People v. Overstock.com, Inc.

• Decision Date: 02 June 2017
• Docket Number: A141613
• Citation: 219 Cal.Rptr.3d 65,12 Cal.App.5th 1064
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE, Plaintiff and Respondent, v. OVERSTOCK.COM, INC., Defendant and Appellant.

12 Cal.App.5th 1064

219 Cal.Rptr.3d 65

The PEOPLE, Plaintiff and Respondent,

v.OVERSTOCK.COM, INC., Defendant and Appellant.

A141613

Court of Appeal, First District, Division 4, California.

Filed June 2, 2017

As Modified June 23, 2017

Robert Feldman, Daniel Bromberg, Sha Londa Hill-Castanon, Kimball Dean Parker, Redwood Shores, Meredith Shaw, San Francisco, Quinn Emanuel Urquhart & Sullivan, LLP, for Appellant Overstock.Com, Inc.

Matthew Beltramo, Alameda County District Attorney, Matthew Thomas Cheever, Sonoma County District Attorney, for Respondent The People.

Sheldon Jaffe, Deputy Attorney General, as Amicus Curiae for Respondent The People of the State of California.

Rivera, J.Overstock.Com, Inc. (Overstock) appeals a judgment entered after the trial court found it had engaged in unfair business practices (Bus. & Prof. Code,¹ § 17200 et seq. ) and false advertising (§ 17500 et seq.) The court granted injunctive relief and imposed $6,828,000 in civil penalties. Overstock contends

the trial court erred in applying the four-year limitations period of section 17208; that there is insufficient evidence to support the trial court's finding that Overstock made false and misleading statements in violation of the laws against unfair business practices and false advertising; and that the trial court imposed excessive penalties and improperly ordered injunctive relief. We shall affirm the judgment.

I. BACKGROUND

Overstock is an online retailer with a stated goal of being an "extreme value" retailer selling products for the lowest prices on the Internet. Overstock was founded in 1999, and originally offered primarily products from businesses that were liquidating excess inventory. Overstock now obtains most of its goods from third party "fulfillment partners."

The product pages on Overstock's website compared the price at which it offered an item to an advertised reference price (ARP or reference price), which it referred to by various terms during the times at issue in this case. From somewhere before 2003 until September 2007, the product pages showed a "List Price" for the product, with the number stricken through; it then showed the price at which Overstock was offering the product and, below that, was a calculation of the difference, expressed both in dollar amounts and percentages.² In September 2007, Overstock changed the "List Price" label to "Compare at," and in April 2011, it changed the term to "Compare." A commercial from 2013 claimed: "We compare prices so you don't have to," and an executive confirmed the commercial was consistent with Overstock's advertising strategy and was intended to instill a sense of confidence that the company offered products at good prices. He also confirmed that advertisement of reference prices gave customers confidence that they were shopping at a site that offered real savings. Overstock's internal research showed in 2007 that "the best predictor of whether a customer returns to our site is whether they feel they have 'received a good deal,' " and an employee email from 2008 indicated "compare at" pricing "definitely helps entice the customer to purchase." Products that did not have "compare at" prices suffered reduced sales.³

Before the Fall of 2008, Overstock had no process in place to ensure that all comparison prices were verified. The term "List Price" in Overstock parlance meant "a high street price, a full retail price," and Overstock's policies allowed the list price to be set by finding the highest price for which an item was sold in the marketplace. Overstock did not determine whether other Internet retailers had made any substantial sales at the comparison price. In an internal email from 2007 entitled "List Price," an Overstock manager told employees that they "probably do not want to use Amazon [to set list price] "as they will be similar to our price. I need you to find the HIGHEST selling price. We found out it can include freight, which will make it even higher." Another internal email chain, from 2006, discussed the pricing for an electronic item and said, "Oh, I think it's been established that the "List Price" is egregiously overstated. This place has got some balls." An employee in the same email chain noted that the "List Price" for a certain type of rug used to be $500, but had been increased to $800. In other emails, an Overstock employee asked a supplier to raise the price for which it offered its goods on its own web site so that, in comparison, Overstock's prices would be the lowest available on-line, and another employee asked a supplier to "bump up" the manufacturer's suggested retail price (MSRP).

