United States: California Court Of Appeal Decision Offers Guidance On Comparative Pricing

Retail Did You Know?

A California court of appeal recently affirmed the decision in The People v. Overstock.com that raised the issue of the use of false advertised reference prices (ARPs) to market products online. This edition of Morgan Lewis Retail Did You Know? takes a look at the decision and the guidance it provides on what suffices as evidence of ARP violations, the statute of limitations under which they can be charged, and how to properly assess civil penalties for such violations.

Background

Over the past six years, there has been a wave of class action cases filed against retailers alleging that they use ARPs to market products online and in stores. These cases generally allege that retailers have advertised the percentage or dollar amount off of a "regular" price or have invited their customers to "compare" the offered purchase price to another higher price without adequately verifying the accuracy of those ARPs or the similarity of the products being compared. 

One of the earliest of these cases (The People v. Overstock.com) was a civil enforcement action filed by district attorneys from Northern California. After a bench trial, the court found that Overstock's use of ARPs violated California's laws against unfair competition and false advertising. The court imposed $6.8 million in statutory penalties as well as substantial restrictions on Overstock's future use of ARPs. Overstock appealed the decision in 2014, and California's First District Court of Appeal recently affirmed it.

The Trial Court's Decision

In the decision, which we reported on in 2014, the trial court determined that Overstock used ARPs in a manner that was designed to overstate the amount of savings found on its website. The court specifically found that three of Overstock's practices violated California law:

  1. "List price" ARPs based on formulas that would mark up the manufacturer's suggested retail price (MSRP) or other benchmark prices
  2. "List price" and "compare at" ARPs based on comparisons of prices for non-identical products, without disclosures
  3. ARPs calculated using the highest possible price that could be found—without regard for the prevailing market price and without disclosures

The court imposed $6.8 million in fines and an injunction containing the following specific requirements for Overstock's future use of ARPs:

  • ARPs cannot be calculated based on a formula, multiplier, or other method that sets the ARP on a basis other than an actual market price
  • ARPs cannot be based on similar but non-identical products without disclosure
  • Unless properly disclosed, ARPs cannot be based on the highest price found without regard to whether there were a substantial volume of sales at that price
  • Unmodified terms such as "compare" cannot be used as a reference price unless they reflect a good faith effort to determine the prevailing market price of the identical product
  • The term MSRP cannot be used without a clear and conspicuous hyperlink that defines the term and states that it may not be the prevailing market price or regular retail price
  • ARPs cannot be set by adding shipping cost without disclosure
  • ARPs cannot be used for longer than 90 days without re-verification
  • ARPs must include disclosure of the date of verification
  • Advertising cannot include a reference price without documentation (such as a screenshot)

Overstock appealed the decision, contending that the court applied the wrong statute of limitations, that the court's liability findings and penalty assessment were not adequately supported by evidence, and that the injunctive relief was not warranted given that many of the enjoined practices already had been abandoned. 

Court of Appeal Affirms Trial Court's Decision

In early June 2017, California's First District Court of Appeal affirmed the trial court's decision in all respects, finding that the trial court applied the proper statute of limitations and that there was substantial evidence to support the findings of violations, the assessment of penalties, and the imposition of the above-described injunction.

The Four-Year Statute of Limitations and Sufficient Evidentiary Basis

The court first resolved the issue of which statute of limitations applied to the government's unfair competition law (UCL) claims. Overstock argued in favor of the one-year limitation that is generally imposed on government penalty claims. But the court rejected this argument and affirmed the trial court's decision that California Business and Professions Code Section 17208's four-year statute of limitations governed because it was specifically applicable to UCL claims.  

The court also rejected Overstock's contention that the trial court's liability findings were not supported by substantial evidence, holding that knowledge of actual deception is irrelevant because all that is needed is whether the advertisement is likely to mislead—a fact that is largely determinable from the face of the advertisement. In its decision, the court walked through the various forms of allegedly deceptive ARPs, finding the following:

  • The unelaborated use of "list prices" that were calculated from a formula and/or a comparison with a non-identical product's price was deceptive because the dictionary definition of that phrase is "the basic price of an item as published in a catalog, price list, or advertisement."
  • ARPs—whether they are a "list price," "compare at," or "compare"—that are calculated from marked-up formulas or non-identical product prices are misleading because evidence suggests that a significant percentage of consumers—though not necessarily a majority—believed that they reflected comparisons of real prices for identical products, unless accompanied by prominent disclosures.
  • ARPs calculated using the highest prices that can be found also are misleading because expert testimony, customer testimony, and customer complaints indicated that consumers believed that those ARPs reflected the prevailing market price for those products.

Trial Court's Penalties Did Not Abuse Broad Discretion

The court recognized that trial courts enjoy broad discretion to affix the proper amount of penalties and fashion injunctive relief that will prevent future false or misleading ARPs. In its review of the penalty, it noted that there were three options entertained by the trial court for calculating the proper amount:

  1. Number of Californians who saw the advertisements
  2. Number of sales made through offending pages
  3. Number of days of violations

The court upheld the trial court's selection of the third option, which imposed a $3,500 per day penalty based on $1,000 for each of the three types of violations (reference prices based on formulas, non-identical products, and highest possible price) and $500 per day for "lack of controls that led to various abuses" from March 2006 through October 2008. It also upheld the trial court's decision to impose a $2,000 daily penalty for the post-October 2008 period because at that point Overstock had implemented a validation team process to verify ARPs and curb some of the more egregious ARP practices.

In support of its decision, the court cited the high number of violations—given the thousands of advertisements and number of days involved—and found that Overstock's violations were willful based on their failure to comply with the Federal Trade Commission's (FTC's) or Better Business Bureau's pricing guidelines. The court also found that the penalties imposed were adequate to deter future violations but not overly punitive, given the trial court's well-reasoned decision that restitution to Overstock's affected customers was not available because of the near-impossibility of identifying the appropriate award and/or recipients.

Practical Implications

As a general matter, this decision may result in increased enforcement activity by district attorneys and other authorities in California, particularly given the clarification that cases can reach back to address perceived violations that occurred four years ago. In deciding those cases, trial courts likely will refer to this decision and the findings of the trial court as a benchmark for what constitutes a deceptive ARP as well as how penalties should be calculated and injunctive relief crafted to deter future violations. 

Retailers should therefore be familiar with this ruling when considering their pricing and disclosure policies. For example, the court's discussion of the use of disclosures is important because, if properly constructed, disclosures may prove to be a useful method of limiting exposure to future claims. 

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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