In 2012, several California district attorneys filed a lawsuit against the company Overstock, more commonly known as Overstock.com, claiming that the defendant company engaged in false advertising in violation of California truth in advertising laws. The state won their suit in Superior Court.  Overstock has appealed. Despite their appeal, there are several lessons a small business owner can learn from the Overstock case. Even though the decision is not final in terms of appeal, an experienced attorney representing small businesses can use the lessons from this case to avoid running afoul of California’s truth in advertising laws.

The Case Against Overstock

The plaintiffs proved to the Court in a jury waived trial that Overstock falsely advertised its products and misled consumers. In summary, the plaintiffs alleged that, based upon Overstock’s labeling, list pricing, and claims of a product’s advertised comparison price, California consumers were misled by claims that Overstock was a deep discounter of goods. Evidence adduced at trial revealed one customer purchased a patio set in excess of $400 from Overstock. Overstock’s website claimed he was receiving a discount in excess of $500. Upon receipt of the goods, the consumer found that the patio set he ordered was of insufficient quality. A price tag was affixed to the patio set from another retailer for $200 less than what the consumer paid for it. Other consumers testified to similar experiences. All consumers who testified stated that they contacted Overstock about their issue, so Overstock was on notice of the problem, which gives rise to liability for violations of state advertising laws.

Overstock’s Arguments

Overstock countered by arguing that the company took measures to ensure their pricing claims were not false or misleading. Additionally, they argued that any regulation of their claims was an unfair regulation of commercial free speech and a violation of the First Amendment to the United States Constitution as well as a violation of the California Constitution.  The defense also argued that the plaintiff’s claims were barred by the relevant California statute of limitations.

The Court’s Ruling

The Court rejected Overstock’s arguments, finding that the claims were filed timely and that the company’s advertising was misleading. The Court went on to recognize that the false advertising laws are violated every time a false advertisement runs, suggesting that the defendant’s exposure to liability is very significant. At the same time, the Court remained cognizant of the defendant’s constitutional rights, indicating that utilizing reference pricing is perfectly lawful if the advertiser discloses how it arrived at that price. The Court indicated the advertiser should indicate whether the reference price is the highest price listed by other retailers for that product or disclose whether the reference price is the manufacturer’s suggested retail/resale price (MSRP). The Court also suggested that using the term “compare” when referencing prices imposes an obligation to present a range of comparison prices and a good faith effort must be made to determine those prices.  The Court also ruled that the comparison prices must be re-evaluated within a timeframe not to exceed 90 days.

Seek Advice From Experienced Business Law Attorneys

The Court recognized the difficulty in navigating these troubled waters and even implied that “prudent” counsel’s advice should be sought when an advertiser makes pricing claims. The decision in Overstock has potential far-reaching implications for all advertisers in the state of California. Companies are advised to consult with an experienced business law attorney to review their advertising practices so they can avoid the traps which befell Overstock.