In the United States, the Federal Trade Commission (FTC) is charged with protecting consumers in the marketplace. Section 5 of the FTC Act, 15 U.S.C. § 45(a)(1) prohibits companies from utilizing “unfair or deceptive acts or practices in or affecting commerce”. This standard has been applied to protect consumers from deceptive pricing schemes. With retail purchases transitioning from brick and mortar stores to e-commerce, deceptive pricing schemes are evolving and in some ways becoming more prevalent. In addition to the FTC, many states have enacted laws meant to protect consumers from deceptive advertising and pricing tactics.

Deceptive pricing, according to the FTC, is any pricing scheme that is likely to mislead consumers and affect consumers’ behavior or decisions about the product or services offered for sale. Basically, any advertising, including pricing, must tell the truth and not mislead consumers.

Deceptive pricing has been found where companies utilize marketing schemes such as:

• strike-through pricing
• bait and switch
• perpetual sales
• price anchoring
• “compare at” pricing.

These pricing practices may not, in and of themselves, be deceptive. However, where the pricing comparisons or fine print are deceptive in nature, the FTC may intervene.

For example, strike-through pricing is a common practice where retailers list the current price in comparison to a former price for the product. The former price appears with a line through it indicating that it is no longer valid. This is a great way to communicate discounts or sales to potential customers. However, if the stricken former price is not a valid indication of an actual former price of the product, the difference in price and consequently the “deal” is misleading.

The FTC has provided some guidance to sellers regarding deceptive advertising issues on their website. Deceptive pricing schemes do cause actual problems for online retailers.

If companies are found to be utilizing deceptive pricing or advertising practices, the FTC will issue fines. Furthermore, many companies have faced civil litigation including class action lawsuits where damages can add up quickly.

In 2017, Canada levied a $1 Million fine against Amazon Canada for misleading pricing practices. They found that Amazon’s practice of comparing prices to higher “list prices” or suggested manufacturer prices (MSRPs) was merely a marketing gimmick that mislead consumers into thinking they are getting a great deal although the list price was not a prior actual price of the product. Canada’s Competition Bureau found Amazon culpable because they relied on their sellers to provide the list prices and never verified that those prices were ever accurate.

During the FTC’s review of Amazon’s purchase of Whole Foods in 2017, Amazon’s pricing was also investigated in the United States because of a letter filed with the FTC by Consumer Watchdog. Consumer Watchdog claimed that the reference prices posted on Amazon were higher than actual former prices of the products in the previous 90 days. Amazon denied the allegations. The FTC suspended its investigation of Amazon in 2017 but stated in a press release that, “Of course, the FTC always has the ability to investigate anti-competitive conduct”. This investigation highlights the FTC’s intent to follow up on complaints and investigate deceptive pricing in the marketplace.

The lesson here for online retailers is to make sure your marketing practices do not cross over the line to deceive consumers. Sellers should make sure that price comparisons including strike-through prices are an accurate representation of the actual deal the customers are receiving.

Today, online sellers have a lot to focus on. New competitors and pricing pressures, adhering to new privacy laws like the GDPR, and securing their customer data against hackers. Don’t make an FTC investigation into your advertised pricing an issue. If you have questions, have one of our Internet Lawyers review your pricing practices before the FTC does.

State Deceptive Pricing Laws and Enforcement

In addition to federal FTC enforcement, e-commerce sellers face exposure under state consumer protection statutes. Most states have enacted their own unfair and deceptive trade practices (UDAP) statutes that parallel or exceed federal FTC protections. Many of these statutes provide for a private right of action, allowing individual consumers — and, in some states, class action plaintiffs — to sue directly for deceptive pricing without waiting for the FTC to act.

California’s False Advertising Law (Bus. & Prof. Code § 17500 et seq.) and Unfair Competition Law (Bus. & Prof. Code § 17200 et seq.) are among the most actively enforced in the country. California’s Consumers Legal Remedies Act also provides explicit protections against price anchoring and misleading “compare at” pricing. California courts and enforcement officials have pursued numerous e-commerce sellers over inflated reference prices and misleading perpetual sale representations. Class action settlements in California deceptive pricing cases have reached into the tens of millions of dollars.

New York’s General Business Law § 349 prohibits deceptive acts and practices and provides for actual damages, attorneys’ fees, and civil penalties. New York’s Attorney General has taken enforcement actions against e-commerce retailers for fake discount schemes. Michigan’s Consumer Protection Act, M.C.L. § 445.901 et seq., similarly prohibits unfair, unconscionable, or deceptive methods, acts, or practices in commerce, with private rights of action for actual damages and injunctive relief.

How to Structure Compliant Pricing Practices

The FTC’s Guides Against Deceptive Pricing, 16 C.F.R. Part 233, provide the clearest framework for evaluating the legality of specific pricing tactics. The Guides address former price comparisons, comparable value comparisons, advertised sales, and other common e-commerce pricing strategies. Key principles include:

• Former price comparisons must be genuine. A “was $100, now $60” representation is only lawful if $100 was the actual, bona fide price at which the product was offered for sale in the recent past. The FTC Guides suggest that a product sold at a higher price “for a reasonably substantial period of time” satisfies this standard. A product that was briefly offered at an inflated “regular” price that was never actually paid by any customer does not.
• “Compare at” or MSRP comparisons must be accurate. Comparing your price to a manufacturer’s suggested retail price (MSRP) is only permissible if the MSRP reflects the price at which the product is actually sold by most retailers. If your competitors uniformly sell the product below MSRP, a comparison to MSRP is misleading.
• Sales cannot be perpetual. If a product is advertised as “on sale” continuously, the sale price is effectively the regular price, and the higher “regular” price is fictitious. This practice — common in the bedding and furniture industries — is a recurring enforcement target.
• “Free” offers must be genuine. Buy-one-get-one promotions are only lawful if the price of the paid item has not been raised to absorb the cost of the “free” item.

Dynamic Pricing and Algorithmic Pricing Risks

E-commerce sellers increasingly use algorithmic and dynamic pricing tools that adjust prices in real time based on competitor pricing, demand signals, and inventory levels. While dynamic pricing itself is legal, it creates compliance risks. If an algorithm repeatedly sets a high “regular” price and then drops to a “discounted” price when demand is lower, the resulting strike-through pricing may be misleading if the regular price is rarely or never actually charged.

Sellers using algorithmic pricing tools should audit those tools for deceptive pricing risks and ensure that any reference prices displayed to consumers accurately reflect prices at which sales have actually occurred. The FTC has signaled that algorithmic pricing tools are within its enforcement focus, and both federal and state investigations of AI-driven pricing practices are anticipated to increase.

If you have questions, have one of our Internet Lawyers review your pricing practices before the FTC does. Contact Revision Legal at 855-473-8474.