The "List Price" was sometimes derived from that of similar products. This might happen, for instance, if a product was made exclusively for Overstock. Before 2007, Overstock employees were not given any specific guidelines for determining whether an item was similar enough to be considered comparable to the product offered by Overstock. And customers were never informed when a similar, rather than identical, product was used for a comparison price.

Overstock also sometimes used "formulas" to derive list prices; these could be based on a number of methods, such as doubling or tripling the cost to Overstock or the usual wholesale cost. A February 2008 email from an employee suggested that list prices could be derived by multiplying the Overstock price by 1.2, to show a discount of 20 percent off list price. An Overstock manager acknowledged that this method would result in an arbitrary number and stated that she would not have allowed the list price to be derived in that manner because there was no documentation to show that anyone else was selling it at that price. Before September 2007, Overstock's employees did not receive any instruction or training on when to use a formula to set a comparison price for a product.

In July 2007, a Shasta County resident, Marc Ecenbarger, bought two identical patio sets that showed a list price of $999 and an Overstock price of $449. Ecenbarger believed the patio sets retailed at the higher price and that, because of that price, they would be of good quality. When the patio sets arrived, however, he found they were poorly made and unstable. One of the tables had a sticker showing it was sold by Wal-Mart for $247. Ecenbarger checked several other Internet sites and found two or three of them selling identical patio sets for $247. He complained to Overstock and received a full refund. Even after his complaint, the patio set remained on Overstock's web site, with the same purported list price, for "quite a while," and Overstock sold the sets at the price paid by Ecenbarger through August 2007. Overstock had received a similar complaint about the patio set four months previously but had not changed the pricing. Ecenbarger reported the matter to the district attorney.

Ralph Mondeaux, Overstock's Vice President of Marketing, sent a letter to Overstock's fulfillment partners in September 2007 "as a reminder that when you provide a 'List Price' associated with a product you sell on our website, it must be in compliance with Overstock.com's policy regarding 'List Price.' " The letter set forth the acceptable ways to set list price, in order of preference: (1) Use the MSRP if there is confirmation of an instance in which the product has been offered for sale at that price. (2) Use the price for the same item offered on-line or, if the item is not available on-line, from a storefront retailer. (3) Use the price for a nearly identical item offered on-line or from a storefront retailer, taking into account "such facts [as] brand name, etc. and not merely the functionality of the product." (4) "[U]se an estimated price derived from standard wholesale and retail markups for [the] type of product." The letter asked the fulfillment partners to prepare documentation of their list prices. Correspondence with Overstock's vendors indicated this request was made in response to the district attorney's investigation.

Overstock changed the term it used for the comparison price from "List Price" to "Compare At" in September 2007. For the first year the "Compare at" term was used instead of "List Price," there was no change in Overstock's policy on how comparison prices were set. Overstock did not have a process in place to verify that a product had been sold at the comparison price. There were instances in which Overstock employees discussed with suppliers the possibility of raising their MSRP so that Overstock could show a higher discount. Overstock continued to use comparison prices that were the highest price at which an item was offered for sale, even if the "street price," or price at which the item could be bought in other stores, was lower.

In July 2008, Overstock conducted a study to determine whether its MSRP prices were inflated in comparison to the market. Among a random selection of ten of the top 100 selling products from each department, "compare at"

prices were on average 15.30 percent higher than the highest actual selling price on line. Among a random selection of 10 products from the top 100 items with the greatest "you save" percentage, the "compare at" prices were 32.81 percent higher than the highest on line selling price. And among a random selection of ten additional products from each department, the "compare at" prices were on average 12.96 percent higher than the highest actual on line selling price.

In October 2008, Overstock removed the "compare at" pricing from most of its products and allowed them to be re-posted only if the fulfillment partner provided a verified reference price. The result was a drop of six percent or more—in some cases up to 20 percent—in sales of products that did not show a "compare at" price. Overstock saw an increase in "conversion"—or the percentage of site visitors who bought products—of 8.9 percent when "compare at" prices were added.

Overstock also formed a "pricing validation team" to verify that the...