What is the “Prevailing Market Price” Under California’s Strike-Through Pricing Laws

California’s strike-through pricing and false advertising laws aim to protect consumers from misleading discount claims. Law firms like Pacific Trial Attorneys, Tauler Smith LLP, Dovel & Luner LLP, and Bursor & Fisher, P.A. have filed these types of consumer rights cases against businesses in California.

A key component of these laws is the concept of the “prevailing market price,” which determines the legality of advertised former prices. This article explores what constitutes the “prevailing market price” under California law, drawing on the significant court case People v. Superior Court (J.C. Penney Corp., Inc.) (2019), and provides clarity for retailers navigating these regulations.

Legal Framework: California Business and Professions Code § 17501

Under Section 17501, retailers are prohibited from advertising a former price for a product unless that price was the “prevailing market price” within the three months immediately preceding the advertisement. If the former price does not meet this standard, the retailer must clearly and conspicuously state the date when that price was in effect. The law defines the “prevailing market price” as:

“the worth or value of anything advertised is the prevailing market price … at the time of publication of such advertisement in the locality wherein the advertisement is published.”

This definition ties the prevailing market price to both a specific time (the advertisement’s publication) and a specific geographic area (the locality of publication), creating a framework that retailers must carefully interpret.

Judicial Interpretation: People v. Superior Court

The California Court of Appeal’s decision in People v. Superior Court (J.C. Penney Corp., Inc.) (34 Cal.App.5th 376, 2019) provides critical insight into what constitutes the “prevailing market price.” The case arose when the Los Angeles City Attorney sued major retailers—J.C. Penney, Kohl’s, Macy’s, and Sears—for allegedly using misleading strike-through prices online. The retailers challenged Section 17501, arguing it was vague and violated free speech, but the court rejected these claims and clarified the term’s meaning.

Key Takeaways from the Court

Market-Based, Not Retailer-Specific:
- The court ruled that the “prevailing market price” is not limited to the retailer’s own former price. Instead, it reflects the price at which the product was actually sold in the market within the relevant three-month period. For example, if a retailer advertises a shirt with a strike-through price of $50, that price must have been the common price at which the shirt was sold in the market, not just the retailer’s own historical price.

Common or Predominant Price:
- The term “prevailing” implies the most common or predominant price in the market during the specified period. The court referenced dictionary definitions and prior legal interpretations, noting that “prevailing” means “widespread” or “predominant” (Webster’s 3d New Internat. Dict., 1976). This suggests that a single outlier price or a price offered briefly does not qualify.

Geographic Locality:
- The “locality” is the geographic area where the advertisement is published and seen by consumers. For online advertisements, this could extend statewide or nationally, depending on the retailer’s target audience. The court emphasized that the market price must reflect conditions in this locality at the time of publication.

In-House vs. Nonexclusive Goods:
- For exclusive or in-house goods (e.g., private-label products sold only by one retailer), the retailer’s own sales data can establish the prevailing market price, as no competitors sell the same item. The court cited Spann v. J.C. Penney Corp. (307 F.R.D. 508, 2015), which held that J.C. Penney’s pricing history alone defined the market price for its exclusive products.
- For nonexclusive goods (sold by multiple retailers), the prevailing market price must account for prices offered by all sellers in the relevant market. A retailer’s own price is insufficient if it deviates from the broader market trend.

Three-Month Lookback:
- The law mandates that the advertised former price must have been the prevailing market price within the three months (89–92 days) before the advertisement. The court interpreted this as a “rolling” period, recalculated daily for ongoing online ads, ensuring relevance to current market conditions.

Practical Examples

Example 1: Exclusive Product
- A retailer sells its private-label jacket online, advertising a strike-through price of $100 and a sale price of $60. If the retailer’s records show the jacket was sold at $100 for the majority of the past three months, this could be the prevailing market price, satisfying Section 17501.

Example 2: Nonexclusive Product
- A retailer advertises a popular brand-name blender with a strike-through price of $150 and a sale price of $90. If competitors in the same market sold the blender for $120 consistently over the past three months, the $150 strike-through price would not reflect the prevailing market price and could violate the law unless the retailer specifies the date when $150 was valid.

Implications for Retailers

The People v. Superior Court ruling underscores that retailers must look beyond their own pricing history to comply with Section 17501:

Market Research Required: For nonexclusive goods, retailers need data on competitor prices in the advertisement’s locality to verify the prevailing market price. This might involve tracking sales data or using pricing analytics tools.
Exclusive Goods Simpler: For in-house products, compliance is more straightforward, relying solely on the retailer’s own sales records, provided they show the former price was predominant.
Documentation Key: Retailers should maintain detailed pricing records to defend against legal challenges, proving that advertised former prices align with market conditions.

Conclusion

Under California’s strike-through pricing laws, the “prevailing market price” is the common or predominant price at which a product is sold in the market—not just by the retailer—within the three months before an advertisement. The People v. Superior Court decision clarifies that this price is tied to the advertisement’s locality and time, with distinct applications for exclusive and nonexclusive goods. Retailers must understand these nuances to ensure their discount claims are lawful, transparent, and reflective of actual market realities.

For legal help, please contact Stuart K. Tubis, Esq., partner at Jeffer Mangels Butler & Mitchell LLP, at skt@jmbm.com or 415-984-9622.

Related Articles: