7th Circuit endorses behavioral approach to reasonable consumer standard

Kahn v. Walmart Inc., No. 23-1751 (7^th Cir. Jul. 3, 2024)

Kahn alleged that Walmart routinely charged more at the checkout than advertised at the shelf, small amounts individually that add up to hundreds of millions of dollars a year. The district court found that a reasonable consumer would not be deceived because the true charge was printed on their receipt, which they could complain about if they cared. The court of appeals, in classic Seventh Circuit style modulated by behavioral economics instead of classical L&E, reverses, saying a lot of things about reasonable consumers as well as the well-resourced businesses that will fleece them if they can get away with it.

The complaint alleged that, “in 2012, California assessed a $2 million fine against Walmart for violating a 2008 ruling requiring it to resolve pricing errors at checkout. In November 2021, North Carolina fined two Walmart stores after an investigation found repeated and excessive scanning errors that caused overcharges on three to seven percent of items purchased each month. In February 2022, five additional Walmart stores had to pay North Carolina over $15,000 in fines for overcharging consumers due to price scanning errors.”

In Kahn’s case, he bought fifteen items, and was allegedly charged more than listed shelf price on six of them, for ten to fifteen percent markups. The overcharge was $1.89, nearly seven percent of the pretax total of his bill. “Small change for Kahn as an individual, no doubt, but keep in mind the volume of Walmart’s business.” Kahn’s counsel investigated other stores in Illinois, Florida, Indiana, Maryland, New Jersey, New York, and North Carolina finding overcharges.

A key question: is the “reasonable” consumer empirical or normative? You will not be surprised to hear that the Seventh Circuit embraces an empirical view: “Reasonable consumer behavior is not a matter of pure economic theory....  [W]hat matters is ‘how consumers actually behave—how they perceive advertising and how they make decisions.’” Consumers are not required to behave like “Adam Smith’s homo economicus, a perfectly rational being who gathers and evaluates the optimal amount of information about options in the marketplace to maximize utility preferences.” This is because “human cognitive abilities are not perfect or infinite. We have limited time, computational skills, and memories, and we rationally use mental shortcuts to deal with those limits. The classical economic model often fails to predict accurately how real humans will behave in real-life marketplaces.”

Furthermore, “[p]redictable tendencies in consumer behavior mean that retail settings can be engineered to influence consumers in ways they (meaning we) do not fully anticipate or appreciate.” But what about the free market, you might ask? “The market itself usually cannot correct for these problems. Instead, consumer protection regulations are often responses to inefficiencies enabled by market manipulation.” Thus, courts applying the reasonable consumer standard must focus on “how real consumers understand the carefully crafted messages aimed at them.”

Grocery shoppers, in particular, are well-studied, providing plenty of empirical fodder for remand. Especially on a motion to dismiss, courts shouldn’t “overlook the realities of attempts to influence consumer behavior.” Here, the nation’s largest retailer “allegedly stands to profit by hundreds of millions each year from shelf pricing discrepancies.” It was reasonable to assume that it was engaging in a lot of careful consumer research. And “we have often stressed that consumers are likely to exhibit a low degree of care when purchasing low-priced, everyday items.” Such a low degree of care “does not make consumers unreasonable—it makes them human, and even economically rational when search costs and transaction costs are included in the utility calculus. But it also makes them vulnerable to exploitation by unfair and deceptive practices.”

There was “nothing implausible” about allegations that Walmart’s inaccurate shelf prices are likely to deceive a significant portion of reasonable consumers. “It is neither ‘unreasonable’ nor ‘fanciful’ for consumers to believe Walmart will sell them its merchandise at the prices advertised on its shelves.” Indeed, Illinois’s consumer protection statutes assume that consumers rely on advertised prices by specifically singling out “misleading statements of fact concerning the … existence of … price reductions” as deceptive acts. The advertised shelf prices weren’t alleged to have been accompanied by any statements warning they might not be reliable or saying they were provisional. “If shelf prices are not accurate, they are likely to mislead reasonable consumers.” (In a footnote, the court noted that Walmart was wise not to challenge materiality: “Price is obviously a material term of consumer transactions.”)

The district court erred when it concluded that providing a receipt after the transaction dispelled any deception created by Walmart’s facially misleading shelf prices. It reasoned that “Kahn could, and indeed did, use this receipt to compare the prices Walmart charged him with the advertised shelf pricing. This comparison revealed the discrepancy and dispelled any potential deception.”

But, first, providing information after the transaction doesn’t show that the shelf prices wouldn’t have deceived a reasonable consumer. And the district court’s rationale would require unreasonable efforts by consumers to protect themselves. The receipt alone, of course, doesn’t dispel deception. Instead, the consumer has to go back and compare the advertised prices for every item. The court:

Who does that? For obvious reasons, many reasonable consumers will not undertake such audits. Some consumers lack smartphones to photograph the shelf prices as they shop, requiring them to write down or remember dozens of distinct shelf prices. Others lack the time to retrace their steps through the store, comparing their receipts against all the shelf prices. Even if shoppers somehow retain records of each shelf price, at checkout, many are trying to corral young children, others are skimming the tabloid headlines displayed to entice them, and still others are lending a hand to the baggers or pulling out their wallets. Shoppers can easily miss the split-second display of a price or two at checkout. Even if consumers do notice a price discrepancy on a point-of-sale display or on a receipt, they must then raise the issue to the store’s attention to resolve it. It is reasonable to infer that many consumers in that situation would be concerned about holding up the six shoppers in line behind them, reluctant to trouble a busy store manager over a few pennies per item, or unable to spare the time to track that manager down.

