Earlier this month Judge Wynne S. Carvill in Alameda Superior Court found in favor of eight District attorneys from eight different California counties who sued Overstock.com for its fraudulent pricing practices. The judge slapped the online retail giant with a $6.819 million civil penalty and issued an injunction to prevent Overstock from continuing its deceptive advertising practices.
Overstock had bet that it would be able to escape with much less civil liability, it had refused an offer from the District attorneys to pay a $7.5 million settlement in March 2010. Overstock is expected to appeal the ruling.
According to the company, in a statement it released to the SEC it only has an additional $1.2 million in assets set aside to cover its litigation risks, including the California litigation and an issue with the Ohio Tax Commissioner.
The lawsuit was first filed in November 17, 2010 alleging that Overstock had claimed to consumers that it had the lowest prices available online for products, when in fact it charged significantly higher prices than other merchants for the same product. The complaint alleged that Overstock has been routinely making these misleading comparative advertising claims for years, since 2006 or earlier. Amongst other practices, Overstock regularly state its competitors charge prices that the District Attorneys say are completely fabricated. An example that the complaint recites is a patio set Overstock sold for $449.00, it claimed that the list price was $999.99. However, when the patio set was delivered it to the consumer it had a Walmart sticker stating that the price was $247.00.
The District Attorneys claimed that these practices violated the False Advertising Law (FAL) and Unfair Competition Law (UCL).
Overstock disagreed, arguing that the price comparison feature was so over used in retail shopping that consumers have become desensitized to it and understand that it really just means that the comparison is to an alternative brand rather than an identical product. It also countered that when the identical items were discovered to be sold at significantly lower prices by competitors, it is because the market value of the items declined, while overstock prices remained steady. Finally, Overstock claimed that the errors were harmless because consumers received the lowest prices online.
But the judge found the evidence weighed against Overstock. One piece of evidence that the judge found particularly persuasive was an internal email where an employee stated that overstock routinely overstated the savings it found. The court declared that Overstock’s amount you save feature was a misleading statement, which was not based in any actual list price, but based by a formula. The ruling bans Overstock from using its price comparison advertised prices unless it provides a screen shot of the product and price it is offering a discount on.
The judge also ruled that harm did not need to be proven in order for the state to make a case for deceptive or misleading advertising. Ultimately, the judge ruled that even if Overstock did have the lowest prices on the internet, it was only by 5% or so, at a time when Overstock claimed that its prices were 40 to 60% lower than that of competitors.
Business Litigation and Consulting