Image: Michael Kors

Plaintiff Tressa Gattinella sued Michael Kors after paying $79.99 for a pair of pants at a Kors outlet. The price tag for the pants stated: “MSRP [Manufacturer’s Suggested Retail Price]: $120” and “Our price: $79.99.” Gattinella claimed she purchased the pants believing she got a bargain at 33 percent off the original price.

According to her lawsuit, the retailer never intended to sell the pants for $120—the price was “artificial, arbitrary, and did not represent a bona fide price at which Michael Kors formerly sold the products.” Instead, the product was manufactured specifically for sale at the outlet location and the tag was created to present the illusion of a discount. Plaintiff claimed the deceptive price tag violated California’s False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act.

Michael Kors agreed to settle the suit for a total of $4.875 million and change its pricing practices. Specifically, the company promised to cease using the MSRP acronym and replace it with the word “Value” on outlet store price tags. Signage in the store will explain the meaning of the term “Value” for customers. Plaintiffs have filed a motion asking the court to approve that settlement deal.

The settlement fund will cover notice and administration costs, award $5,000 to Gattinella and a second named plaintiff, pay counsel fees of up to 30 percent of the settlement fund, and compensate the estimated “tens of thousands” of class members (all consumers who purchased products from a Michael Kors outlet store over a four-year period).

Each class member who submits a valid claim verification form will receive a percentage of the net settlement fund. Notably, claimants need only verify that they purchased Kors outlet products, but need not submit proof of purchase. Those who do provide receipts, however, will be entitled to a higher distribution. Class members who submit a valid claim form will receive points on a scale from one to five—ranging from one point for submission of a claim verification form alone, up to five points for providing a valid receipt evidencing the purchase of products totaling $1,000 or more. Each class member’s percentage share will be determined by dividing the number of points he or she receives by the number of total points of all class members.

The plaintiffs noted that the deal was “well within the range of reasonableness,” particularly given the lack of precedent. “Cases against outlet stores alleging false product pricing are a relatively new phenomenon, meaning there is no extensive body of case law governing applicable damages models,” according to the plaintiff’s unopposed motion. Moreover, in other similar cases, courts have granted the retailer’s motions to dismiss such claims.

Why it matters: Outlet pricing has attracted attention from federal legislators as well. In January 2014, Sens. Sheldon Whitehouse (D-R.I.), Richard Blumenthal (D-Conn.), and Ed Markey (D-Mass.), along with Rep. Anna G. Eshoo (D-Calif.), wrote a letter to the Federal Trade Commission requesting that the agency investigate whether outlet stores are engaging in deceptive advertising and pricing.

A number of similar cases have been filed recently in both California and New York courts challenging the pricing at outlet malls. Similarly, a California federal court recently certified a class of J.C. Penney customers who alleged that they were tricked by false “original” prices on “sale” merchandise into believing they were getting deeper discounts on private-branded apparel and accessories than they actually were.

*Article courtesy of Manatt Phelps & Phillips LLP.