Not-So-Fast Fashion: Landmines Facing Brands Pivoting Toward Direct-to-Consumer Strategies New York Law Journal

August 1, 2017

With on-going struggles in the retail sector, traditional business strategies are under siege. Fashion brands increasingly chase each other down the “direct-to-consumer” rabbit hole, in fear of missing out on capturing revenue lost by way of once profitable wholesale accounts.

As a result, merchants and brand strategists have upended the traditional retail experience; overhauled their design and development process; and heavily relied upon social media, influencers, and new technologies for experiential-centric marketing and sales campaigns. In their haste to outmaneuver their competitors, brands may fail to consider legal, regulatory, and social obligations before implementing marketing and sales strategies on a global scale. In doing so, they risk class action/large scale/ litigation, most recently regarding unfair trade practices and truth in advertising.

Deceptive and Unfair Trade Practices (Pricing and Taxing)

While traditionally pursued against brick-and-mortar retailers, online retailers have come under attack by a host of state and private actions alleging deceptive pricing and taxing. In 2016, consumers filed a class action suit against Zara, alleging the retailer “…engaged in fraudulent pricing practices across the U.S.,” and “surreptitiously imposing an arbitrary markup” in its currency conversion without disclosure to the consumer.  See Rose v. Zara U.S.A., Inc., U.S. District Court, Central District of California, No 2:16-cv-6229 (2016). In that same year, J Crew received a complaint by another consumer class action group, wherein the proposed class alleged that J Crew deceived consumers by engaging in “phantom markdowns,” contending that the “value at” pricing listed for a particular item was never listed at such price, therefore misleading. See D'Aversa v. J. Crew Group Inc. et al., case number 1:16-cv-01590, in the U.S. District Court for the Southern District of New York.  Most recently, a consumer class action out of the Southern District of New York was filed against Forever 21, seeking damages in excess of $5,000,000. In that complaint, plaintiff alleged Forever 21 engaged in payment system that systematically overcharges the consumer in the guise of a sales tax that does not exist in the jurisdiction governing that transaction. See Togut v. Forever 21, Inc., U.S. District Court, Southern District of New York, No. 1:17-cv-05616-RWS (2017).

Many online retailers face similar claims, including Michael Kors (settling class action claims in the amount of $4,900,000 based on allegations of phantom discounts); Khol’s Department Store (settling class action claims in the amount of $6,150,000 against allegations of phantom discounts); and Amazon (as of July 2017, under FTC review for deceptive pricing, following a 2014 class action for the same). These cases, and the rate consumers are filing them is the result of the underlying business practices of the direct-to-consumer (and fast fashion) business strategy.  With brands churning out five to eight plus drops a year, inventory must move quickly or considerable losses result.  Thus, many brands get caught utilizing deceptive pricing strategies to get out of the hole.

Brands can limit exposure to such claims by simply saying what they do, doing what they say, and clearly defining policies and procedures for disclosing pricing and taxing terms. Of course, to be effective, comprehensive implementation of the aforementioned is required. Such policies and procedures should be carefully crafted, as what is disclosed may also be used against a brand in a deceptive trade practices claim. See Branca v. Nordstrom, Inc., No. 14-cv-02062 (S.D. Cal.). On October 9, 2015 (Finding, on plaintiff’s second amended complaint, that a plaintiff could support a claim of interpretation of a brand’s pricing with a showing of a brand’s retail pricing manuals and advertising, along with consumer surveys of comparable pricing). To that end, brands should strive for uniformity and transparency throughout a brand’s website, social media, and marketing and sales materials (internally and externally.) Commercial obligations don't end there; retailers must seek to understand their obligations under respective state and international consumer protection statutes in any regions where merchandise is delivered, as well as the FTC Guidelines for deceptive pricing.

Influencers and the FTC (Truth in Advertising)

With growing masses of fashion brands pivoting towards online direct-to-consumer marketing and sales strategies, merchants now face challenges of being seen and heard through a densely saturated marketplace and countless social media platforms. Brands heavily rely on celebrity and influencer (e.g. bloggers and other individual whom have garnered much attention and significant followers) product placement to tap into a priceless, elusive global audience of followers. Brands have engaged “celebrity placement” consultants, instituted formal gifting programs, and often pay influencers to wear or mention their product in a post on personal branded blogs, Twitter, YouTube, or Instagram.

Following series of complaints by consumer watchdog groups, the FTC recently issued an excess of ninety guidance letters to both influencers and brands regarding proper disclosures in sponsored posts on social media platforms. The guidance letters noted that “if there is a “material connection” between an endorser and an advertiser – in other words, a connection that might affect the weight or credibility that consumers give the endorsement – that connection should be clearly and conspicuously disclosed, unless it is already clear from the context of the communication.” See, “A material connection could be a business or family relationship, monetary payment, or the gift of a free product.” Id. The FTC further warned of significant civil penalties, much like that of its case against Lord & Taylor in 2016. In that case, the commission’s complaint alleged that, “as part of the roll-out of Lord & Taylor’s Design Lab clothing collection, the retailer paid 50 top online so-called fashion “influencers” to post Instagram photos of themselves wearing a paisley dress from the collection.” See, The FTC further alleged that “Lord & Taylor failed to disclose that it had pre-approved each post, required that the posts include the retailer's social media handle and hashtag, and that each poster had been given the dress -- as well as payment of up to $4,000 -- in exchange for their endorsements.” Id.

The FTC included copies of the FTC Endorsement Guidelines, in addition to providing background information on when and how marketers and influencers should disclose a material connection in an advertisement. They specifically highlighted material regarding tactics utilized by influencers and brands wherein hashtags and other disclosures fall below the “more” button, out of plain view of the post itself. Such tactics, as noted by the FTC, do not properly alert the consumer to the disclosure, and likely to cause confusion.

While the FTC has been limited in enforcement of potential violations following the issuance of the guidance letters, consumers have been active in taking action against brands and their use of influencers to promote goods and services. One recent rash of lawsuits against the ill-fated Frye Festival is likely to have a ripple effect on fashion brands and their use of influencers in social media marketing campaigns.  At present, the organizers (and in some cases, the influencers) are the subject of six federal and one state class action lawsuits, in addition to four individual lawsuits. In time, brands and influencers will see the fate of such strategies through Frye. As such, brands should pause before pursuit and ensure compliance.


Many fashion brands, especially emerging brands, remain uninformed of their obligations regarding consumers, as evinced in their marketing and sales campaigns. More so, such brands are ill-equipped to implement the best practices for addressing their legal obligations do companies have when they market themselves. As such, without procedures and protocols in place, these brands open themselves up to substantial regulatory and legal action, let alone considerable consumer backlash.

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