Published on June 1, 2020 by the FairShake Team
When it comes to laws that protect consumers against false advertising, one of the areas you’d expect the law to hold companies accountable is their prices.
And that’s true in the U.S. — false advertising laws contain an entire section devoted to what the Federal Trade Commission (FTC) calls “deceptive pricing.” The law clearly states that sellers can’t try to mislead consumers about their prices — and outlines specifically prohibited practices when it comes to advertising that use prices to try to persuade consumers to make a purchase.
But the rules written into the law are long and packed with legalese. They’re not something the average consumer has read, so a lot of people actually don’t know the deceptive pricing rules the FTC enforces.
The best way to protect yourself as a consumer is to know and understand the laws that were written to help protect you. That’s where this guide comes in. Read on, and we’ll break down the FTC’s rules designed to protect consumers from deceptive pricing. We’ll also tell you what you can do if you see a seller breaking the law.
The legal definition of “deceptive pricing” is set in Section 5 of the FTC Act. The full text of the Act covers a wide variety of consumer protection issues, saying that sellers and retailers can’t mislead consumers when it comes to their pricing or any other advertised information.
The “deceptive pricing” section of the Act offers guides on five specific types of pricing the FTC prohibits:
We’ll break down each of these types of prohibited pricing with examples so you can spot them for yourself.
According to this rule, if a retailer is offering a supposed bargain on a product by saying it costs less now than it did at a previous price, the advertised former price must be genuine and accurate. In other words, retailers aren’t allowed to say they’re offering a product or service at a new, lower price if that isn’t actually the case.
The rule also states that no sales necessarily need to have been made at the former price, but sellers still can’t offer a lower, “bargain” price unless the former price was legitimate and offered “for a reasonably substantial period of time.”
The last comparison prohibited by this rule is sale prices that are “so insignificant as to be meaningless.” According to the FTC, if a seller is advertising a sale, the discount must be substantial enough that any buyers are getting a genuine bargain.
Here’s the FTC’s example of this deceptive pricing rule being broken.
“John Doe is a retailer of Brand X fountain pens, which cost him $5 each. His usual markup is 50 percent over cost; that is, his regular retail price is $7.50. In order subsequently to offer an unusual ‘bargain.’ Doe begins offering Brand X at $10 per pen. He realizes that he will be able to sell no, or very few, pens at this inflated price. But he doesn’t care, for he maintains that price for only a few days. Then he ‘cuts’ the price to its usual level — $7.50 — and advertises: ‘Terrific Bargain: X Pens, Were $10, Now Only $7.50!’ This is obviously a false claim. The advertised ‘bargain’ is not genuine.”
That’s not the only example the FTC offers. It also says, “An advertiser might use a price at which he never offered the article at all; he might feature a price which was not used in the regular course of business, or which was not used in the recent past but at some remote period in the past, without making disclosure of that fact; he might use a price that was not openly offered to the public, or that was not maintained for a reasonable length of time, but was immediately reduced.”
All of those cases are prohibited, according to the Former Price Comparisons rule.
This part of the Act states that, if a seller advertises a good or service at a lower price than their competitors, they have to actually have competitors in the same geographic area who offer the same goods for a higher price.
It also says that sellers may compare their prices to the prices of similar goods and services that are of “like grade and quality” in their area, as long as they make it clear in their advertising that that’s what they’re doing — they can’t compare their prices to the prices of items that are similar while claiming they offer the exact same item for a lower price than a competitor.
Here’s the FTC’s example of this rule.
“Retailer Doe advertises Brand X pens as having a ‘Retail Value $15.00, My Price $7.50,’ when the fact is that only a few small suburban outlets in the area charge $15. All of the larger outlets located in and around the main shopping areas charge $7.50, or slightly more or less. The advertisement here would be deceptive, since the price charged by the small suburban outlets would have no real significance to Doe’s customers, to whom the advertisement of ‘Retail Value $15.00’ would suggest a prevailing, and not merely an isolated and unrepresentative, price in the area in which they shop.”
Buckle in — this is the longest of all the FTC’s deceptive pricing rules.
This rule points out that manufacturers tend to create a “list price” or “suggested retail price” for their items, which may or may not be the actual prices sellers ask for those items. In fact, the FTC points out under this rule that “the widespread failure to observe manufacturers’ suggested or list prices, and the advent of retail discounting on a wide scale, have seriously undermined the dependability of list prices as indicators of the exact prices at which articles are in fact generally sold at retail.”
So, if a seller advertises that they’re offering a product for less than the “list price” or “suggested retail price,” the product needs to actually be widely sold at the “list price” or “suggested retail price.”
According to the FTC rule, “In other words, a retailer who advertises a manufacturer’s or distributor’s suggested retail price should be careful to avoid creating a false impression that he is offering a reduction from the price at which the product is generally sold in his trade area. If a number of the principal retail outlets in the area are regularly engaged in making sales at the manufacturer’s suggested price, that price may be used in advertising by one who is selling at a lower price. If, however, the list price is being followed only by, for example, small suburban stores, house-to-house canvassers, and credit houses, accounting for only an insubstantial volume of sales in the area, advertising of the list price would be deceptive.”
