Appellate court upholds $6.8 million penalty against

By Sara McCleary | Jun 14, 2017

SAN FRANCISCO (Legal Newsline) – California’s First District Court of Appeal, Division Four has upheld a trial court’s judgment finding an online retailer had conducted false advertising and engaged in unfair business practices.

The decision, filed June 2, affirmed the court’s decision to grant injunctive relief and impose $6.8 million in civil penalties against The company’s appeal argued that it had been improper for the trial court to order injunctive relief, and that it had imposed excessive penalties.

The case was initially filed in November 2010 by a number of district attorneys who had been investigating Overstock’s business practices. The complaint stated the company had made untrue and misleading statements regarding prices, price reductions, shipping costs, and where it sourced it products. The trial began in September 2013.

Throughout the trial, Overstock’s methods for determining its advertised reference price, or ARP (listed on its website at various times as List Price, MSRP, Compare At price, or Compare price) came to light. According to the appellate court’s written opinion, the company had a team dedicated to setting these prices, and was told to find the highest price in the marketplace, even including shipping charges to bump it up. Evidence even came to light of employees asking suppliers to raise prices on their websites, or to raise their suggested retail prices.

When no prices could be found for exact products, Overstock could determine its ARP by using similar products or formulas, which might include doubling or tripling Overstock’s wholesale cost. These methods could be followed without informing the customers how the comparison price had been determined.

According to the appellate court’s written opinion, “the trial court found Overstock had made untrue and misleading statements regarding pricing in violation of the unfair competition law. The court imposed civil penalties of $6,828,000… It also ordered injunctive relief, prohibiting Overstock for five years from advertising an ARP based on a formula, multiplier, or other method that would set it on any basis other than the actual price offered in the marketplace… using the term MSRP or a similar term unless a clear and conspicuous hyperlink defines that term and states that it may not be the prevailing market price or regular retail price; advertising an ARP that was set by adding the cost of shipping, without disclosure; ... [and] advertising an ARP for longer than 90 days without reverification...” 

However, the court did not order Overstock to pay customers restitution.

In its appeal, Overstock argued that the People (the plaintiffs) had failed to provide substantial evidence that it had made false or misleading statements in violation of California’s False Advertising Law (FAL) and Unfair Competition Law (UCL). Under the FAL, it is illegal for any person or company to sell any product using any means “which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading.”

However, the appellate court agreed with the trial court’s findings, concluding that Overstock’s use of and methods for determining list prices, including using supposedly similar products and formulas or finding the highest price without regard for the number of sales at those prices, constitute misleading practices. Overstock also argued, according to the opinion, “that there is no evidence that it knew the use of the challenged practices to set ARP’s was false or misleading,” but again, the appeals court determined that “the record more than adequately supports the court’s finding that Overstock knew or should have known the use of formulas, prices for similar products, or the highest market prices as ARP’s – all without disclosure – had the capacity to mislead customers.”

Overstock also appealed the penalties it had been set, arguing that the $6.8 million figure amounts to an abuse of the court’s discretion, since it had found that Overstock’s conduct was only moderately serious, and there was no evidence that its practices in setting ARPs caused any consumers any kind of injuries.

As the written opinion details, however, the penalties determined by the trial court fell well within the law. The FAL and UCL allow for penalties up to $2,500 per violation, and the court considered three ways to determine the number of violations: the number of Californians who viewed the misleading ARPs, the number of sales made through the pages showing the ARPs, or the number of days the company had used the misleading practices. The trial court opted to use the third option, determining that the first two would result in excessive penalties. Instead of charging the full $2,500 per violation, the trial court set the penalty as $1,000 for each of the three types of violations it had found Overstock guilty of, plus an additional $500 per day for failing to create preventative controls against such abuses. 

The appeals court found that Overstock failed to show an abuse of discretion, so did not change the penalty.

Finally, Overstock’s appeal addressed the trial court’s imposition of injunctive relief, in particular arguing that because it had stopped the use of formulas in 2008, it had been inappropriate of the trial court to enjoin the practice. 

However, the appellate court determined that “While this is a close issue, we conclude the trial court acted within its discretion in enjoining the use of formulas. Overstock continued to take the position that the use of formulas was proper; in its post-trial brief it argued that formulas in fact matched the actual selling price of retailers who used the same formulas to set their selling prices. Even after ceasing the use of formulas, it continued to use other misleading practices, such as basing ARP’s on nonidentical products. On these facts, the trial court acted within its discretion in rejecting Overstock’s argument that it could not properly enjoin the use of formulas.”

Similarly, Overstock argued against the injunction requiring it to verify an ARP every 90 days because it already employs this practice. However, the appellate point again determined that this practice only began after the litigation began, and without an injunction, Overstock could abandon the practice at any time.

Finding no errors in the trial court’s judgment, justices Maria Rivera, Ignazio Ruvolo and Timothy Reardon affirmed all aspects of the decision.

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