United States: $6.8 Million Penalty Upheld In Overstock Price Advertising Case

Last Updated: June 23 2017
Article by Karen F. Lederer and Eric L. Unis

On June 2, 2017, a California appeals court affirmed a $6.8 million judgment against the online discount retailer Overstock.com, Inc. in a case in which the trial court found that Overstock made false and misleading representations about its advertised referenced prices. The $6.8 million penalty is the largest penalty ever obtained in an enforcement action involving price advertising.

In 2010, eight California counties sued Overstock alleging that Overstock engaged in unfair business practices and false advertising under California law. The case went to a bench trial in September 2013. The record at trial showed that, at various times, product pages on overstock.com displayed comparisons to "List Price," "Compare at" prices, and "Compare" prices. Often, the comparison was to the highest price at which an item was ever sold in the marketplace, regardless of whether other Internet retailers made substantial sales at the comparison price, and did not represent the prevailing market price. Evidence at trial also showed that in some instances Overstock employees encouraged suppliers to raise their MSRPs so that Overstock could advertise a higher discount. When making its comparisons, Overstock did not disclose to consumers whether Overstock was comparing its price to a price elsewhere for the identical product or to a price elsewhere for a similar product.

In February 2014, the Alameda County Superior Court issued a 93-page decision and ordered Overstock to pay a $6.8 million penalty. The court found that "List Price" was a false representation because it was not the actual list price for the product and that the terms "Compare At" and "Compare" were likely to mislead reasonable consumers when they were not accompanied by any explanation of the basis for the comparison.

The court also granted injunctive relief prohibiting Overstock for five years from advertising an advertised referenced price (ARP): "based on a formula, multiplier, or other method that would set it on any basis other than the actual price offered in the marketplace; advertising an ARP based on a similar but non-identical product 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 defines that term and states 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 reverification; advertising an ARP without disclosure of the date of verification; and advertising an ARP without documentation such as a screenshot."

The California Court of Appeal of the First Appellate District, Division Four, affirmed the trial court's judgment in its entirety, ruling that the $6.8 million penalty was not excessive and that the injunction was warranted. The appeals court agreed with the lower court's findings that Overstock's price comparisons were both fictitious and misleading. There was sufficient evidence, the court found, demonstrating that the referenced prices were arbitrary and did not represent a prevailing market price. The appeals court also stated that "On their face, the words 'compare' or 'compare at,' without further qualification, communicate to the reader that the price being compared is for the same, not a different item, and the trial court could properly conclude that using those terms to refer to the price of a similar item was likely to mislead a consumer."

Overstock also argued that no concrete injury occurred because Overstock actually did offer the lowest prices in the market. In disposing of that argument, the appeals court pointed to the trial court's finding that "the most powerful evidence was not that the advertisements led consumers to pay more than they otherwise would have but that there was a reduction in search intentions, an increase in a perception of transaction value and a greater likelihood that the consumers would return to the Overstock webpage."

THE TROUTMAN TAKEAWAY: The 2014 Overstock decision presaged a wave of class action litigation against retailers. Dozens of complaints have been filed alleging that retailers displayed false former prices or made misleading comparisons to their competitors' prices. J.C. Penney settled a class action alleging that it advertised false "regular" and "original" prices for $50 million and there have been other multi-million dollar settlements. A slew of cases have also alleged that retailers' outlet stores made misleading comparisons to prices charged on different, higher quality merchandise at the retailers' mainline stores. As these class actions continue to be filed, the decision in the Overstock appeal is a reminder that state and local regulators also have their attention on price advertising practices and that they can obtain very significant penalties. News that a $6.8 penalty was affirmed on appeal might encourage more government enforcement activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Karen F. Lederer
Eric L. Unis
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