$6.8 Million Judgement For Misleading Pricing Upheld

Online Retailer Allegedly Based Advertised Reference Prices (ARPs) On Formulas, Nonidential Products, and Highest Possible Prices

People v. Overstock.com
Affirmed – Overstock allegedly used unverified or artificially inflated Advertised Reference Prices (ARPs) to induce sales. Advertising stated, ‘we compare prices so you don’t have to’ and Overstock allegedly used ‘compare’ prices to ensure consumer felt they ‘received a good deal’ (since products without ‘compare’ prices did not sell as well – average drop of 6% – 20% in sales).

The lower court found that Overstock:

  • Used list prices that were from 12% – 32% higher than the actual selling price
  • Did not train employees on setting comparison prices prior to 2007
  • Had no program to verify comparison prices prior to 2008
  • Had policies that allowed the highest market price to be used as a ARP
  • Encouraged adding freight to further increase ARPs
  • Used formulas to set an ARP at a desired discount level (e.g., multiply overstock price by 1.2 to market a 20% discount)
  • Failed to verify substantial sales of products at its quoted ARPs, and purposefully eliminated some sources from consideration (e.g. Amazon, whose prices were similar to Overstock’s)
  • Based ARPs on similar, but not identical, products (and failed disclose to consumers the broader comparison)
  • Asked suppliers to raise their prices & bump up their MSRPs to increase amount of perceived discounts

In April 2011, Overstock revised its polices to require a bona fide ‘list price’ be used, as well as reviewed every three months (every six months for MSRP). However, Overstock continued to base ARPs on similar, but not identical, products.

Based on the above, the court issued a $6,828,000 civil penalty. In addition to the civil penalty, the court issued injunctive relief, prohibiting Overstock from:

  • Advertising an ARP based on a formula, multiplier, or other method that deviated from an actual price offered in the marketplace
  • Advertising an ARP based on similar but non-identical products without disclosure
  • Advertising an ARP based on the highest price found anywhere without regard to whether the ARP reflected a substantial volume of recent sales, without disclosure
  • Using an unmodified term such as ‘compare’ as the ARP nomenclature unless the ARP reflected a good faith effort to determine the prevailing market price of the identical product
  • Using the term MSRP or a similar term unless a clear and conspicuous hyperlink defined that term and stated that it may not be the prevailing market price or regular retail price
  • Advertising an ARP that was set by adding the cost of shipping, without disclosure
  • Advertising an ARP for longer than 90 days without re-verification
  • Advertising an ARP without disclosure of the date of verification
  • Advertising an ARP without documentation such as a screenshot

The appellate court felt the trial court reached a correct conclusion, as supported by the evidence:

  • The ‘compare’ / ‘compare to’ prices were factual representations, and were false representations since they were based on formulas or similar products
    • one customer complained “Comparing this dress to a DVF dress is like comparing a Lexus to a Geo Metro
    • another customer complained “Nowhere in the USA does anyone sell [this product] at $517. . . . I am not not saving 81%
  • Markups were manipulated to achieve a specific amount of ‘savings’
  • Overstock knew (or should have known) its practices were misleading
    • an Overstock manager stated the use of formulas produced an ‘arbitrary number’
    • another Overstock manager stated, “You probably do not want to use Amazon as they will be similar to our price. I need you to find the HIGHEST selling price.”
  • Disclosures, to the extent provided were not sufficiently clear or prominent to explain how ARPs were derived

The court found that under the UCL & FAL, consumers didn’t need to be actually mislead, false advertising statements were actionable based on a ‘likely to mislead’ standard.

The appellate court also upheld the $6.8M civil penalty and injunctive relief, given the seriousness (willful), duration (several years) and numerosity (occurred daily, on thousands of product pages) of the offending practices, and the fact violations continued after Overstock was aware its was being investigated and prosecuted. The award fell within Overstock’s ability to play, thus was not constitutionally disproportionate. And the injunctions were necessary to prevent Overstock from re-engaging in the offending practices.
[Alameda Co. Sup. Ct.; A141613]
jbho: another reminder discount rates must be based on an actual price, supported by evidence of the price basis (how a company actually listed prices: MSRP, etc.), and you must disclose the basis for the pricing to consumers. Per the order: “An advertiser should be reasonably certain that the higher ARP does not significantly exceed the price at which substantial sales of the article are being made in the area.”

The court did acknowledge that 70% – 90% of Overstock list prices came from standard industry data. It was the minority of products with unverified comparison prices that were the focus of this action.

In case you are interested, the court defined the penalty structure as follows:

  • $3,500 per day for the period 24 March 2006 to 1 October 2008
    • $1,000 for each of the three types of violations (basing ARPs on formulas, non-identical products, and the highest possible price)
    • $500 for the lack of controls that led to the violations
  • $2000 per day for violations after Overstock implemented its first price verification program & stopped using formulas (1 October 2008 through trial date)

The court decided to use the ‘days of violation; measure, as using the number of Californians, or number of sales would have resulted in (excessive) penalties in the hundreds of millions of dollars (UCL & FAL authorize civil penalties of up to $2,500 for each violation).

UCL – Unfair Competition Law (§ 17200 et seq.)
FAL – False Advertising Law (§ 17500 et seq.)

 

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