Antonio Hinojos felt duped.

The California consumer was shopping at a Kohl's department store when he saw in-store advertisements showcasing a variety of items that were substantially marked down. Hinojos purchased some items supposedly “on sale.” To his dismay, he found out later that the so-called “sale” prices he paid weren't a bargain at all; in fact, Kohl's routinely sold the items he purchased at the prices he paid, meaning they were the regular prices.

Hinojos sued Kohl's Corp., claiming the company violated California's Unfair Competition Law (UCL) and Fair Advertising Law (FAL) because its false advertisements persuaded him to buy items he wouldn't have otherwise purchased.

Lack of Standing

Kohl's moved to dismiss the case, arguing that even if the store had falsely advertised items as “on sale,” Hinojos didn't satisfy California's standing requirements to sue under the UCL and FAL. A state rule enacted in 2004—Proposition 64—restricts such standing to plaintiffs who “suffered injury in fact and have lost money or property as a result of the unfair competition.” Kohl's argued that Hinojos neither suffered injury nor lost money as a result of his purchases. A district court agreed and dismissed the case.

Hinojos moved for reconsideration based on Kwikset v. Superior Court, a 2011 case in which the California Supreme Court ruled that purchasers of goods falsely labeled as “made in the U.S.A.” could sue under the UCL and FAL if the false advertising induced them to buy items they wouldn't have otherwise bought.

“Kwikset's treatment of a plaintiff's subjective view made businesses nervous that it would become much easier for plaintiffs to have standing in California consumer class actions,” says Stephanie Sheridan, a partner at Sedgwick.

Despite Hinojos' Kwikset argument, the district court denied reconsideration, saying Kwikset only applied to false advertisements regarding a product's “composition, effects, origin, and substance.”

Too Narrow

On appeal, the 9th Circuit squarely disagreed with the district court's narrow reading of Kwikset.

“The 9th Circuit did not agree that Kwikset was so limited,” says Brian Martin, a partner at Pillsbury.

The appeals court wrote that “Hinojos has done everything Kwikset requires to allege an economic injury under the UCL and FAL,” and it reversed and remanded.

The 9th Circuit reasoned that that the lower court's interpretation “ignores the fact that, to other consumers, a product's 'regular' or 'original' price matters.” It said the original price of an item provides valuable information regarding the item, and misinformation about price is significant because consumers would be purchasing based on a higher perceived value.

“We hold that when a consumer purchases merchandise on the basis of false price information, and when the consumer alleges that he would not have made the purchase but for the misrepresentation, he has standing to sue under the UCL and FAL because he has suffered an economic injury,” Judge Stephen Reinhardt wrote for the court in its May 21 opinion.

The court adopted a “standing threshold that requires only that a plaintiff allege that he would not have made the purchase but for the price history misrepresentation,” Martin says.

Hinojos is a reminder that California law contains multiple highly specific advertising prohibitions. And now that the 9th Circuit has broadened the scope of standing to sue under the UCL and FAL, general counsel at retail companies should carefully review their companies' pricing practices to avoid similar litigation (see “Similar Suits”).

“Retailers should review the language on price tags and advertisements and consider whether a potential plaintiff could argue they were misled by the language,” says Sheridan. “Snappy-sounding pricing policies that cannot be authenticated may expose retailers to class action suits.”

Martin adds that retailers must be wary of other types of pricing misrepresentations that could also lead to false advertising claims. “The Hinojos court provided some specific examples of representations that could be misleading if false: 'not available in stores,' 'available for a limited time only,' 'the same model of shoe worn by LeBron James,' '50 percent of customers who purchased product X also purchased our product,' and 'more doctors recommend our product than any other brand,'” he says.

Experts say GCs at retail companies should consult counsel experienced with California law to review all of their California advertising, both in-store and published. “Even existing advertising campaigns need to be periodically reviewed to ensure that representations previously characterized as unlikely to be actionable remain that way in light of changing statutory or case law standards,” Martin says.