Oops! the Legal Consequences of and Solutions to Online Pricing Errors
| Citation | Vol. 1 No. 1 |
| Publication year | 2004 |
Cite as: Benjamin Groebner,
(c) 2004 Benjamin Groebner
How can businesses conducting sales over the Internet protect themselves from the inevitability of pricing errors? Unlike the brick and mortar retailers' ability to catch a pricing error quickly, thousands of orders can be placed with online retailers before they detect the problem. When pricing errors do occur and contracts are formed, merchants are forced to choose between absorbing the resulting financial loss as an investment in goodwill or trying to invalidate the contracts under the doctrine of unilateral mistake.
To avoid binding contracts with customers at erroneous prices, online retailers should employ protective methods of contract formation that help prevent loss.
[1] With an estimated $54.9 billion spent on U.S. retail e-commerce sales in 2003,(fn2) pricing errors that expose online retailers to considerable loss are inevitable. In 2003, experienced online retailer Amazon.com lodged 6,000 orders for a $1,049 television incorrectly listed online for $99.99 before the company detected and corrected the pricing error. Amazon.com could have been bound to 6,000 enforceable contracts with each television purchaser for a loss totaling over $500,000 if its user interface designed for online contracting was not designed to minimize the company's exposure to this kind of risk. Instead, Amazon.com avoided considerable loss by being able to cancel the orders.(fn3)
[2] This article discusses the financial impact caused by Internet pricing errors and examines the methods online retailers use to limit liability. Two specific methods include: (1) controlling the method of contracting by designing a system that conditions contact formation on verification of the contents of a customer's order, and (2) resorting to the equitable doctrine of unilateral mistake.
[3] All retailers experience pricing mistakes, but they can be more commonplace and much more harmful to online retailers. Many errors result from normal proofreading mistakes and software problems, but the probability of mistakes increases because many online retailers change their prices more often than brick-and-mortar stores.(fn4) Also, unlike brick-and-mortar retailers, online merchants execute sales automatically and therefore lose the added safety of having a human eye confirm the price.
[4] The Internet, with information spreading quickly, can compound the harm. Shopping "bots"(fn5) like MySimon.com and Shopping.com, combined with chat rooms, emails, and bulletin boards, rapidly circulate news concerning good deals. This can result in a flood of orders and thousands of sales being processed before the retailer is able to recognize and correct the mistake. For example, in late 2001, Kodak offered a £329 digital camera for £100.(fn6) At the time, legal experts argued that Kodak's automatic confirmation email formed legally binding contracts,(fn7) and in the end, the company decided to honor the sales. The incident caused Kodak to suffer a loss of more than £2 million.(fn8) In another instance, Buy.com agreed to a $575,000 settlement after 7,000 customers sued the company after it refused to honor their orders for a $164 Hitachi monitor, mistakenly marked down from $588.(fn9) Fortunately, companies can implement inexpensive measures to protect against this type of loss.
[5] Instead of relying on post-contractual strategies to mitigate loss, companies can implement simple proactive procedures to avoid the problems caused by pricing errors up front. As a first line of defense, creating special data monitoring systems or purchasing products that generate alerts when atypical shopping activities occur can help limit the frequency and effects of pricing errors.(fn10)...
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