Price Comparison Advertising and Deceptive Pricing

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Advisory
I. IntroductIon “Sale!,” “Reduced Price!,” “50% Off!,” “Lowest Prices Around!,” “Priced Below MSRP!”. Retailers and manufacturers use these and other comparative pricing claims to imply that a consumer can obtain a bargain by purchasing the advertised product from the seller at a relative discount. However, sellers should not make these claims lightly as price comparisons are regulated by both Federal and State authorities. The Federal Trade Commission (“FTC”) has issued Guides Against Deceptive Pricing (“Pricing Guides”)1 setting forth the circumstances under which sellers can compare their prices to competitors’ prices, manufacturer’s suggested retail prices, or even their own former prices. Many states also have similar statutes or regulations, several of which even dictate the number of days at which a seller must offer its products at the regular price before advertising a sale price. Additionally, individual competitors may lodge complaints through the Better Business Bureau’s National Advertising Division (“NAD”). II. Federal comparatIve prIcIng polIcIes a. Former price comparisons In comparing a new discounted price to a former “regular” price, the primary issue is whether the seller can establish that the reference price is bona fide. According to the FTC’s Pricing Guides, a seller may compare sale prices to former prices if the
1 See, http://www.ftc.gov/bcp/guides/decptprc.htm. The Pricing Guides, like other FTC industry guides are administrative interpretations of laws administered by the FTC. The FTC may take corrective action for failure to comply with the guides. 2 See, Joint FCC/FTC Policy Statement For the Advertising of Dial-Around And Other Long- Distance Services To Consumers, http://www.ftc.gov/os/2000/03/jpsada.pdf.

Price Comparison Advertising and Deceptive Pricing

seller actually offered the product to the public on a regular basis for a reasonably substantial period of time. In contrast, if the seller uses an inflated reference price, or never even offered the product at the reference price, the seller’s price comparison would likely be deceptive. B. comparisons to competitor’s prices Sellers also often compare their prices to their competitor’s prices for similar products. When making such a comparison, the higher reference price must be based on fact and not be misleading. Additionally, the seller must be reasonably certain that the higher reference price does not appreciably exceed the price at which substantial sales of the article are being made in the area. For products that are comparable, but not identical (such as different brands of essentially similar products), Sellers must inform consumers that the compared product is available in the trade area and is of similar quality to the product offered. The FTC has also indicated that price comparisons to a competitor’s former price might not be deceptive in certain circumstance and with proper disclosures.2

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c. price comparisons to list price or msrp Another form of bargain pricing occurs when sellers compare their prices to the manufacturer’s suggested retail price (“MSRP”) or list price. In such comparisons, there must be sellers in the trade area who actually sell the product at the list price. Otherwise, comparison to the MSRP could be deceptive. Also, manufacturers who preticket their products with their MSRP or advertise their MSRP as part of a national advertising campaign could be held liable for creating an instrumentality for deceptive comparison if no one in the trade area actually sells the product at the MSRP. Thus, sellers are obligated to ascertain that the MSRP is actually charged in the local trade area before using the MSRP for price comparisons. National advertisers such as manufacturer’s or large retailers who use list prices in ad campaigns that cover many trade areas, should, in good faith, ensure that the list price does not appreciably exceed the highest price at which substantial sales are made in a trade area. d. other price comparisons There are numerous other forms of price comparison. For instance, the Pricing Guides set out standards for use of the terms “Free” “Buy One, Get One” or “2-For-1”. When making these types of offers, sellers may not increase their regular prices, or impose other conditions, in order to deceive the consumer into believing he or she is receiving a bargain, when that it not the case. Also, in the case newly introduced products, sellers might compare current prices to future prices, raising a question of how a seller can establish a bona fide regular price when the seller has never before offered the product for sale at any price.

III. state polIcIes

comparatIve

prIcIng

Many states have codified some if not all aspects of the FTC’s Pricing Guides. Some states even dictate the length of time a seller must offer a product at the “regular price” before the seller can use it as a reference for a sale price comparison. Standards vary by state, so sellers should confirm the specific requirements of the trade areas in which they intend to advertise their products. Iv. Industry comparatIve prIcIng polIcIes Advertisers may also face challenges lodged by their competitors through NAD. NAD has issued its own advertising commentary, the Code of Advertising, which includes policies regarding comparative price advertising.3 While NAD’s standards are generally in harmony with the FTC’s, NAD has recently considered challenges of advertisers who used high reference prices at which there were few, if any, sales. NAD referred at least one matter to the FTC, which refused to take action, finding in part that the advertiser offered the products for a sufficient period of time at the higher reference price, despite the lack of sales. It remains to be seen whether NAD will adjust its standards to meet the FTC’s or will maintain a stricter interpretation of deceptive price comparison practices. Defending or challenging price comparison advertising requires a careful analysis of the particular facts surrounding an advertisement’s claims and of the relevant law of the trade area where the comparison is made. The FTC, State Attorneys General, and NAD apply varying standards in defining such terms as how long regular prices must be offered to be considered bona fide reference prices.

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aBout our advertIsIng and marketIng practIce Kelley Drye Collier Shannon’s Advertising & Marketing practice comprises attorneys with proven success in advertising litigation and NAD proceedings; expertise in the area of advertising, promotion marketing, and privacy law; and experience at the FTC, FDA, and the Offices of State Attorneys General. We help leading companies identify risks, respond effectively to inquiries, and prevail in contested proceedings. aBout kelley drye collIer shannon Kelley Drye Collier Shannon, the Washington, DC office of Kelley Drye & Warren, is an international, multidisciplinary law firm that solves competitive problems for Fortune 500 companies, privately-held corporations, government entities, and trade associations. Founded more than 170 years ago, Kelley Drye & Warren has more than 400 attorneys and professionals practicing in eight locations around the world and specializing in: Advertising and Marketing; Antitrust and Trade Regulation; Corporate; Employee Benefits and Executive Compensation; Environmental; Government Contracts; Government Relations and Public Policy; Homeland Security; Intellectual Property; International Trade and Customs; Labor and Employment; Litigation; Private Clients; Real Estate; Restructuring, Bankruptcy, and Creditors’ Rights; Tax; Technology; Telecommunications; and Trade Associations.

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