A Wake-up Call On Reference Pricing: High Court Rejects CMA's 1:2 Ratio

The High Court has now handed down its judgment on the enforcement order sought by the Competition and Markets Authority (CMA) against Emma Sleep, in connection with the use of reference pricing (including was/now pricing). The Court found that Emma Sleep had infringed consumer protection law in respect of a number of admitted breaches, but declined to find that Emma Sleep had committed infringements more generally or to grant the enforcement sought by the CMA.

Most notably, the Court refused to impose the CMA's proposed 1:2 fixed volume requirement, under which at least one product would need to be sold at the reference price for every two products sold at the discounted price, in order for the reference price to be considered non-misleading. The Court held that failing to meet such a ratio would not, of itself, amount to a breach of consumer law.

The judgment provides valuable guidance on the factors relevant to assessing whether reference pricing claims are genuine and, therefore, compliant.

Making the bed: background to the dispute

The CMA began its investigation into Emma Sleep in November 2022 as part of a broader review of online selling practices, including online choice architecture and techniques used to influence consumers' transactional decisions. The investigation was bought under the Consumer Protection from Unfair Trading Regulations 2008 (the 'old' law), rather than the Digital Markets, Competition and Consumers Act 2024 (DMCCA).

Since the investigation commenced, Emma Sleep and the CMA have resolved a number of the CMA's concerns, including through a consent order relating to Emma Sleep's "urgency messaging", under which Emma Sleep accepted that aspects of its previous conduct (including its use of countdown clocks in connection with online sale prices) infringed consumer law and provided undertakings regarding future compliance. For more details, please see our article.

However, the parties remained unable to agree on Emma Sleep's use of "reference pricing", namely, the practice of displaying a higher price alongside a lower current price (the example given by the court was "Was £1,000, now £500" or "£1,000, £500" with a higher struck-through price). Although Emma Sleep admitted various instances of specific breaches, the CMA sought an enforcement ordering compliance with a 'fixed volume requirement' - essentially a rule that for every two products sold at the discounted price, at least one must have been sold at the higher reference price (a 1:2 ratio), for the higher, reference price to be considered genuine and non-misleading in the context of mattress sales.

The mattress market context

The Court accepted unchallenged evidence that mattresses are relatively expensive, infrequently purchased and generally non-urgent products. Consumers can therefore often delay a purchase until a promotion becomes available, as reflected by increased sales during major promotional events such as Black Friday and Boxing Day.

Against that backdrop, the Court concluded that the "average consumer" of Emma Sleep's products is likely to be someone capable of postponing a purchase and, therefore, need something to induce them not to defer, for example, the perception of a good deal through a discounted price.

What is the issue?

It is well established that reference prices must be genuine. Guidance from both the Advertising Standards Authority (ASA) and the Chartered Trading Standards Institute (CTSI) makes clear that any claimed price advantage must not be misleading.

Whether a reference price is genuine requires a fact-specific assessment. Relevant factors include: how long the product/service was on sale at the higher price, when it was on sale at the higher price, number of sales at the higher price, etc.

Emma Sleep admitted a number of specific infringements, including:

• using a reference price for a new product that had not previously or subsequently been offered at that higher price;
• using a reference price that was not the product's immediately preceding selling price;
• using a reference price which applied while Emma Sleep was simultaneously offering the same product at a lower price through a bundle discount; and
• using a reference price where the number of sales were insufficient to substantiate an assertion that consumers purchased at the undiscounted reference price. These specific admissions from Emma Sleep related to circumstances where the percentage of products sold at the advertised reference price were less than 1% of total sales, with the data cited showing many more examples where the percentage figure was greater than 1% but less than 5%.

The dispute before the Court focused on two issues:

• Duration requirement: Emma Sleep accepted that a product should be offered at the reference price for a meaningful period and that it would be misleading to use a reference price if the product in question had not been offered for sale at the reference price for at least as long as it is being offered for sale at the discounted price.

• A fixed volume requirement: the CMA argued that a 1:2 sales ratio should apply, such that for every two discounted sales, at least one sale should have been made at the reference price. The CMA had previously set out this expectation in guidance for the mattress sector and sought an order compelling Emma Sleep to comply with it. Emma Sleep argued that such a requirement was disproportionate, unfair and impractical.

Given the serious consequences that would flow from a breach (exposing Emma Sleep to significant penalties), it was noted and agreed that "safety valves" would need to be built into any fixed volume requirement – covering e.g. clearance sales and a 15% margin of error such that Emma Sleep would not be in breach simply because it sold more goods at the discounted price than it was expecting.

Key Findings

• In assessing whether a reference price is genuine, the average consumer would attach some importance to the number of sales made at the higher price.
• The Court accepted that the data on the percentage of sales made at the reference price, as a proportion of overall sales, raised question marks.
• The Court refused to impose the CMA's proposed 1:2 fixed volume requirement. It held that a low proportion of sales, or even no sales, at the reference price does not automatically mean consumers are misled. Other contextual factors remain relevant, and there may be circumstances in which a reference price remains genuine despite very low sales volumes.

