Overstock.com Litigation Analysis Fourth-Quarter 2010

Overstock.com has been sued on November 17, 2010 in California state court by seven District Attorneys in Northern California for systematically misleading consumers by intentionally overstating list prices and its own purported discounts on such items. According to the Complaint, “Overstock’s untrue and misleading representations accompanied virtually every product listing on its site beginning no later than January 1, 2006.” The action seeks $15 million in restitution and fines, a sum which might be manageable even for a troubled company like Overstock.com, which declined to settle the claims since April 2008 for a far lesser sum. However, this $15 million claim for purchasers in Alameda County, extrapolated to include all purchasers throughout America, would clearly vastly exceed the financial resources of Overstock.com if new governmental or private litigants commence individual and class actions against the company, as would seem likely.

In my opinion, the true significance of the case is life-threatening for Overstock.com, which has been struggling, reporting losses, under SEC investigation regarding financial reporting issues, and now, a week before Black Friday and the crucial fourth-quarter sales blitz, charged with systematically misleading consumers about the most important competitive advantage claimed by Overstock.com: its supposedly low prices. The lawsuit has received extensive media coverage throughout the United States, and been commented upon by innumerable consumer advocates, including the wry comment from Chris Morran of The Consumerist: “Apparently the “O” in Overstock.com stands for “Overstating…”

The most telling comment came from Overstock.com itself, demonstrating that management clearly understands that its immediate prospects have been cast in doubt by the filing and consequent negative publicity on the eve of Black Friday and the essential fourth-quarter sales effort. Jonathan Johnson, President of Overstock.com, stated that “…the officials have chosen to file this lawsuit at what appears to us to be a strategically-timed moment.” Johnson also said “We have been singled out” and the odd boast that “As always, we look forward to our day in court”, perhaps referring to the extensive and growing portfolio of litigation against Overstock.com described in Note 6 to the financial statements in the Form 10-Q for the quarter ended September 30, 2010.

In short, this is a classic instance of the old adage “It couldn’t have happened at a worse time.”

Overstock.com, having made the now-obvious blunder of not settling with the seven District Attorneys, now faces a Hobson’s Choice of epic proportions which may be a life-or-death corporate decision: settle now, confirming to everyone that Overstock.com’s claimed discounts are suspect and hope the company survives past this fourth-quarter long enough to rebuild its tarnished brand name, or not settle, look forward to its day in court “as always” and have a sword of Damocles over the principal claimed reason to shop at Overstock.com…its supposedly low prices.

The moral of the story for corporate managers, in-house and outside counsel is that “A bad settlement is better than a good verdict.” Overstock.com could have jointly announced a settlement with the California District Attorneys after 4PM on a sleepy summer Friday during the summers of 2008, 2009 or 2010, with agreed-upon language blurring the lines. Instead, Overstock.com now faces a crisis of its own making which, as Overstock.com itself admitted, came at “…a strategically-timed moment” the week before Black Friday and the fourth-quarter crucial to any retailer.

Disclosure: I represent Sam E. Antar, who has exposed accounting shenanigans at Overstock.com, and been the target of issuer retaliation comparable to General Motors’ retaliation against Ralph Nader. I have spoken out against the anti-Semitic comments of Overstock.com’s CEO Patrick Byrne.