"prevailing price" regs not unduly vague, but commercial speech doctrine may still defeat them

People v. Superior Court, --- Cal.Rptr.3d ----, 2019 WL 1615288, No. B292416 (Ct. App. Apr. 16, 2019)

The Los Angeles City Attorney asserted claims under California consumer protection law against the real parties in interest, including J.C. Penney, alleging that they sold products online by means of misleading, deceptive or untrue statements about the former prices of those products. The trial court found the statute void for vagueness as applied to the parties; the court of appeals reverses, even though the price law at issue applies to truthful as well as false commercial speech.

According to the complaints, real parties engaged in misleading, deceptive, or false advertising by offering goods for sale online at prices discounted from so-called “reference prices” that purported to reflect real parties’ own former prices, but which did not do so. The complaints asserted that each real party “deliberately and artificially sets the false reference prices higher than its actual former sales prices so that customers are deceived into believing that they are getting a bargain when purchasing products.”

Section 17501 explains: “For the purpose of this article the worth or value of anything 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.” It then states: “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.”  The court agreed with the challengers that this governed both false and non-false speech—it was additional to the other prohibition in the statute on false and misleading speech—but that wasn’t the end of the story.

One note: the court thought that the existence of Section 17500 barring false and misleading advertising made clear that 17501 went beyond falsity—but that’s not necessarily the case.  Many consumer protection laws list specific examples of conduct that, through experience, have been shown to be predictably deceptive, as well as having a catchall provision for the infinite variety of possible falsities.  A key question is whether the legislature can identify such practices in advance; I think the legislature does have the power to do so and presume certain commercial practices deceptive as a matter of law. The question, as always, is who gets to decide.  Fake former prices seem to fit very well into that model, but the court here determined that a considerable number of “former price” claims would be truthful and nonmisleading if they were truthful claims about the retailer’s own former prices. “For example, if a retailer offered widely sold brands of Halloween costumes, the prohibition would preclude the retailer from advertising, ‘All Halloween costumes 50 percent off our former prices,’ on the day after Halloween, unless those prices coincided with one of the two requisite market prices.”

Viewed in context, the prohibition, by its plain language, forbids any advertisement of the former price of an “advertised thing” that does not express the market price information regarding former worth or value, as specified in the statute. Simply put, the prohibition bans any advertised claim regarding the former price of an item (1) unless the advertised former price was “the prevailing market price as [ ] defined [in section 17501] within the three months next immediately preceding the publication of the advertisement” or (2) unless the advertised former price was the prevailing market price—as defined in section 17501—on a clearly specified date. So understood, the prohibition imposes standardized market-based meanings on permissible former price claims, and proscribes all other former price claims—including discount advertising that conveys the seller’s own former price for an item, unless that advertised former price coincides with one of the specified two market prices.

The City Attorney suggested an alternative interpretation—that the retailer’s own former prices could provide the necessary “market price,” but the court of appeals found that this interpretation “neither complies with the canons of statutory interpretation nor restricts the prohibition to nonprotected commercial speech” because it would regulate truthful “claims regarding an item’s former market value (as based on the prices offered by other sellers in the market) when that differed from the retailer’s own former price.” [As noted, I’m skeptical of the latter argument; falsity and misleadingness of course are separate standards.]

Under Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489 (1982), and Holder v. Humanitarian Law Project, 561 U.S. 1 (2010), “a facial challenge fails if the statute clearly applies to some or all the challenger’s conduct.” That was the case here. “[T]he facial challenge fails even if the statute’s impact on protected speech triggers a higher standard for clarity, as the statute clearly applies to some of the misconduct alleged in the complaints, and is not inherently unworkable or devoid of guidance to retailers.” This also disposed of the as-applied challenge for purposes of a demurrer.  As Holder said, “[E]ven to the extent a heightened vagueness standard applies, a plaintiff whose speech is clearly proscribed cannot raise a successful vagueness claim under the Due Process Clause of the Fifth Amendment for lack of notice.” And due to the limited constitutional protection of commercial speech, the targets here couldn’t invoke the statute’s impact on protected commercial speech, as per Hoffman Estates.  The court concluded: “Here, the meager record permits no evaluation of the validity of the section 17501 under the Central Hudson test. In view of the broad sweep of the prohibition contained in the statute, we question whether an adequate justification exists for the prohibition. Nonetheless, the record before us does not establish that the requisite justification does not exist.”

The complaints asserted that the retailers offered goods for sale online at prices purportedly discounted from so-called “reference prices” that are “deliberately and artificially” stated to be higher than real parties’ actual former prices. Some of the goods were exclusive “in-house” goods, and others were sold by competing retailers.  According to an investigation, from 19.38 percent to 51.29 percent of the daily offerings were never offered at (or above) the reference price; 48.65 percent to 88.08 percent of the daily offerings were offered at (or above) the reference price for only 14 days or fewer; and 83.76 percent to 98.55 percent of the daily offerings were offered at (or above) the reference price for only 30 days or fewer. Each complaint specifically alleges that with respect to the in-house goods, the retailer is the only possible “market” regarding those goods.

The retailers and their amici argued that the statutory definition of “prevailing market price” was unworkable. Section 17501, which provides that the “prevailing market price” is that which obtains “at the time of publication of such advertisement in the locality wherein the advertisement is published.” “The clear import of the definition is that a retailer, in selecting the medium for the advertised item, determines the particular market in which the prevailing market prices are to be identified. The relevant market is the one that exists in the locality of consumers likely to see the advertisement at the time it is published, and consists of the vendors then competing to sell the advertised item to them.”

For exclusive in-house goods, the “advertised actual price for an in-house item necessarily constitutes the item’s prevailing market price at the time the actual price is advertised.” The statute identifies the relevant market price as that for the “advertised thing,” so if it specifies a precise item “by reference to name, brand, or other distinctive features, … the market and therefore the market price is properly determined on the basis of sales of that item only.” [Mark Lemley & Mark McKenna may be interested to see that the court cites an antitrust case noting that when a seller’s product is differentiated, seller has “a little pocket of monopoly power.”]

The retailers and amici argued that “locality” is necessarily vague, and that the advent of the Internet has made its application “even more question-begging.” Nope. The reference is to “consumers targeted by the advertisement and the sellers competing to sell the item to them. So understood, the Internet raises no special difficulty regarding the term, as it is merely a medium that reaches a very large group of consumers.” And for exclusive in-house goods, it doesn’t matter.  The reference price would have to be calculated on a rolling basis, and though it might be difficult to calculate, there wasn’t anything fatally vague about it.

The retailers argued that the statute was void for vagueness as applied to them because it didn’t resolve whether the actual prices charged for in-house items in their brick-and-mortar stores could serve as the basis for their online former price claims. But the factual allegations of the complaints contradicted the retailers’ assertions about in-house pricces.

As to nonexclusive goods, the retailers’ own actual former prices weren’t enough to establish the prevailing market price.  Even so, the complaint plausibly pled a claim because it was reasonable to infer that, in competitive markets, the actual prices offered by vendors selling the same item tend to converge on the market price. Thus, the factual allegation that the retailers’ advertised former prices were consistently higher than their actual prices “supports the inference that those advertised prices were not the prevailing market prices during the requisite three-month period.”