisons to “former prices” is  “unconstitutionally vague” and in the other an  appellate court confirms standing to pursue similar claims under section 17500.

Over the past three years, retailers across the country have come under a barrage of consumer litigation, with a majority of that litigation challenging retailers’ use of reference or comparison pricing. Not surprisingly, California has led the way, with a large number of those cases being brought by California city and district attorneys under Sections 17200, 17500 and 17501 of the Business and Professions Code, which prohibit unfair competition and false advertising. A recent decision from a trial court in Los Angeles County, if upheld, may offer some relief. The July 5 decision in State of California v. J.C. Penney, brought by the Los Angeles city attorney against J.C. Penney, Sears, Kohl’s and Macy’s, held that Section 17501 of the California Business and Professions Code’s False Advertising Law is “unconstitutionally vague” as applied to the defendants. Just a month later, however, in Hansen v. NewEgg, an appellate court reversed a trial decision granting a demurrer on the grounds that the plaintiff had received the “benefit of the bargain,” holding that all a consumers in California needs to show is that they would not have bought the product but for the alleged deceptive price comparison. Although not directly in conflict, these decisions frame the continued uncertainty retailers face in using comparison pricing, especially in the state of California.

Most states have regulations governing the use of comparison pricing, essentially prohibiting comparison pricing unless a retailer can demonstrate some legitimate basis for the comparative price. For example, Section 17501 (the statute at issue in J.C. Penney) states:

For the purpose of the article the worth or value of any thing advertised is the prevailing market price, wholesale if the offer is at wholesale, retail if the offer is at retail, at the time of publication of such advertisement in the locality wherein the advertisement is published.

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.

In J.C. Penney, the retailers filed a demurrer to the state’s complaint, challenging the state’s reliance on Section 17501 as a basis for the suit. The retailers argued that Section 17501 violated the First Amendment and California’s liberty of speech clause and was unconstitutionally vague. In particular, they argued that the statute implicated constitutionally protected free speech because it regulated how a seller may describe its pricing, which is central to any commercial transaction. The court agreed, centering its opinion on the interpretation of the phrase “prevailing market price” in the context of the statute. The court noted that a 1984 Report of the Attorney General’s Committee on Sale and Comparative Price Advertising had concluded that Section 17501 was “hopelessly vague and constituted more of a hindrance to consumer protection from misleading pricing than a help,” and the committee “essentially ‘threw up its hands’ when attempting to formulate a reasonably clear construction of Section 17501.” Despite this considered conclusion in 1984, Section 17501 continued to exist as a basis for lawsuits against retailers in California.

The court concluded that the retailers lacked the usual avenues for clarification: no case law, administrative process or central enforcement authority has provided consistent guidance for compliance with Section 17501’s requirements to disclose prevailing prices. In fact, as the court pointed out, although the statute was enacted in 1941, “[t]hree quarters of a century of published case law in California’s courts provides no guidance to a retailer seeking to comply with section 1750l’s vague requirements to disclose former ‘prevailing’ prices.”

In NewEgg, the plaintiff, an individual, brought his claim pursuant to Section 17500, the general California statute prohibiting deceptive advertising. The defendant filed for a demurrer of the claim, asserting that the plaintiff had received the benefit of the bargain and therefore suffered no injury, a position accepted by several other courts across the country. The trial court granted the demurrer. On appeal, the Second District court reversed, holding that California law accepted that consumer have been “injured” where they can truthfully plead that they would not have purchased the product but for the alleged misleading price comparison. Although not addressing the constitutionality of Section 17501, the court noted that California law has specifically prohibited the type of price comparison alleged by the plaintiff in NewEgg.

While the J.C. Penney decision gives retailers hope that there will be some reining in of this type of litigation, these decisions highlight the dangerous ground retailers continue to face in using comparison pricing, especially in the state of California. Perhaps the retailer in NewEgg will assert a constitutionality challenge like the one accepted in J.C. Penney, and the appellate court will provide further guidance. Until further clarity is provided, however, retailers should continue to track these decisions and review their internal policies to ensure compliance with the varying state and federal regulations governing price comparisons.