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Congress Members Ask FTC to Probe Alleged Outlet Store Switcheroos

By Mark Wilson, Esq. on August 22, 2014 | Last updated on March 21, 2019

Is your company engaging in false advertising? Are you sure? When was the last time someone from the marketing department walked through your door to make sure they were on the up-and-up?

Maybe it's time you checked. The Federal Trade Commission is investigating "outlet stores" -- those low-priced colonies of large clothing labels like Saks, J. Crew, Gap, and so on -- that live in outlying outlet malls around the nation.

This Will Blow Your Mind

According to FTC complaints, customers are being deceived into believing that clothing sold at an outlet or factory store is the same stuff that's sold in regular retail stores, just discounted because it's out of season or there's too much of it.

That used to be true, say Jay Hallstein and Katie Doyle, founders of an online women's clothing company. But clothing companies found that outlet stores were their own cash cows. These days, it's estimated that 85 percent of the stuff sold in outlet stores was manufactured exclusively for the outlets, according to a press release from Sen. Richard Blumenthal of Connecticut. It's allegedly cheaper, lower-quality stuff than you find in retail stores, but no one is telling consumers that.

Prices Count, Too

OK, maybe your company isn't doing that. But what about its pricing scheme? Prices communicate information to the consumer about the product, and falsely describing a product as on sale (when in fact it's always sold at that price) can land your company in hot water.

In 2013, the Ninth Circuit addressed a claim against the department store Kohl's for false advertising and deception. Like many chains, Kohl's was listing a "retail" price on merchandise tags -- a price at which the product was never sold -- and also a "sale" price to make the consumer think that he was getting a bargain.

The court found that prices, as much as qualitative statements about a product, induce a consumer to purchase. "Misinformation about a product's 'normal' price is, therefore, significant to many consumers in the same way as a false product label would be. ... That, of course, is why retailers like Kohl's have an incentive to advertise false 'sales'," wrote Judge Stephen Reinhardt in Hinojos v. Kohl's Corp.

Hinojos was decided under California law, but the FTC's investigation could raise state and federal eyebrows nationwide. Whatever product your company is selling, false advertising is more of a concern than ever. Take a trip down to marketing to make sure you're not soon to be on the short end of an investigation.

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