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Phantom Markdown Lawsuits

A handful of large retailers and outlet stores across the country are facing class action suits for tricking consumers with “phantom markdowns”. Retailers like Calvin Klein, The Gap, Banana Republic, TJ Maxx, and Ross are at the center of the controversy alleging that companies are breaking federal and state laws which require that items with a list or retail price to have been sold for the amount listed at some previous point.

These phantom markdown claims are particularly focusing on retailer’s outlet chains. These outlet stores often sell items that have been especially manufactured—and often at a lower quality— for the outlet store and have never been sold at the main retailer. However, consumers are under the impression that the products have flowed through the brand-name retail stores before ending up at the outlet and factory stores.

Non-outlet retailers are also being accused of labeling clothing with overly-inflated manufacturer’s suggested retail price (“MSRP”) to make consumers believe they are obtaining a good price when the items go on sale. Complaints against Macy’s and Bloomingdale’s accuse them of creating price tags showing “prices that were artificially inflated and arbitrary and did not represent a bona fide price” and then selling “the items for a reduced or discounted sale price, which supposedly represented a significant discount off of the false, original, regular or compare at price.”

For example, the woman who filed an action against Michael Kors alleges that she purchased a pair of jeans for $79 but the “retail price” on the tag read that it was valued at $120. She later discovered that the jeans had never been sold at the main retailer but were created exclusively for the outlet store. Michael Kors ended up settling the case for $ 4.8 million dollars. In addition to the settlement, Michael Kors agreed to relabel its products to read “Value” on its outlet price tags and to display signs indicating what “Value” means within the outlet stores.

Another woman accused Macy’s of duping her onto buying a $5,000 mattress because she believed it had a 50% discount when in truth the price had been listed at an artificially high price, making the discount a sham.

Some of these claims are arising under California’s False Advertising Law which states that a “former price” cannot be listed unless that stated price was the “prevailing market price” for at least three months before the discount. If the three-month term is not met, then the tag must list the last date of the former price “conspicuously”. As for the Federal Trade Commission’s standards, the guidelines indicate that retailers should not list items at a “suggested retail price” is the price does not correspond with a “substantial number of sales” at that stated price.

However, some of these cases are not so obvious. Nordstrom and Neiman Marcus have also been sued for these phantom markdowns but both retailer successfully argued that the “Compare To” pricing on their outlet store tags was not meant to imply that the item had been previously sold at a higher price. While Neiman Marcus managed to have its complaint dismissed, the plaintiff suing Nordstrom has filed a second amended complaint against the retailer.

The plaintiffs in these cases are asking for unspecified damages, restitution, and for injunctions on the retailers to stop them from continuing their deceptive pricing schemes.

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