Manufacturers are also held accountable by this rule. The FTC prohibits them from choosing a suggested retail price that’s intentionally inflated in order to allow retailers to offer a deceptive “bargain” at a lower price.
Here’s the example given by the FTC of a retailer following this rule.
“Manufacturer Roe, who makes Brand X pens and sells them throughout the United States, advertises his pen in a national magazine as having a ‘Suggested Retail Price $10.’ In a substantial number of representative communities, the principal retail outlets are selling the product at this price in the regular course of business and in substantial volume. Roe would not be considered to have advertised a fictitious ‘suggested retail price.’ If retailer Doe does business in one of these communities, he would not be guilty of a deceptive practice by advertising, ‘Brand X Pens, Manufacturer’s Suggested Retail Price, $10, Our Price, $7.50.’”
In this case, the manufacturer’s “suggested retail price” is the price at which many of the items are actually sold in communities across the U.S. That means the retailer in the example who offers the same product at a lower price is not breaking the law by advertising that.
We’ve all seen these kinds of offers: “Free,” “Buy One — Get One Free,” “2-For-1 Sale,” “Half Price Sale,” etc. These types of offers aren’t inherently against the law, but the FTC has rules about how sellers can use them so they aren’t misleading customers.
For example, according to the FTC rule, a seller can’t increase the price of an item when offering this kind of a special. They also can’t decrease the quantity or quality of the item, or otherwise attach any strings to the offer, other than that the customer must purchase the advertised item in order to get the “free” or additional item, or a discount on a second item.
This section of the rules also states that any terms or conditions related to the offer need to be disclosed before the customer makes a purchase. at the outset.
The FTC doesn’t offer an example of this rule written into the law. But here’s how it would look in practice.
John sells hand-sewn bandanas at a local store for $15 each. One summer, John decides to offer a “buy one, get one free” deal on his bandanas, but at the same time the deal goes into effect, he raises the price to $30 per bandana so he actually makes the same amount of money. This is not a bargain for customers, and would be considered deceptive pricing by the FTC.
The final rule in the FTC’s deceptive pricing section is a little bit vague, and meant to capture any instances of deceptive pricing that don’t explicitly fit into the more specific rules outlined above. Basically, this section says that sellers and retailers need to act in good faith, and not try to deceive or mislead their customers in any way related to pricing. Some examples that are outlined in this section include:
To sum up this section of the law, the FTC act states that “advertisers should make certain that the bargain offer is genuine and truthful. Doing so will serve their own interest as well as that of the public.”
The tough thing about fighting back against deceptive pricing is that it can be hard to prove when it’s happening.
But if you spot a retailer breaking any of these FTC rules, there are actions you can take. And if you’ve overpaid because you purchased something from a seller who was using deceptive pricing, there are steps you can take to try to get justice.
Before you do anything, you should gather any evidence you can think of that will support your claim that the seller was deceptive with their pricing. If the ad was in print in a newspaper or magazine, hold onto it. If it was in a TV commercial, try to get a recording. Get creative and try to collect any evidence that may exist that supports your claim.
Since the FTC is the federal agency that enforces deceptive pricing laws, you’ll want to file a complaint with them. This is relatively simple to do, and you can submit your complaint entirely online if you want to. Otherwise, follow the instructions on the FTC’s complaint website to reach an agent by phone.
However, filing a complaint with the FTC doesn’t guarantee that the seller will be investigated. It also doesn’t guarantee that you’ll get a refund if you overpaid for an item or service because of a seller’s deceptive pricing. For that, you have other options.
As a consumer, if you feel you’re entitled to a refund because a business acted unfairly or deceptively, you have options.
You should always reach out to the business first, by contacting their customer service department or sending them a complaint letter. Let them know why you feel wronged, and how they can resolve it for you. If they don’t respond, or they say they won’t help you, you can escalate your complaint in other ways.
One way is to use social pressure. If you have a following on a social media platform, you can post about what happened. Many businesses like to avoid this kind of a scenario because it’s bad press for them, and they may be more inclined to resolve your complaint if you take it public.
You could also sue the business in small claims or civil court, if you’re seeking a refund or other kind of monetary reward. However, a lawsuit can be expensive, complicated, and time-consuming.
Another option is to pursue consumer arbitration. This works kind of like a lawsuit — you’ll file some paperwork, and you and a representative from the business will meet with an independent third party, called an arbitrator, who will hear both sides of the dispute and make a decision. The decisions made in arbitration are legally binding, and generally can’t be appealed. Plus, arbitration takes time and money, so many businesses settle arbitration claims before even reaching that point.
Should you choose to pursue arbitration, you don’t have to do it alone. FairShake can help you file your complaint, work through the paperwork, and navigate every step of the process toward getting justice. Ready to get your fair shake? See how FairShake can help you resolve a deceptive pricing dispute today.
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