A California state court has ruled that Overstock.com's comparative advertising ... In addition, the court ordered the o
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 >> continues on next page
Attorney Advertising 1453
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
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