Left to right: Amy Lally and Rachel Goldberg Sidley Austin

On Aug. 24, 2017, the California Court of Appeal affirmed that outlet stores can sell outlet clothes. The need for this judicial proclamation was precipitated by a lawsuit filed by Linda Rubenstein against Gap alleging that it was fraudulent and unlawful for Gap to offer Gap branded merchandise at its outlet store that was not identical to the Gap branded merchandise offered at its non-outlet stores.

You might recognize the plaintiff’s name from Rubenstein v. Neiman Marcus, an unpublished 9th Circuit decision from April 2017. In that case, the 9th Circuit reversed the district court’s dismissal of Rubenstein’s complaint that the price tags at Neiman Marcus’s Last Call stores were false and misleading, and remanded the case back to the district court.  In contrast, the California Court of Appeal affirmed the trial court’s judgment sustaining Gap’s demurrer without leave to amend in Rubenstein v. The Gap.

In Rubenstein v. The Gap, Rubenstein pled causes of action under California’s Unfair Competition Law (“UCL”), False Advertising Law (“FAL”), and Consumers Legal Remedies Act (“CLRA”), based upon the allegation that Gap deceptively sold “lesser-quality Gap and Banana Republic clothing items at Gap and Banana Republic ‘Factory Stores,’” that were “never sold at ‘traditional’ Gap and Banana Republic stores.” Rubenstein asserted that by using their brand names in their “factory” outlet stores, The Gap and Banana Republic were “communicating to the public that the Factory Store products are the same products of the same quality that consumers have come to associate with the Gap and Banana Republic brands.”

The Court of Appeal and the trial court disagreed and, in short, rejected Rubenstein’s arguments across the board.

Specifically, the Court of Appeal found that Rubenstein had failed to show a violation of the UCL, FAL or the CLRA on a variety of grounds. First, she failed to make an allegation about any particular advertisement, promotional material or affirmative representation that purportedly misled her. Rather than identify a particular representation, Rubenstein alleged that Gap and Banana Republic’s use of their brand names, in itself, was a representation that the items offered at their outlet stores were the same as those offered at their traditional retail stores. The court rejected this argument on its face: “As a matter of law, Gap’s use of its own brand name labels on clothing that it manufactures and sells at Gap-owned stores is not deceptive, regardless of the quality of the merchandise or whether it was ever for sale at other Gap-owned stores.” Instead, the court pointed out that “[r]etailers may harm the value of their brands by selling inferior merchandise at factory stores, but doing so does not constitute false advertising.”

Second, the court disagreed with Rubenstein that Gap and Banana Republic had a duty to disclose that the items sold at their outlet stores were different than the items sold at their traditional stores. The court rejected Rubenstein’s argument that reasonable consumers, based on use of brand names, would expect the items offered at the outlet stores previously to have been offered at the non-outlet stores.

Finally, the court found Rubenstein had failed to present any facts that the clothing offered at Gap and Banana Republic outlet stores had any quality issues. Thus, the court found, Rubenstein lacked standing because she failed to show she suffered any harm.

The court also rejected the position offered by the California Attorney General, as amicus curiae. The Attorney General asserted that the court, in assessing whether Gap had a duty to disclose, should “examine the context of a business practice to determine whether it is likely to deceive consumers by reinforcing their misleading expectations or assumptions” instead of applying the more narrowly defined test in LiMandri v. Judkins, 52 Cal. App. 4th 326 (1997). In LiMandri, the duty to disclose was limited to the following four circumstances: “(1) when a defendant is in a fiduciary relationship with plaintiff; (2) when a defendant had exclusive knowledge of material facts not known to plaintiff; (3) when a defendant actively conceals a material fact from plaintiff; or (4) when a defendant makes partial representations but also suppresses some material facts.” The court found no reason to stray from LiMandri, especially in light of the substantial amount of precedent on the issue.

A number of lessons can be learned from Rubenstein’s Gap case that will be useful to companies challenging complaints raising similar allegations regarding other outlet stores:

  1. A reasonable consumer would not assume that the merchandise offered at a brand’s outlet store is the same as the merchandise offered at that brand’s non-outlet store.
  1. A reasonable consumer would not assume that the merchandise offered at a brand’s outlet store was previously offered at that brand’s non-outlet store.
  1. A brand may offer brand-named clothing at its outlet store that is not identical to the brand-named clothing offered at its non-outlet store without being fraudulent, deceptive, misleading, unlawful, or unfair to its customers (at least according to the opinion of the California Court of Appeal, Second Appellate District, Division One).
  1. A brand is free to use its brand-name to promote and sell brand-named goods different from that which is typically sold by the brand.

Amy Lally is a partner in Sidley Austin LLP’s Los Angeles office. Rachel Goldberg is an associate at Sidley Austin LLP’s Los Angeles office.