Wednesday, May 22, 2013

Being fooled by false "sale" ads confers standing despite receiving advertised price

Hinojos v. Kohl’s Corp., No. 11-55793 (9th Cir. May 21, 2013)

Judge Reinhardt began with some scene-setting:

Most consumers have, at some point, purchased merchandise that was marketed as being “on sale” because the proffered discount seemed too good to pass up. Retailers, well aware of consumers’ susceptibility to a bargain, therefore have an incentive to lie to their customers by falsely claiming that their products have previously sold at a far higher “original” price in order to induce customers to purchase merchandise at a purportedly marked-down “sale” price. Because such practices are misleading—and effective—the California legislature has prohibited them.

Hinojos alleged that he was the victim of such a practice at Kohl’s and that he wouldn’t have paid what he did for what he bought had he not been misled by advertised markdowns from fictitious “original” or “regular” prices.  The district court found that he hadn’t “lost money or property” because he received the advertised price, and the court of appeals reversed.

Under California law, a consumer loses money or property “so long as false advertisements induced him to buy a product he would not have purchased or to spend more than he otherwise would have spent.”  This revived Hinojos’s UCL, FAL and CLRA claims.

Hinojos alleged that he bought several items advertised as substantially reduced in price, but in fact routinely sold by Kohl’s at the advertised “sale” prices rather than the purported “original” or “regular” prices. He alleged that the advertised “original/regular” prices didn’t reflect prevailing prices in the three months immediately preceding the ads, and that he wouldn’t have bought the products without the misrepresentations.  The district court dismissed the claims, and denied reconsideration based on Kwikset, holding that Kwikset applied only to false advertisements regarding a product’s “composition, effects, origin, and substance.”

The FAL provides that “No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price . . . 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.”

However, Proposition 64 restricts standing to individuals who suffered injury in fact and lost money or property as a result of unfair competition.  The California Supreme Court held that the purpose of Proposition 64 was to “curtail the prior practice of filing suits on behalf of clients who have not used the defendant’s product or service, viewed the defendant’s advertising, or had any other business dealings with the defendant,” but “just as plainly preserved standing for those who had had business dealings with a defendant and had lost money or property as a result of the defendant’s unfair business practices.”  

The quantum of lost money or property is only so much as would suffice to establish Article III injury in fact.  Here, there was “no difficulty” regarding Article III injury in fact: the contention that class members paid more than they otherwise would have paid, or bought when they otherwise would not have bought, constitutes an Article III injury in fact. The only issue was whether this injury in fact was an economic injury sufficient to confer statutory standing.

Kwikset explained that:

From the original purchasing decision we know the consumer valued the product as labeled more than the money he or she parted with; from the complaint’s allegations we know the consumer valued the money he or she parted with more than the product as it actually is; and from the combination we know that because of the misrepresentation the consumer (allegedly) was made to part with more money than he or she otherwise would have been willing to expend, i.e., that the consumer paid more than he or she actually valued the product. That increment, the extra money paid, is economic injury and affords the consumer standing to sue.

Thus, Hinojos properly alleged lost money or property.  Kohl argued that Hinojos didn’t allege at what price (if any) he would have bought if the original/regular price hadn’t been misrepresented.  But that’s not a requirement, as Kwikset explicitly held, though the difference between what he actually paid and what he would’ve paid had the ads been truthful would be the appropriate measure of restitution.  But under Kwikset, he “need not be able to prove the quantum of damages he suffered in order to be entitled to injunctive relief given that he alleges sufficient facts to prove that he suffered some economic injury.”  [Compare the Article III analysis above, plus this statement, to the decision I blogged about yesterday denying a plaintiff standing to seek injunctive relief in this exact situation; were I plaintiff’s counsel I might move for reconsideration.]

The district court also erred to limit Kwikset on the grounds that it was limited to “factual misrepresentations about the composition, effects, origin, and substance of advertised products.” Kohl reformulated this as an argument that there was no difference in value between the product as labeled and the product as it actually was.  A misrepresentation of the “regular” price, Kohl’s argued, didn’t misrepresent the innate value of the products, so a consumer gets the product he expects at the price he expects.  Kwikset is broader than that.  True, Kwikset was about conditions of production (allegedly false “Made in USA” claims), and described other similar actionable misrepresentations, but they weren’t intended to be exhaustive. 

