The dispute centers primarily on shipping costs for goods sold through the service, which Onsale has marketed aggressively both online and in radio ads. Onsale promotes atCost as charging the wholesale cost, fees for sales tax and shipping, plus a $5-$10 markup.
"In many cases, Onsale's distributor provided free shipping, and Onsale retained those amounts [shipping fees]," said Kenneth Rosenblatt, a deputy district attorney in the Santa Clara County District Attorney's Office. "It will be our position that that's not standard in the industry. They made affirmative misrepresentations about where the consumer money was going."
Onsale, which sells computers and consumer electronics products, contends That charging full-rate shipping fees is a common practice. It admits charging buyers regular UPS rates even though it gets a volume discount for shipping. Several weeks ago, after discussions with the county prosecutor's office, Onsale changed its Web site disclosure on shipping charges.
Onsale is one of many Internet retailers selling items at cost or razor thin margins in the race to attract customers and boost market share. Onsale's atCost site was unveiled in January after the company's auction format produced disappointing financial results in last year's fourth quarter. At the time, Onsale told Wall Street analysts it intended to make money on shipping fees.
Onsale disclosed news of the dispute Friday, when it filed a request for declaratory relief against the Santa Clara County District Attorney and the California Attorney General.
"We just wanted to make sure we properly positioned it, to make sure it's not blown out of portion," said Brian Fawkes, Onsale's vice president of corporate communications. "We charge what UPS would charge you individually."
The company contends it is a common retail practice to charge customers standard UPS rates while negotiating bulk shipping discounts. Fawkes noted that Onsale has not tacked on extra shipping charges, as many catalog firms do.
Ken Cassar, e-commerce analyst at Jupiter Communications said many catalog firms that try to make a profit on shipping and handling, and the number is growing.
"Cataloguers are reaching maturity stage where they need to find new ways of profit," Cassar said.
The company says it agreed to change the wording on its Web site after consulting with the District Attorney, although prosecutor Rosenblatt would not confirm that. But Onsale maintains it should not have to pay a civil penalty or compensate customers who paid for shipping that Onsale got for free or at a discount. Fawkes said the district attorney is seeking "a few hundred thousand dollars."
"We believe it's inappropriate to comment on settlement discussions, particularly when they have broken down," Rosenblatt said.
The Onsale lawsuit is not a prelude to broad investigation of online retailers, Rosenblatt said.
"We are not investigating any other e-commerce companies at this time," he said, adding that the consumer protection unit will, however, respond to complaints. "I think this is more or less unique to the Onsale model."
Fawkes said that despite the "atCost" name, Onsale does not market itself as having the lowest prices on the Internet, because some competitors are willing to sell below cost as so-called "loss leaders."
In fact, a disclosure appears on the atCost site that sales are made at "actual invoice cost," which "does not include any volume discount that may be granted by our vendors or manufacturers."
Analyst Cassar noted that a retailer's cost varies depending on how much the retailer buys in bulk.
"Wal-Mart pays a far lower cost than any Internet merchant pays, so it's possible for Onsale to pass along its actual costs and for consumers to be able to find something somewhere else more cheaply," he said.