• The Court considered it inappropriate to impose this fixed volume requirement and then dilute it with safety valves because if Emma Sleep failed to identify a particular safety valve, it would risk significant consequences under consumer laws.
• Beyond sales volumes or the proportion of products sold at the reference price, the retailer's subjective belief is relevant. The Court held that consumers would regard it as significant whether a retailer genuinely believed it could make meaningful sales at the reference price. If the retailer holds such a belief, it will often be right. In the absence of such a belief, the reference price is unlikely to be a realistic price. If that belief is also objectively reasonable, that provides a further indication in favour of the reference price being genuine.
• The longer the discount period, the weaker the reference price becomes. 

This matter is not fully resolved. While the Court declined to make an order imposing the 1:2 fixed volume requirement, given that Emma Sleep had (and admitted to having) breached consumer laws, the preconditions for an enforcement order were met. The judge invited the parties to agree revised enforcement order terms reflecting this judgment, failing which a further hearing will take place in the last quarter of 2026.

No need to lose sleep: practical takeaways for businesses

Reference pricing claims are not inherently illegal, but they must be genuine and not misleading.

Reference pricing claims are more likely to be compliant where:

• a meaningful number of sales at the higher price have been made;
• the retailer genuinely believes it can make meaningful sales at the reference price;
• that belief is objectively reasonable;
• the product has been offered at the higher price for a sufficient period – likely, at least as long as the discounted price; and/or
• the higher price is the immediately preceding sales price.

Businesses should ensure they can evidence these factors and regularly review promotional campaigns, particularly where discounts run for extended periods (as the longer a product is discounted, the less secure the reference price will become as a comparator).While the Court has, at this stage, declined to endorse a bright-line sales volume ratio, the judgment reinforces that compliance will depend on a holistic assessment of all the circumstances, including pricing history, sales data and the trader's genuine commercial expectations.

While businesses involved in mattress sales, and other retailers, may be breathing a sigh of relief that they do not necessarily need to demonstrate one reference price sales for every two discount sales, in order to defend their discount and sale claims as genuine, they should not relax too much.

This area remains under close scrutiny by regulators including the CMA – which now, under the DMCCA has the power to issue fines without going through the courts – Trading Standards and the ASA. Further, the Court did not find that the percentage of sales made by Emma Sleep at the reference prices was sufficient, merely that there could be reasons why a business could have a genuine belief that a reference price was realistic and achievable, even if it did not go on to achieve significant sales (perhaps even any sales at that price).

In our view that provides some comfort, particularly for businesses testing the market with new products (without being significantly out of step with the existing market for similar products) or for those who have a reasonable expectation of significant sales, only to find, for example, that they have been undercut by a competitor.

That said, we do not expect the judgment to provide much in the way of additional leeway for businesses persistently marketing products, across several sales periods, at prices which do not result in significant sales; those displaying a lack of belief in their ability to make sales at the reference price (e.g. by offering voucher discounts in those reference pricing periods); or those that cannot, persuasively, explain why they have placed a product on the market at a particular reference price outside of its utility in making a subsequent discount seem more attractive.

Practical Tip

Always assume that internal documents may be disclosed and closely scrutinised as part of any regulatory investigation.

The judgment refers to Emma Sleep's internal pricing guidelines, including a "high price/high discount" strategy and statements such as "Try to create clear reasons for consumer to believe this is a unique sales opportunity". These materials featured prominently in the proceedings and serve as a reminder that internal pricing, marketing and promotion strategies should be drafted with regulatory scrutiny firmly in mind. In this case, the CMA certainly appeared to infer an intention to mislead from these and other statements, but the Court found that this inference was not unanswerable.

Other CMA consumer law updates

• The CMA has announced a package of enforcement action in the private parking sector, investigating practices that can leave motorists facing unexpected parking charges and difficult appeals processes. As part of its action, the CMA has opened an investigation into Euro Car Parks, issued an open letter to the sector, engaged with trade associations, and made recommendations to government for a stronger statutory code of practice, including improved transparency (making drivers aware of their rights), fairer appeals processes and clearer rules on grace periods.
• The CMA opened an investigation into a major technology company over concerns that consumers may not have been given clear information about subscription changes and pricing following the introduction of new features. The investigation will examine whether customers were misled about their options at renewal and consequently paid more than they otherwise would have done.

The CMA's proposed 1:2 ratio may have been put to bed, but reference pricing remains firmly under the microscope and the CMA are incredibly active in consumer law enforcement at the moment. If you would like to stress-test your sale and discounting strategies or assess your exposure under the DMCCA, Dan Smith and Zoe Pearman would be happy to help.

Read the original article on GowlingWLG.com