Outlet Stores Become Targets in False Advertising Class Actions

In 1970, the clothing manufacturer VF Corporation began selling its flawed and overstocked goods to the public for a discount. While the company previously reserved these items for employees, the extension of these sales to everyday consumers marked the beginning of the outlet store movement. Today, there are more than 300 outlet malls in the United States.

The basis for these stores, however, has changed over the years. Industry experts estimate that at least 85 percent of today’s outlet store merchandise is manufactured for exclusive sale in these stores, meaning that the majority of these items were never sold or meant to be sold at original retail locations. Furthermore, these items are often of a lower quality than those sold for the full price at original retail stores.

This change has not stopped many outlet stores from claiming that their clothing and accessories are between 30 and 70 percent off “original prices.” Often, the stores will sell items with price tags that juxtapose suggested retail prices – often denoted as “compare at” or “value” prices – with newly reduced outlet prices. In a post-recession economy, shoppers have jumped on these deals: in 2011, outlet stores reportedly saw a 17.8 percent increase in apparel sales. For comparison, overall apparel sales only increased by 1.4 percent that year.

But if these items were never meant to be sold at these suggested retail prices, then aren’t these deals artificial? Several consumers, as well as four members of the United States Congress, believe that they just may be and are taking steps to stop these potentially deceptive practices.

Congress to FTC: Outlet Stores May Be Breaking the Law

In January 2014, four Congressional members sent a letter to the Federal Trade Commission (FTC) about their concerns over outlet stores’ pricing policies. In the letter, the Congressional members explained how outlet stores may be using deceptive reference pricing when they advertise original retail prices next to outlet store prices on items that were never sold or even meant to be sold at full price.

“Since the item was never sold in the regular retail store or at the retail price, the retail price is impossible to substantiate,” according to the letter. The Congressional members said that, as a result, consumers may be deceived about the quality of items they purchase from these stores.

In addition, the Congressional members warned the FTC that this practice may be illegal under the commission’s Guides Against Deceptive Pricing, which states that if “the former price being advertised is not bona fide but fictitious – for example, when an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction – the ‘bargain’ being advertised is a false one.” Pointing to these guidelines, the Congressional members requested that the FTC review common outlet store pricing policies to prevent any unfair or deceptive marketing practices that may be occurring.

Six Retailers Targeted in Class Actions Over False Advertising

Several months after the FTC was warned about these potentially deceptive practices, consumers began taking action against the companies they believed were using false and misleading advertising in their outlet stores. Between August and September 2014, the following retailers were hit with class action lawsuits alleging that they deceive shoppers about the deals and quality of items found at their outlet stores:

• Saks Fifth Avenue (Saks Off 5th)
• Nordstrom (Nordstrom Rack)
• Neiman Marcus (Last Call)
• Michael Kors (Michael Kors Outlet)
• Gap (Gap Outlet)
• Banana Republic (Banana Republic Factory Store)

In a class action against Nordstrom, the plaintiff alleges that the retailer took advantage of the public’s perception of outlet stores when it opened Nordstrom Rack and tagged items with “original” and “discounted” prices. The lawsuit claims:

“The entire price tag – indeed the entire ‘outlet store’ motif – is designed to falsely convince consumers that they are buying main line retail designer brand products at reduced prices. In fact, consumers are buying lower quality goods that were never offered or sold as genuine quality designer brand clothing and accessories.”

Similarly, in a lawsuit filed against Saks Fifth Avenue, the plaintiff claims that large retailers specifically use outlet stores as a way to “capture a larger pool of consumers” who would not typically purchase items from upscale retailers. Traditionally, outlet stores attracted customers by selling discounted designer items that were overstocked or didn’t sell at the original retailer, according to the suit; however, Saks Fifth Avenue allegedly failed to inform shoppers that items in its outlet store, Saks Off 5^th, were never intended to be sold at full price.

Could More Outlet Stores Face Class Action Lawsuits?

Given the large number of outlet stores operating across the country, a slew of lawsuits may be on the horizon. It’s still unclear, however, whether all outlet stores follow similar pricing policies – and whether they are, in fact, illegal – but those who do may have to face similar claims in the future.

Have you noticed similar pricing practices in your favorite outlet store? Tell us about it in the comments.