Online retailers and advertisers should take heed of a recent California prosecution of Overstock.com for allegedly deceptive price comparisons that resulted in $6.8 million in civil penalties and a five-year injunction on the company’s practices. The action took aim at some common online pricing practices and applied Federal Trade Commission (“FTC”) principles that the FTC itself has not emphasized as a priority in recent years. The state court’s decision in People of the State of California v. Overstock.com, Inc. includes what may become the “do’s and don’ts” for a new era of state and local consumer protection agency scrutiny of online pricing claims and comparisons.
Shopping for bargains on the internet has become one of America’s favorite indoor sports. One way to shop, of course, is to go from one internet retailer to the next, comparing the price charged by each for a particular product. However, the last decade has seen the growth of online discount retailers who claim, either because of mass purchasing or for other reasons, to be able to charge a price that is consistently lower than the competition. Discount seekers often start their searches at such sites, one of which is Overstock.com.
Overstock.com was founded in 1999 and began by offering products from manufacturers, retailers, or jobbers that were liquidating excess or outdated inventory. Overstock.com still acquires some products in this fashion, but, increasingly, it has also developed relationships with manufacturers, importers and others who use Overstock.com to distribute non-distress merchandise. The critical selling point for Overstock.com is to convince the web-focused shopper that visiting a bunch of sites is unnecessary as Overstock.com can be counted on to sell consistently below competitive prices. The critical question is how the competitive price - - known in the industry as the Advertised Reference Price (“ARP”) - - is established. The Overstock.com case contains an interesting - - although necessarily preliminary - - discussion of the issue.
In 2010, a number of California District Attorneys, acting on behalf of the People of the State of California, sued Overstock.com in Alameda state court over its practice of displaying a “list price” for products that was higher than the sale price offered by Overstock.com, and then calculating “savings,” expressed in both absolute and percentage terms, which the consumer would purportedly realize by purchasing the item on Overstock.com. The State alleged that the represented savings were false or misleading because Overstock.com overstated or arbitrarily assigned “list prices” to products, which resulted in the alleged “savings” being inflated or nonexistent.
Overstock.com used various techniques to describe the purportedly prevailing price for products, initially describing it as a “List Price.” After controversy was raised over its use of this term, Overstock.com switched tactics and suggested that consumers “compare at” a particular price and, ultimately, that consumers merely “compare” the price of products.
Pricing claims, like all advertising claims, must be substantiated before made, and must also be true, accurate, and non-deceptive. Because Overstock.com had no processes or procedures in place to confirm for any given list price that there was in fact at least one instance of a sale at the list price stated in the advertisement, the Court had no trouble determining that its representation of a “List Price” was unjustified. In addition, the Court found that the invitation to consumers to “compare at” or “compare” the Overstock.com price with another price suggested that the price to which the comparison was invited was a real price. Again, there was little or no evidence of that; instead, the evidence established that the “savings” were often based on Overstock.com’s price estimates for the same or comparable products. The Court also found that it was misleading to set ARP’s based on the highest price that could be found for a product without regard to the prevailing market price and without disclosing how the ARP was set. The mere fact that there was an invitation to “compare” a particular price, according to the Court, included an implied representation that the ARP represented a significant or prevailing level of transactions for the product. According to the facts presented in litigation, it did not.
The Court also took issue with Overstock.com’s use of a formula to supposedly substantiate the prices used in its price comparisons. The injunction issued by the Court prohibits Overstock.com’s use of ARPs based on a formula, multiplier or other method that would set the ARP on any basis other than an actual, substantiated price offered in the marketplace at or about the time the advertisement is first placed. The Court also enjoined Overstock.com’s use of ARPs for a similar but non-identical product than the one offered for sale by Overstock.com, unless the use of a similar product as the basis for the ARP is clearly and conspicuously disclosed on the product page of the website in a manner reasonably designed to alert consumers, e.g., “compare similar” or “similar product at.” The injunction also precludes Overstock.com from using the highest price that may be found anywhere to set ARPs without regard to whether the referenced price reflects a substantial volume of recent sales, unless the basis of the comparison is clearly and conspicuously disclosed.
Further, the Court ordered that if the basis of the price comparison is an unmodified term such as “compare,” then the ARP must reflect a good faith effort by Overstock.com to actually determine the “prevailing market price” of the identical product. The injunction allows Overstock.com to disclose the ARP within a range of verified prices or select from a price charged by one of the five largest internet shopping sites or one of the three largest brick and mortar shopping sites identified by a third party or industry source. Although use of these methodologies was not required, employing one of the approaches sanctioned by the Court would help ward off claims by regulators and demonstrate a good faith attempt to comply with the injunction. The Court’s injunction also includes detailed instructions for how to validate use of the term “MSRP” and disclose shipping costs, sets a 90-day limit for re-validating ARPs, and requires Overstock.com to maintain verification documents for a period of two years during the five year period of the injunction.
The lengthy (89 page) opinion by a single state court judge is not, of course, the last word on the subject. Indeed, Overstock.com has announced that it will appeal the decision and the $6.8 million penalty. However, the mere prosecution of Overstock.com by the State, as opposed to the FTC, is significant. In an age when the FTC seems to have priorities other than enforcing its Guide Against Deceptive Pricing, 16 C.F.R., Part 233, the attack on Overstock.com’s ARP- setting and price comparison methods appears to signal the beginning of a new enforcement trend in the on-line space, at least by California enforcers. Retailers and advertisers should review the Overstock.com decision for guidance in formulating and implementing price comparison practices, and Edwards Wildman’s Advertising practice has developed a set of best practices for clients based on these and other relevant precedent.
Notably, private plaintiffs’ counsel too may be emboldened by the Overstock.com decision as they file consumer class actions under California’s False Advertising Law, California Bus & Prof Code Sections 17500 et seq., and Unfair Competition statute, California Bus & Prof Code Sections 17200 et seq. Although the Overstock.com Court held that the State did not have to prove that consumers were harmed in order to prevail on the false advertising and unfair competition claims (as private plaintiffs seeking damages would have to do), the Court found that harm had been shown because the formulas Overstock.com used to set high ARPs had the capacity to and did in fact mislead consumers. The Court denied the State’s request for restitution for consumers who purchased goods on Overstock.com, finding that the record did not support a reasonable metric to determine what might be an appropriate award of restitution or any methodology for identifying those who should receive it, but it did allow the harm to consumers to factor into its decision to award the State $6.8 million in statutory penalties. Although the same problems inherent in awarding restitutionary damages would arise in any consumer class action, the Court’s finding of harm will likely incentivize plaintiffs’ class action lawyers to file targeted class actions which seek to overcome the obstacles that led the Overtsock.com Court to deny restitution.
In light of Overstock.com, online retailers and advertisers need to dust off their FTC Guide Against Deceptive Pricing, look for lessons in the state court’s decision, and exercise caution when making pricing claims, particularly comparison price claims. ARPs, expressly stated and implied as “compare at” prices, need to be substantiated with actual prevailing prices. Additional nuances for price comparisons can be gleamed from the Overstock.com opinion and the Guide Against Deceptive Pricing on which it in part relies. Edwards Wildman’s Advertising practice provides compliance counsel to retailers and advertisers on price comparisons and other advertising claims and practices.
The article was originally posted on the Law360 website on January 23, 2014.