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People v. Overstock.Com, Inc.

California Court of Appeals, First District, Fourth Division

June 2, 2017

THE PEOPLE, Plaintiff and Respondent,
v.
OVERSTOCK.COM, INC., Defendant and Appellant.

         CERTIFIED FOR PARTIAL PUBLICATION[*]

         Alameda County Super. Ct. No. RG10546833 Wynne S. Carvill Trial Judge.

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

          Counsel for Respondent The People: Matthew Beltramo, Alameda County District Attorney.

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

          Counsel for Appellant Overstock.Com, Inc.

          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. In the unpublished portion of this decision, we conclude that the trial court properly applied the four-year limitations period of section 17208 and that there is sufficient 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. In the published portion, we reject Overstock's arguments that the court imposed excessive penalties and improperly ordered injunctive relief.

         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 items it sold were actually sold elsewhere at “compare at” prices submitted by buyers or fulfillment partners, and to re-verify those prices every 90 days. Fulfillment partners were asked to fill out spreadsheets listing, among other things, the high street price and low street price of each item. Internal communications showed that the team sought to verify the highest street price for the product, which showed the greatest percentage of savings. Jonathan Johnson, an executive who had been with Overstock since 2002, testified that it would not surprise him to learn that members of Overstock's “validation team” had a practice of using the highest price in the marketplace as a comparison.

         Under Overstock's new policy, the pricing validation team was not allowed to validate prices based on the sales prices offered by the fulfillment partners themselves. However, there were still instances in which Overstock employees and fulfillment partners discussed the possibility of the partners raising the prices for their products on their own websites or on Amazon in order to create a higher comparison price.

         The validation team did not use formulas to set reference prices. It sometimes verified a high street price for an item that was similar, rather than identical, to that sold on Overstock. Overstock received numerous complaints from customers that the “compare at” prices were inflated.

         In April 2011, Overstock began using the term “Compare” rather than “Compare at” for its comparison prices. Overstock's guidelines provided that the “Compare” price “must be a bona fide price at which the product is being offered for sale or sold.” Overstock also began using the term “MSRP” on its website as the ARP for some items. The guidelines for “Compare” and MSRP pricing stated that “Compare” prices must be revalidated every three months and MSRP prices generally must be revalidated every six months. Overstock continued using comparison prices based on products that were similar but not identical.[4]

         After the People began investigating potential claims against Overstock, the parties entered into an agreement tolling the statute of limitations as of March 24, 2010. The People, through a number of district attorneys, [5] filed this action on November 17, 2010, alleging causes of action for unfair business practices (§ 17200) and for false advertising (§ 17500), i.e., making untrue and misleading statements concerning pricing, price reductions, source of products, and shipping charges (§§ 17500). After extensive discovery, a court trial began in September 2013.

         At trial, the People adduced the facts already described. In addition, each party presented expert testimony. Dr. Larry Compeau, the People's expert in the field of advertised reference prices, their effects on consumers, and their capacity to deceive consumers, testified that as ARP's increase, “internal reference prices, ” or the price that a consumer senses something costs, also increase. Likewise, consumers' perception of product quality and the “perceived value” of the product, or “the overall value that the consumer attaches to the product, ” increase as ARP's increase. As the product's perceived value increases, consumers are less likely to continue comparison shopping and are more likely to decide to purchase the product.[6] These effects are not limited to unsophisticated or gullible consumers; rather, the vast majority of consumers are subject to them. Dr. Compeau did not believe all ARP's were misleading or confusing, and opined that as long as the ARP was “bona fide, ” it was not deceptive. He described “bona fide” in this context as meaning that the price has “some veracity in the marketplace.” This could be done by monitoring the market to compare prices to those of other sellers to determine an average or prevailing market price. An advertiser should be reasonably certain that the higher ARP does not significantly exceed the price at which substantial sales of the article are being made in the area.

