California Appellate Panel Affirms $6.8M Penalty Against Overstock

By Richard P. Lawson, Partner, Advertising, Marketing and Media

In affirming a $6.8 million penalty against for deceptive pricing, a California appellate panel found that the amount was not excessive.

District attorneys in eight counties filed suit in 2010, claiming that the Internet retailer posted an inflated list price next to the sale price to trick consumers into thinking they were saving more money because the list price was not always based on an actual price.

The complaint cited one incident where Overstock advertised a patio set for $449.99 with a list price of $999. A consumer claimed that when he received the set, it had a retailer sticker on it with a price of $247.

A state court judge ordered the retailer to pay the $6.8 million penalty in 2014, holding that the defendant had made untrue and misleading statements regarding pricing in violation of the unfair competition law (UCL) and the False Advertising Law (FAL). In addition to the civil penalty, the court ordered injunctive relief regarding Overstock’s advertising practices.

Overstock appealed, but the appellate panel affirmed the trial court’s decision.

“The trial court carefully considered Overstock’s culpability, explaining that the seriousness of the misconduct was moderate, but that the offending practices were numerous, persistent, and willful, and the record fully supports these findings,” the court wrote. “The penalty the court set was both far below the maximum allowed by the statute and well within Overstock’s ability to pay.”

Overstock argued that the trial court applied the incorrect statute of limitations for the penalties under the UCL. Instead of the four-year period found in the UCL, the retailer argued that the court should have applied the one-year limitation found in the Code of Civil Procedure section 340, which applies to actions “upon a statute for a forfeiture or penalty to the people of this state.”

Reading section 340 in conjunction with section 312—which provides that the periods described in the Code should give way where “a different limitation is prescribed by statute”—the appellate panel found the UCL to present just such a different limitation and kept the four-year period in place.

The court also rejected Overstock’s contention that the government failed to present sufficient evidence of false or misleading statements, holding that the DAs provided “ample evidence” for the trial court to find violations of the UCL and FAL and that Overstock knew the use of the challenged practices was false or misleading.

“In sum, the record more than adequately supports the court’s findings that Overstock knew or should have known the use of formulas, prices for similar products, or the highest market prices as [comparators]—all without disclosure—had the capacity to mislead consumers,” the panel wrote.

Turning to the penalties imposed by the trial court, the appellate panel noted that both the UCL and FAL authorize civil penalties of up to $2,500 for each violation. The trial court considered three possible ways to compute the number of violations: the number of Californians who saw the offending advertisements, the number of sales made through the offending pages or the number of days Overstock violated the statutes.

Choosing the third approach, the court imposed a daily penalty of $3,500 for the period between March 24, 2006, and Oct. 1, 2008, calculated as $1,000 for each of three types of violations (basing pricing on formulas, nonidentical products and the highest possible price), with an additional $500 for “the lack of controls that led to various abuses.” From Oct. 1, 2008, through the date of the first trial, the penalty was $2,000, as Overstock implemented a pricing validation process and no longer used formulas, for a total of $6,828,000.

Overstock told the court the award was an abuse of the trial court’s discretion and that no evidence existed that its practices caused concrete injury to consumers. Neither position swayed the appellate panel.

“Although one factor—the finding that the seriousness of the conduct was moderate—weighed in Overstock’s favor, the other statutory factors all weighed against Overstock,” the court wrote. “Those included ‘the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, [and] the willfulness of the defendant’s misconduct.’ The offending conduct took place persistently over a period of years and continued not only after Overstock received customer complaints, but after it became aware its conduct was being investigated and prosecuted.”

Further, the trial court expressly found that Overstock’s deceptive pricing practices not only had the capacity to cause harm but “in fact did so,” the court noted. “The fact that Overstock in fact (according to its undisputed evidence) offered the lowest prices in the market does not mean no injury occurred.” The trial court only declined to order restitution not because no harm existed, the panel added, but because there was no practical way to determine what might be an appropriate award or how to identify those who should receive it.

The appellate panel also upheld the injunctive relief ordered by the trial court, as it had already determined the findings were supported by substantial evidence.

To read the opinion in People v., Inc., click here.

Why it matters: The action against Overstock triggered the current wave of lawsuits alleging deceptive pricing, and the appellate court’s affirmation of the $6.8 million award will do little to stem the tide. An attorney for Overstock said the company is considering an appeal to the California Supreme Court.

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