On January 3, 2014, the Superior Court of the State of California issued a tentative ruling and proposed statement of decision, finding that the online merchant Overstock.com had made untrue and misleading comparative advertising claims in connection with the pricing of its products.  District attorneys from seven separate California counties initiated the lawsuit against Overstock.com on November 17, 2010. Although the ruling was limited in its application to California’s False Advertising Law, the 89 page decision will likely be used as a guide for state and federal regulatory agencies nationwide when analyzing claims of fraud in comparative advertising.

The Comparative Advertising Allegations

                The complaint filed by the State of California against Overstock.com alleges that Overstock’s advertised reference prices (“ARPs”) in all of their various names and forms (Overstock alternatively used terms such as “list price,” “compare at,” or “compare”) have been false or misleading because Overstock instructed its employees to choose the highest price they could find as an ARP or constructed an ARP using a formula that applied an arbitrary multiplier to Overstock’s wholesale cost.  The State claimed that Overstock.com set ARPs without ascertaining and/or determining the prices at which other merchants typically sold the identical product. Moreover, Overstock also claimed, according to the complaint, that some of the products it offered were identical to different products offered by another retailor, when in fact the products offered for sale by Overstock were unique and/or otherwise not offered for sale elsewhere.

               In addition, the State claimed that Overstock’s ARPs were false and misleading because in some instances the online merchant did not actually compare prices.  Instead, Overstock and applicable product manufacturers would agree on the price that Overstock would pay these manufacturers for the sale of each of their products.  Overstock would then, according to the complaint, apply its own markup to the wholesale price, and advertise that amount as “Today’s Price.”  Thereafter, either Overstock or the manufacturer would fabricate a “list price” for the subject product based, once again, on an arbitrary markup.  This created the appearance to the consumer of substantial savings, which did not actually exist.

The Court’s Decision

                The Court ruled that “[t]o the extent that the ARP [advertised by Overstock] is not an actual ‘list price’ but either an estimate of one based on a formula or a reference to a price of a different item – that is, a non-identical product – it is a false representation because it is not the actual list price for the product being sold.”  The Court also found that the ARPs used by Overstock were misleading because Overstock failed to disclose that the ARPs were not “real numbers,” but instead were based on a formula or comparison to a non-identical product. Similarly, the Court found it “misleading to set ARPs based on the highest price that can be found without regard to the prevailing market price and without any disclosure of the practice.”  The Court recommended that if Overstock “wants to use an unqualified term such as ‘compare,’ then it needs to either use a range of prices that reflect what may be commonly found on the internet . . . or make an effort to identify and use the prices it finds at one or more of the major online retail sites.”

Protect Yourself

               The Court’s decision may lead state and federal regulators to begin scrutinizing the practices of online retailers who use comparative advertising.  It is therefore critical for retailers and advertisers to navigate various state and federal laws concerning truth in advertising.  Businesses that advertise comparative online shopping should be cautious about the prices and/or formulae used for such advertising.