         Dr. Joel Steckel testified for Overstock as an expert in statistics, marketing, and consumer behavior. He opined that four conditions would have to be met in order for Overstock's consumers to be misled by the ARP's: the consumer must be aware of the reference price; the consumer must form an expectation of what the reference price means; the consumer must believe that Overstock's use of the reference price conforms to that expectation; and Overstock's use of the reference price must differ from that belief. He concluded that a majority of Overstock's customers did not notice reference prices, did not have well-formed expectations of what the reference prices mean, and thought the ARP reflected a high or non-discounted price. However, on cross-examination, he acknowledged that ARP's can help increase a customer's sense that he or she derived some value from the sale and increase customer loyalty. He also acknowledged that between 70 percent and 75 percent of participants in a survey he conducted believed such terms as “MSRP, ” “compare, ” and “compare at” reflected “regular average” prices.

         Issuing an exceptionally detailed, 93-page statement of decision, the trial court found Overstock had made untrue and misleading statements regarding pricing in violation of the unfair competition law (§ 17200 et seq.) (UCL) and the False Advertising Law (§ 17500 et seq.) (FAL.)[7] The court imposed civil penalties of $6, 828, 000 pursuant to sections 17206 and 17536. 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; advertising an ARP based on a similar but non-identical product without disclosure; advertising an ARP based on the highest price found anywhere without regard to whether the ARP reflected a substantial volume of recent sales, without disclosure; using an unmodified term such as “compare” as the ARP nomenclature unless the ARP reflected a good faith effort to determine the prevailing market price of the identical product; 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; advertising an ARP for longer than 90 days without reverification; advertising an ARP without disclosure of the date of verification; and advertising an ARP without documentation such as a screenshot. The court denied the People's request that customers receive restitution.

         II. DISCUSSION

         A. Statute of Limitations

         Overstock first contends the trial court used the wrong statute of limitations for the penalties under the UCL. The trial court concluded the proper statute of limitations for the penalties for the UCL claims was four years. (§ 17208.) Therefore, because the parties agreed to toll the statute of limitations on March 24, 2010, the court calculated penalties beginning four years before that date, March 24, 2006. Overstock argues the correct statute of limitations for government penalty claims under the UCL is one year.[8] (Code Civ. Proc., § 340, subd. (b).) This is a purely legal issue, which we review de novo. (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1191.)

         The UCL authorizes the Attorney General or a district attorney to bring an action to recover civil penalties in the name of the people of the State of California. (§ 17206, subd. (a).) It also provides: “Any action to enforce any cause of action pursuant to this chapter shall be commenced within four years after the cause of action accrued....” (§ 17208.) Our high court has emphasized that this language “admits of no exceptions. Any action on any UCL cause of action is subject to the four-year period of limitations created by that section.” (Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 179 (Cortez).)

         Overstock asks us to ignore this clear statutory language and apply instead the one-year limitation of Code of Civil Procedure section 340, subdivision (b) (340(b)), which applies to “[a]n action upon a statute for a forfeiture or penalty to the people of this state.” Overstock argues that the UCL's statute of limitations is general in nature and does not specifically address government penalties, and that Code of Civil Procedure section 340(b) is a more specific limitations statute and should govern the penalties sought by the People.

         Overstock's argument is based on the difference between two subdivisions of Code of Civil Procedure section 340. Subdivision (a) of that statute establishes a one-year limitations period for “[a]n action upon a statute for a penalty or forfeiture, if the action is given to an individual, or to an individual and the state, except if the statute imposing it prescribes a different limitation.” (Italics added.) Subdivision (b), which applies to actions for penalties “to the people of this state, ” does not contain the final clause excepting circumstances in which the statute imposing the penalty prescribes a different limitation. And, Overstock points out, in an action under the UCL, a public prosecutor may collect civil penalties, but a private plaintiff is limited to injunctive relief and restitution. (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 950 (Kasky).) Because the cause of action for UCL penalties is given only to the public prosecutor in the name of the People, and not to an individual, Overstock argues that it is governed by Code of Civil Procedure section 340(b), and is not subject to an exception if the ...


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