Reasonable consumer behavior does not require shoppers to audit their transactions and to overcome those additional hurdles just to ensure that they receive merchandise at the advertised shelf prices.

Consumer protection laws “do not expect or require real consumers to undertake such measures over a few pennies per item. Nor, as plaintiff plausibly alleges, does Walmart expect them to. That is precisely why these alleged price discrepancies may be highly profitable on a large scale and over the long run.” Plaintiffs “are entitled to present evidence on how consumers actually understand these labels” and respond to Walmart’s advertising. Walmart could, of course, attempt to prove that its shoppers have photographic memories and plenty of time to scrutinize receipts.

In addition, Kahn adequately pled that, even where the consumer discovers the discrepancy before completing a purchase, Walmart was engaged in deceptive bait-and-switch pricing. These are injuries that consumers “cannot reasonably avoid,” which come “in the form of higher prices and search costs.”

For similar reasons, Kahn adequately alleged “unfairness” under Illinois consumer protection law. This claim wasn’t necessarily based on fraud, since inaccurate shelf pricing practices could “offend an established public policy, and are immoral, unethical, oppressive, and unscrupulous,” in ways “substantially injurious to consumers.” This was plausible because the sunk costs plausibly leave consumers with little choice but to submit. And a small harm to lots of people can be a substantial injury. Moreover, the FTC reasons that the substantial injury to consumers “is not outweighed by benefits to consumers or competition” because “[t]he practice of advertising prices that are not the full price does not benefit consumers or competition.”

The district court also held that Kahn failed to allege sufficiently that Walmart intended for him to rely on its inaccurate shelf prices. First, Illinois consumer protection law “eliminated the requirement of scienter,” so that “innocent misrepresentations are actionable as statutory fraud.” Kahn needed only to allege that Walmart intended that he rely on its shelf prices, not that it intended to deceive him. He did both. (Under Rule 9(b), scienter can be alleged generally.)

Kahn alleged that “Walmart is well aware that it is deceiving its consumers,” in part because Walmart stores have been fined for this practice in multiple states. “There is nothing implausible about these allegations that Walmart intends consumers to rely on shelf pricing. The contrary proposition seems absurd. Walmart uses shelf pricing to inform consumers of its prices so they can compare items and decide what to buy.” There were no indications that there were disclaimers, which would in any case merely create a fact issue of sufficiency.

Plus, affirmative intent to mislead was plausible. The relevant factors: “Walmart’s size, the hundreds of millions of dollars in profits allegedly available from the pricing discrepancies, and the company’s heavy focus on sales from brick-and-mortar stores.” It was reasonable to infer that Walmart, in particular, had access to consumer research and was “aware of the obstacles that would deter real consumers from trying to hold it to its advertised shelf prices.”

Of course, Walmart sells hundreds of thousands of products, and some errors were inevitable. But error rates can be managed:

We assume that neither courts nor regulators can insist on perfection in retail pricing. They can, however, address how a retailer tries to prevent and remedy discrepancies like those alleged here. Even if some low level of price discrepancies is unavoidable, Walmart is not alleged to have undertaken any preventive or remedial measures to mitigate overcharges, such as by implementing systemic controls.

That made deceptive intent plausible. (What if they try and fail to the tune of hundreds of millions of dollars a year? Who is the cheapest cost avoider? What is the proper remedy?)

Walmart’s best argument was its reliance on Tudor v. Jewel Food Stores, Inc., 288 Ill. App. 3d 207, 681 N.E.2d 6 (1997). Tudor alleged that Jewel violated the consumer protection law because the prices scanned at the cash register differed from the advertised or shelf prices. The state court of appeals found a lack of deceptiveness/lack of intent on the pleadings, which alleged that the store’s internal audits showed the scanned prices were accurate 96% of the time. Also, the complaint pled that Jewel had a “policy providing ‘[i]f the scanned price on any unmarked item is different from the price on the shelf, you will get the item free.’” The “combination” of “the high accuracy rate …, along with the issuance of a receipt and defendant’s policy of providing a money-back guarantee …, indicates there was no deception by defendant.” Nor was Jewel’s conduct “unfair,” since the provision of a receipt and the money-back guarantee meant that “oppressiveness and lack of meaningful choice necessary to establish unfairness” were lacking. These same two factors also indicated that the “defendant did not intend that plaintiff rely on an incorrectly scanned price.”

But Tudor didn’t control where here, the only overlapping exculpatory allegation was that Walmart provided an accurate receipt. Of note, the state of Illinois participated as amicus on Kahn’s side, and the court of appeals predicted that the Illinois Supreme Court, if faced with the allegations in this case, would also distinguish Tudor.

The complaint here didn’t allege a 96% accuracy rate (to be clear, with millions of transactions a year, that’s still a lot of inaccurate charges; it would probably be useful to know how many favored the store). Nor did it allege a money-back policy that went beyond a mere refund and provided the mislabeled item for free: “Offering consumers the full value of the item as a bounty gives them an incentive to look for price discrepancies and shifts the balance of incentives for the retailer closer to optimal deterrence.”

Kahn didn’t sufficiently plead a likelihood of future injury, though, so the court’s remand would allow an opportunity to replead if possible for injunctive relief (the only form available under one of the relevant Illinois laws). “It may be possible for plaintiff to plead a likelihood of future harm, particularly in light of the injuries to consumers routinely caused by bait-and-switch pricing schemes …, such as the time and mental energy reasonable consumers must expend to protect themselves from the alleged unfair and deceptive practices.”