A recent California state court held that Overstock.com, Inc. (“Overstock”) must pay the price for its allegedly deceptive pricing practices.  Seven district attorneys throughout California brought a complaint against Overstock in 2010, alleging five separate violations of state law.  The focus of these claims was that Overstock allegedly made false and misleading statements in reference to the “advertised reference price” (“ARP”) that appeared on its website.  Specifically, the attorneys general stated that Overstock was deceiving consumers about the savings the company promises by routinely fabricating or inflating the prices its competitors reportedly charge, and that where Overstock did examine the competing prices for a certain product, it deliberately lists the highest retail price rather than the price most often encountered.  Last week, the trial court issued an injunction against the online seller, and assessed an approximately $6.8 million civil penalty.

In examining the claims, the court paid special attention to Overstock’s terminology on its website, as well as its pricing policies.  First, it distinguished between Overstock’s use of the term “list price” from its later use of the phrases “compare” and “compare at.”  It also noted that until September 2008, Overstock had no processes or procedures in place to confirm that for any given list price there was in fact at least one instance of a sale at this price.  However, at that point Overstock created a “Pricing Validation Team” to document the sources of ARPs.  Still, Overstock would seek and use as the ARP, the highest street price it could find.

The court explained that the analysis differs depending on whether the ARP was described as “list price” or “compare” price.  When called a “list price,” the court found that Overstock was making a false representation because this price was not always the actual list price of the product being sold.  Rather, it sometimes was a price based on a formula or the price of a similar but non-identical product.

For the “compare” and “compare at” eras, while not literally false, the court found Overstock’s practices were misleading in certain circumstances.  The court held it was misleading to use formulas or similar products to set ARPs, and that it is misleading to set ARPs based on the highest price found without disclosing that practice.  The court went on to provide examples of what acceptable disclosures should entail:

  • If using MRSP as the ARP, the disclosure should say “compare MSRP.” (It is interesting to note that the NAD has suggested that use of MSRP as a reference price if it is not a prevailing price paid by consumers in the market is deceptive.  See here and here.)
  • If an online retailer uses non-sale department store prices as ARP, the disclosure should say “compare regular department store.”
  • If making an unqualified use of “compare,” you must either use a range of prices of what is commonly found on the Internet (“compare at $X to $Y”) or make an effort to identify and use the prices it finds at one or more of the major online retail sites.

The court then issued an injunction that would:

  • Prohibit the use of ARPs based on a formula or a similar but non-identical product;
  • Prohibit the use of the highest price found anywhere unless the basis of the comparison is adequately disclosed (as described earlier);
  • Allow the unqualified use of “compare” language only if there is a good faith effort to determine the prevailing market price of the product;
  • Require a hyperlink defining any term used associated with an ARP (e.g. “MSRP”); and
  • Set a 90-day limit as the maximum period the ARP may remain posted before it must be validated as a posted price.

The court denied the restitution request for consumers who were misled by Overstock’s pricing practices, but did hit Overstock with a stiff civil penalty.  The court assessed a daily civil penalty of $3,500 from March 24, 2006 – September 24, 2008 (the approximate date of the pricing validation team implementation), and a daily penalty of $2,000 thereafter.  The total civil penalty assessed was therefore $6,819,000.

Overstock has already said it plans to appeal both the injunction and the amount of the penalty.  And we are glad.  This is one of the few litigated cases involving allegations around sales pricing claims.  And while we are all opposed to fraudulent pricing claims, as we have written before, these laws and enforcement of them really seems to deter good faith discounting, as well.  Marketers discount their prices only if it will promise more traffic in their stores.  And more traffic can only be generated if the price savings is advertised.  The investigatory hurdles set up by this decision may make offering legally compliant sales an impossibility for all but the most sophisticated retailers.  And even for the big guys, the cost of such a compliance program would surely mean consumers are paying more.  But in the meantime, discounting retailers would do well to pay attention to these California developments.