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Just when is a discount a discount? And when a consumer sees something advertised on a website or inside a traditional retail store as "50 percent off," how is that discount computed?
California Judge Wynne Carvill ruled against Salt Lake City-based Overstock.com and the result could be a $6.8 million fine that gets to the heart of that question.
According to a story written by Wired Enterprise editor Cade Metz, the story began in 2010 when a group of California district attorneys sued the Utah firm for $15 million, claiming that the company "routinely and systematically" made false and misleading claims about the prices of its product.
Metz wrote that Carvill found that Overstock's price comparison techniques violate the state's unfair competition and false advertising laws.
"The judge feels like we need more disclosure at how we arrive at price comparisons," Overstock.com attorney Mark Griffin told The Salt Lake Tribune Tuesday. "He didn't have any evidence to show we aren't a low price leader or that the prices themselves were false."
Griffin said the judge wanted the company to reveal the methodology it uses to arrive at an advertised discount price. He said the suit was caused in large part to a 2007 pricing error on a single item of patio furniture.
In a news release, Overstock.com said that it will appeal the tentative ruling from the California trial court, which prohibits the company from comparison price advertising unless done in conformity with new court-mandated practices which the company claims differ widely from industry standards.
"Where we use comparison prices, we find at least one example of a retailer selling at that price, and across such cases currently Overstock's discount averages 33 percent," said Overstock chairman and CEO Patrick Byrne in a news release. "Judge Carvill instructs that we must instead use one of several methods to derive a comparison price, such as using the highest price from among a set of five retailers chosen from a third-party ranking service for some categories, or of three other retailers for other categories, or from three others for some other categories, or the average price among them.
"I freely confess that I had no sense that the word 'compare' was replete with so much arcane meaning, nor that our reading of 'compare' to mean 'it is selling somewhere else at this price' would prove so odd and idiosyncratic in the eyes of California law."
Byrne and staffers did recalculations using the new California ruling last weekend and said that following his order will reduce Overstock's average 'compare-at' discount from 33 to 26 percent.
Griffin said though the ruling affects California, the practical effect is that Overstock's entire website will need to be changed to a one-size-fits-all standard.
"When you are doing retail, you have to adopt a one-size-fits-all format," he said. "Larger states can muscle this type of decision through because they know we need them as part of our market."
Griffin said that the ruling will affect about 100,000 items on Overstock.com, which usually lists about 1 million products at any one time. He said the ruling favors large manufacturers over smaller ones.
Byrne seemed particularly upset at how the ruling affects the company's Worldstock and Main Street Revolution stores. Worldstock sells arts and crafts made by global artisans and Main Street Revolution provides a category for small U.S. suppliers.
"The rules [the judge] has created are highly impractical for these categories unlike, for example, our sales of brand-name televisions, which can easily be made to conform with Judge Carvill's ruling," he said.
According to Overstock.com, the judge did not order restitution. But its ruling will require more elaborate price comparison disclosures on individual product website pages, depending on the type of comparison made.
The company said that if other retailers must follow the same rules, traditional retail stores would be required to make lengthy disclosures on paper price tags to disclose their methods of price comparisons. Overstock.com also said the ruling could prohibit retailers from using common reference terms such as "compare" without going through a prohibitively difficult and often impossible validation process.
"I believe this ruling is unjust," said Overstock.com President Stormy Simon. "I know because since 2008, I have been an integral part of the process by which we log, verify and advertise 'compare-at' prices."
Twitter: @tribtomwharton