Discount sites duke it out: Overstock sues NoMoreRack over competitive advertising

February 10, 2014: 12:58 PM ET

After fending off a lawsuit from Nordstrom, discount startup NoMoreRack must now battle Overstock.com, and a chorus of angry customers.

140210123503-tug-of-war-620xa

FORTUNE -- NoMoreRack, a fast-growing discount e-commerce startup, has a way with words that its competitors don't appreciate.

Take the word "rack." As NoMoreRack began racking up profits after it launched in 2010, brick-and-mortar competitor Nordstrom (JWN) sued the startup for riding the coattails of its Nordstrom Rack brand. It had a point: Nordstrom's sub-brand has been around since the 1970s, and the company operates 141 Rack stores that sell deeply discounted inventory. Meanwhile, NoMoreRack is no tiny, no-name startup that raised $52 million in venture capital and took in $350 million in revenue last year.

The basis of the Nordstrom lawsuit, filed in October 2012, was the word "rack." Five months later, a judge denied preliminary injunction on Nordstrom's case, saying that the word "rack" was not grounds for a trademark suit.

Now, Overstock.com (OSTK) is going after NoMoreRack for the same reason: trademark infringement. Overstock, a discount web retailer founded in 1999, noticed that NoMoreRack was heavily featuring the word "overstock" in its online ads. From the lawsuit:

At least as early as February 2012, NoMoreRack began promoting its discounted consumer goods through Internet-based advertisements that featured the term "OVERSTOCK" prominently at the top of the advertisements, using a font nearly identical to that used by Overstock, with phrases such as "OVERSTOCK CLEARANCE" and "Overstock iPads."

Overstock claims the ads use an identical font and color scheme as its own, and that they are targeting customers who had previously visited Overstock.com.

MORE: For digital native PopSugar, an old-school advertising strategy

Digital advertising is competitive, particularly for e-commerce sites. Buying Google search terms for a competitor's name is fairly commonplace and accepted. For example, if you had a daily deals site in 2010, you might buy search ads for the term "Groupon" so that your name would appear at the top of the sponsored results when anyone searches for that popular deals site. What's not commonplace and accepted is deception, where the ad itself says "Groupon" even if clicking on it takes you to some other daily deals site. Overstock accuses NoMoreRack of the latter, and a basic search of the term "overstock" reveals that that's the case.

overstocksearch

From the lawsuit:

Plaintiff's and Nomorerack's services are highly similar and move through comparable or identical channels of trade to similar or identical classes of consumers. Indeed, Defendant, upon information and belief, is taking unfair advantage of the market and customers cultivated and properly serviced by Overstock.

Given the font and logo claims, the lawsuit may have a better chance than Nordstrom's lawsuit. However, the ads in question are clearly labeled with NoMoreRack's logo at the bottom.

overstock

NoMoreRack isn't so worried. CEO Deepak Agarwal said, "We are confident that this lawsuit is frivolous and reflects the growing competitive threat from NoMoreRack." Agarwal argues the lawsuit did not raise valid issues about trademark infringement, denying the accusation that its ads look like those used by Overstock. "The term 'overstock' is common English, and we use it at times to accurately describe surplus products we are selling at deep discount on our site," Agarwal said. He pointed out that Overstock's CEO has a history of lawsuits. In 2012, the company sued Goldman Sachs for short-selling its stock and lost. 

MORE: Sears Chicago flagship to close

Still, the lawsuit isn't NoMoreRack's only problem.

As Overstock's complaint happily points out, NoMoreRack has some very unhappy customers. NoMoreRack has an "F" rating with the Better Business Bureau of New York, where it is headquartered, and the company has received almost 1,400 complaints from customers in the last 12 months regarding defective products, poor quality items, and incorrect orders. According to the bureau, NoMoreRack "failed to provide a sufficient explanation of how the company intends to correct the issues they have been experiencing." Disgruntled NoMoreRack customers are even organizing on Facebook.

Join the Conversation
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.