May 3, 2013

Oops! Pricing Mistakes By Online Retailers

Consumer Advertising Law Blog

An online retailer of video game hardware peripherals, software, and systems, Razer, recently suffered an apparently costly glitch on its UK website. A coupon code offering 90% off many products, intended for use only in a behind-the-scenes test of the company's website shopping cart, was accidentally released to the public. Customers naturally jumped at the opportunity.

Razer is hardly the first online retailer to suffer such an advertising glitch. Zappos and others have found themselves in a similar predicament. Generally, companies in that situation have wasted no time repudiating any obligation to honor purchases made at the erroneous price. But Razer took a different tack. It quickly announced that it would honor those coupons tendered by customers who bought "single products for their own use," as distinguished from those who bought multiple items (presumptively for the purpose of turning a quick buck). It isn't clear just how much this cost the company, but it cannot have been inconsequential. On the other hand, for "doing right" by its customers, the company was lionized in the media and may well have made back that much and more in increased traffic, publicity and goodwill.

Putting aside the possible marketing advantages of acquiescing in such an error, what are the rules when a merchant accidentally advertises a lower price than intended? What right, if any, does the online retailer have to repudiate the apparent deal? After all, didn't it make an offer to sell at a particular price that became a binding obligation when the buyer accepted the offer by tendering the purchase price? Was Razer being benevolent, or just putting lipstick on the pig?

Well, it depends.

In the first instance, there may or may not have been a binding offer and acceptance. Contracts 101 teaches that whether a communication from one party to another constitutes an actionable offer, as distinguished from mere preliminary communications or an invitation to make an offer, is a fact-intensive inquiry, looking at all the circumstances. Even generalizations aren't particularly helpful. For example, print advertisements such as those in newspapers and mail order catalogs are less frequently held to be offers than the prices posted in bricks-and-mortar stores. To the extent this is a meaningful distinction, which is the appropriate analogy for an online retailer? Is Amazon's website more like a virtual catalogue or a virtual store?

Some online retailers have adopted website terms and conditions that attempt to overcome such uncertainties by explicitly characterizing the customer's order as the offer, thereby leaving the retailer free to reject it for any reason, including because the advertised price was erroneous. Others simply reserve the right to cancel orders, either for any reason or specifically where the posted price was erroneous. In addition, even absent such contractual hedges, under the common law doctrine of unilateral mistake of fact, a contract is voidable if its enforcement despite one party's mistake regarding a material term such as price would be "unconscionable" or if the other party "had reason to know of the mistake. Thus, at least where a posted price is so egregiously low—or, in Razor's case, a coupon so dramatically over-generous—that a reasonable consumer would suspect it is a mistake, this doctrine would entitle the retailer to repudiate the contract.

On the other hand, none of these safeguards is necessarily ironclad. The unilateral mistake doctrine is so obviously fact-dependent that in all but the most egregious circumstances, its applicability is likely to be disputable. Using agreed terms and conditions to avoid the otherwise-uncertain application of general contractual rules is a time-honored strategy. But online terms and conditions are both adhesive in nature and subject to special FTC rules requiring that they be "clear and conspicuous." Thus, their enforceability is also inherently very fact-bound. And whatever protection the common law and artful drafting might provide in other circumstances, some states impose particular obligations on retailers when it comes to honoring the prices they advertise, however egregious the error.

In short, quite apart from the resulting public relations bonanza, a retailer in Razer's situation could hardly be faulted for concluding that the high road was also the prudent one.

Razer apparently managed to turn the sow's ear of its pricing gaffe into a silk purse. Mindful of this, some online marketing specialists are undoubtedly being tempted even as we speak to consider the deliberate use of such an "accidental" release scenario as a form of guerilla marketing: going viral, driving traffic to the site, and winning kudos for "voluntarily" honoring some part of the resulting uptake. One word: bad idea. The saving grace of Razer's gaffe was its inadvertence. Deliberately posting a false discount to drive traffic, with the intent to honor only some of the resulting sales, would amount to a bait-and-switch, violate a plethora of state and federal laws prohibiting deceptive and misleading advertising, and likely leave the retailer in a world of hurt at the hands of regulators, prosecutors and the plaintiff's class action bar.

© Arnold & Porter Kaye Scholer LLP 2013 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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