Indeed, Kwikset based its reasoning on the fact that “[t]o some consumers, processes and places of origin matter.” The court of appeals concluded, “[t]o other consumers, a product’s ‘regular’ or ‘original’ price matters; it provides important information about the product’s worth and the prestige that ownership of that product conveys.”  The court cited Dhruv Grewal & Larry D. Compeau, Comparative Price Advertising: Informative or Deceptive?, 11 J. of Pub. Pol’y & Mktg. 52, 55 (Spring 1992) (“By creating an impression of savings, the presence of a higher reference price enhances subjects’ perceived value and willingness to buy the product.”); id. at 56 (“[E]mpirical studies indicate that as discount size increases, consumers’ perceptions of value and their willingness to buy the product increase, while their intention to search for a lower price decreases.”).  Thus, misinformation about a “normal” price was significant to many consumers in the same way as other falsities, just as falsely labeling a watch as a Rolex would be actionable even if the watch was a functional equivalent of a Rolex.  The court noted that it was not relying on the cited article to establish facts not contained in the pleadings, but rather “in support of the conclusion that false advertisements about a product’s true market price are significant to consumers.”  (Iqbal/Twombly aren’t mentioned, but plausibility probably plays a role here.)

Indeed, this significance is exactly why retailers like Kohl’s have an incentive to falsely advertise sales, and exactly why the California legislature barred the practice.  “In fact, the deceived bargain hunter suffers a more obvious economic injury as a result of false advertising than the Kwikset consumer who was duped into buying foreign-made goods, because the bargain hunter’s expectations about the product he just purchased is precisely that it has a higher perceived value and therefore has a higher resale value.”

The district court’s test would preclude claims against “a vast array of other misleading marketing practices that have little or nothing to do with a product’s ‘composition, effects, origin, and substance.’”  Examples: “not available in stores,” “available for a limited time only,” “the same model of shoe worn by LeBron James,” “50% of customers who purchased product X also purchased our product,” and “more doctors recommend our product than any other brand.”  All of these were “effective marketing techniques” that could be used to deceive, if false, and generate purchases that otherwise wouldn’t occur.  There was no reason to think that Proposition 64 “meant to silently close the door on consumers’ ability to bring UCL and FAL claims based on such false advertising,” and Kwikset emphasized that Proposition 64 shifted the focus to actual deception by a misleading ad instead of “fishing expeditions” by nonpurchasers.

The district court also held that Hinojos got the benefit of his bargain because he kept the goods he bought, which weren’t defective.  Kwikset explicitly rejected this rationale.  He only got the benefit of the bargain if the misrepresentation wasn’t material.  This was an issue of fact, and also “the legislature’s decision to prohibit a particular misleading advertising practice is evidence that the legislature has deemed that the practice constitutes a ‘material’ misrepresentation, and courts must defer to that determination.”  (So is it material as a matter of law?)  Hinojos specifically and plausibly alleged that Kohl’s falsely marketed its products as on sale because consumers reasonably regard price reductions as material information. “In sum, price advertisements matter.”

The court also refused to certify the case to the California Supreme Court because Kwikset provided more than sufficient guidance.  The majority also expressed disapproval of Kohl’s strategies in this regard: Kohl’s initially removed the lawsuit under CAFA, then discussed Kwikset extensively in the appellate briefs, but never suggested certification there or at oral argument.  At oral argument, “any objective witness” would’ve concluded that Kohl’s had a “slim at best” chance of prevailing on the merits, and only a month and a day after oral argument did Kohl’s file a motion to certify.  The court looks with disfavor on motions to certify filed after prior opportunities to seek certification.  Also, the court didn’t like manipulation of the appellate system by attempts to avoid unfavorable panels—that’s why the Ninth Circuit doesn’t make panels public until shortly before oral argument.  Kohl’s sought certification only after it knew the panel’s views of the case at oral argument.  This smacked of manipulation.

Judge Wardlaw concurred, but only in the result on certification; though Kohl’s motivations were suspicious, “on this record and without providing an opportunity to Kohl’s to respond, it is somewhat unfair to conclude that Kohl’s had only a nefarious motive. I would simply deny the request as untimely.”

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