California’s False Advertising Law prohibits advertising that is false or deceptive to the reasonable consumer. One practice—phantom discounting—is when a retailer induces a purchase by promoting a fictitious price reduction. The retailer advertises an artificially-high former price—at which the product was never sold—and then appears to sell the product at a lower, sale price.
To ensure that sales are genuine, California bans using advertisements that purport to convey a former price of a product unless that former price was in fact the prevailing market price for the product within the three months preceding publication of the advertisement (unless the advertisement explicitly specifies when the former price last prevailed).
Phantom discounts are commonly seen in strike-through pricing, where an advertisement shows a stricken-through former price next to a new, lower price. Courts have also applied the law to words and phrases in advertisements such as: “‘formerly—,’ ‘regularly—,’ ‘usually—,’ ‘originally—,’ ‘reduced from ___,’ ‘was ___ now ___,’ ‘___% off.”
Courts have been reluctant to dismiss cases on the pleadings where phantom discounts are alleged. But while most cases are settling, either before or after court orders adverse to the defendants, not all are meritorious.
Plaintiffs sometimes bring these claims based on a misunderstanding of the advertised pricing. For example, retailers frequently offer discounts for multiple-item or bulk purchases. In that context, a strike-through price—which courts have generally ruled may be understood by a reasonable consumer to indicate a former price—isn’t indicative of a former or prevailing market price but instead represents a discount premised on order quantity. Bulk pricing is certainly not prohibited under California law.
Similarly, the complaints sometimes fail—intentionally or not—to reference a correct prevailing market price when asserting phantom-discounting claims. The prevailing market price of the product isn’t necessarily limited to only the specific channel through which the consumer entered into the transaction. A product may be sold for a different price in-store than it is online, for example, and the burden is on the plaintiff to prove that the alleged prior price wasn’t the prevailing market price. But not all demands and complaints take into account all sales channels when alleging the market price.
Steep penalties may be motivating settlements. While many of the filed cases are defensible, the possibility of steep penalties, along with several large settlements, may be motivating defendants to settle. Plaintiffs are eligible to seek injunctive relief, restitution, and civil penalties. Government enforcement actions can also lead to fines of up to $2,500 per violation.
Civil enforcement actions by district attorney coalitions have also resulted in sizeable settlements, including a $2 million settlement with Amazon in 2021 and a $4.1 million settlement in 2024 with Lamps Plus, Inc.
To avoid being involved in litigation, retailers must maintain accurate records showing the dates of publication of their discounts.
Additionally, where a discount is offered for reasons other than a limited timeframe or flash sale (such as bundle discounts), retailers should ensure that the basis for the discount is clearly presented to consumers in the advertising.
Online retailers might also consider incorporating a class action waiver and arbitration provision into their website’s terms of service. Finally, retailers should always keep themselves well-informed of trends in California litigation involving pricing claims.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Luke Sosnicki is a commercial and financial services litigator and a partner in Thompson Coburn’s Los Angeles office.
Kim Bousquet is partner at Thompson Coburn and offers strategic advice and compliance counsel to help food, beverage and agriculture companies protect their interests.
Joseph Scott is an associate at Thompson Coburn with broad experience drafting and arguing motions, formulating effective discovery strategies, and efficiently resolving disputes of all sizes.
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