California Court Ruling Rejecting Overstock.com`s ARP Program

JANUARY 2014
ADVERTISING, MARKETING
& PROMOTIONS
>> ALERT
CALIFORNIA COURT RULING REJECTING
OVERSTOCK.COM’S ARP PROGRAM PRESENTS
CHALLENGES FOR ONLINE RETAILERS
A California state court has ruled that Overstock.com’s comparative advertising method is misleading and
must be changed. In addition, the court ordered the online retailer to pay $6,819,000 in penalties.
BACKGROUND
Overstock.com offers more than one
million products on its website for sale
to consumers nationwide, including
throughout California. It engages in
comparative advertising based on
price, using so-called “advertised
reference prices” or “ARPs.”
A group of district attorneys in
California sued Overstock.com,
alleging that its ARPs were false or
misleading because Overstock.com
instructed its employees to choose
the highest price they could find as
an ARP or constructed ARPs using
a formula that applied an arbitrary
multiplier to Overstock.com’s
wholesale cost. As a result, the district
attorneys alleged, Overstock.com’s
prices were not the lowest available
and the “savings” displayed on its
product pages were inflated.
THE COURT’S DECISION
The court ruled that to the extent that
an ARP used by Overstock.com was
not an actual “list price,” but either was
an estimate of one based on a formula
or a reference to a price of a different
item – that is, a non-identical product
THE BOTTOM LINE
While there aren’t many regulatory or other legal challenges involving deceptive
pricing, and competitive pressures sometimes force retailers to take actions they may
not take otherwise, the court’s Overstock.com decision illustrates that failing to pay
attention to the laws regarding pricing can be dangerous. Retailers should take a look
at their policies and practices regarding comparative pricing and ensure they are
compliant with the law.
– then it was a false representation
because it was not the actual list price
for the product being sold. “Every time
Overstock.com displayed a list price
based on a formula or a similar
product rather than the list price
established by the manufacturer,
distributor or other supplier of that
identical product it made an untrue
statement,” the court said.
Amplifying its ruling, the court said
that it was misleading to set ARPs
“based on the highest price that
could be found without regard to the
prevailing market price and without
any disclosure of the practice.” If
Overstock.com used the highest
price it could find for an ARP, it must
disclose that, the court decided. As
examples, it mentioned “compare
highest retail” or “compare original
retail.”
Moreover, the court continued, if
Overstock.com used a manufacturer’s
suggested retail/resale price (MSRP)
as the ARP, it should disclose that
– e.g., “compare MSRP.” If it used
non-sale department store prices as
an ARP, the court declared that it also
should disclose that – e.g., “compare
regular department store.”
The court also ruled that if Overstock.
com wanted to use an unqualified term
such as “compare,” it then needed to
either use a range of prices that
reflected what might be commonly
found on the internet (compare at $X
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Attorney Advertising
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JANUARY 2014
ADVERTISING, MARKETING & PROMOTIONS
>> ALERT
to $Y) or make an effort to identify and
use the prices it found at one or more
of the major online retail sites (e.g., the
top online retail sites over all or the top
sites for a particular category of trade
such as furniture, jewelry, etc.).
THE INJUNCTION
The court concluded its decision by
prohibiting Overstock.com from using:
>>> an ARP based on a formula,
multiplier, or other method that
would set the ARP on any basis
other than an actual price offered in
the marketplace at or about the
time the advertisement was first
placed;
>>> an ARP based on a similar but
non-identical product than the one
advertised for sale unless the use of
a similar product as the basis for the
ARP was disclosed on the product
page in a manner reasonably
designed to alert consumers – e.g.,
“compare similar,” “like product at,”
“similar product at,” etc.; and
>>> the highest price that could be
found anywhere to set ARPs
without regard to whether the
reference price reflected a
substantial volume of recent
sales unless the basis of such a
comparison was disclosed on
the product page in a manner
reasonably designed to alert
readers to the context or nature of
the comparison – e.g., “compare
MSRP,” “compare department
store retail,” “compare original retail
price,” “compare at some retailers,”
etc.
The court also ruled that if the ARP
used by Overstock.com was an
unmodified term such as “compare,”
then the ARP must reflect a good faith
effort to determine the “prevailing
market price” of the identical product.
The court said that this requirement
would be deemed to have been met if
any of the following criteria were
satisfied:
>>> the ARP was a range of prices
(i.e., $X to $Y);
>>> the ARP was a price from one of the
five largest internet shopping sites
as identified by any third party/
industry source (or an average of
such sites) and that method was
identified by a hyperlink to the ARP;
>>> or the ARP was a price from one of
the three largest shopping sites for
the category of product being sole
(e.g., furniture, jewelry, etc.) as
identified by any third party/industry
source (or an average of such sites)
and that method was identified by a
hyperlink to the ARP label.
PRICING LAWS AND REGULATIONS
Almost every state has specific laws
regarding deceptive pricing, and the
FTC also has a “Guide Against
Deceptive Pricing.” The Guide
addresses retail price comparisons
and indicates that “[w]henever an
advertiser represents that he is selling
below the prices being charged . . .
for a particular article, he should be
reasonably certain that the higher price
he advertises does not appreciably
exceed the price at which substantial
sales of the article are being made in
the area.” Of further relevance to the
Overstock.com decision relating to
suggested prices (and actually at odds
with the opinion), the Guide states that
if “list or suggested retail prices do not
in fact correspond to prices at which a
substantial number of sales of the
article in question are made, the
advertisement of a reduction may
mislead the consumer.”
FOR MORE INFORMATION
Joseph J. Lewczak
Partner
212.468.4909
jlewczak@dglaw.com
or the D&G attorney with whom you
have regular contact.
Davis & Gilbert LLP
T: 212.468.4800
1740 Broadway, New York, NY 10019
www.dglaw.com
© 2014 Davis & Gilbert LLP