avc-negotiation-strategy-memo.docx

1038-00004 · Calderwood & Harkness LLP · Analysis

avc-negotiation-strategy-memo.docx DOCUMENT M&A / Corporate

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MEMORANDUM

May 20, 2024

FROM: Alan Ngo, Partner, and Patrick Gallagher, Associate Calderwood & Harkness LLP 1201 Third Avenue, Suite 4400 Seattle, WA 98101

TO: Diana Prescott-Levy, General Counsel, and Terence Ashford, Chief Compliance Officer Cascade Retail Holdings Inc. 4500 Overlake Boulevard, Suite 800 Bellevue, WA 98004

RE: AVC Negotiation Strategy and Framework — Washington AG Consumer-Protection Inquiry (C&H Matter No. 1038-00004)

CC: Sylvia Hartwell (Calderwood & Harkness LLP); Simone Laroche (Calderwood & Harkness LLP)

I. Executive Summary

The purpose of this memorandum is to outline Cascade Retail Holdings Inc.'s ("CRH" or the "Company") strategic negotiating framework for the anticipated Assurance of Voluntary Compliance ("AVC") with the Washington State Attorney General's Consumer Protection Division (the "AG" or the "Division"). This memorandum follows the May 14, 2024 meet-and-confer between Calderwood & Harkness LLP ("C&H") counsel and the AG's investigative team and is intended to provide CRH management with a comprehensive roadmap for the negotiation phase that lies ahead.

At the May 14 meet-and-confer, Lead Assistant Attorney General Meredith Calloway-Voss and Investigating Assistant Attorney General Jordan A. Kittridge signaled the AG's willingness to resolve the pending consumer-protection inquiry through an AVC rather than filing a formal enforcement action under the Washington Consumer Protection Act, RCW 19.86 et seq. This development represents a meaningful and favorable shift in the trajectory of the investigation. An AVC would allow CRH to resolve the matter without litigation, without a public adjudication of liability, and without the attendant reputational risk that accompanies a contested enforcement proceeding — considerations of particular importance for a Nasdaq-listed company with a market capitalization of approximately $5.1 billion.

While the AG's willingness to negotiate is encouraging, the terms of any AVC will require careful attention. The AG is expected to seek prospective pricing reforms, the appointment of an independent compliance monitor, the establishment of a consumer restitution fund, and the payment of a civil penalty. Each of these terms presents opportunities for negotiation and, in some cases, significant financial exposure if CRH is unable to secure favorable provisions.

This memorandum addresses the following topics in detail: (i) the background and procedural history of the AG's inquiry; (ii) the applicable legal framework; (iii) our recommended negotiating positions on each key AVC term; (iv) a comprehensive financial exposure analysis; (v) tactical recommendations for the conduct of negotiations; and (vi) open questions that require input from CRH management. We project that the total financial settlement will fall in the range of $3.0 million to $4.5 million, and we recommend a target resolution in the range of approximately $3.5 million to $3.8 million. We believe this range is achievable and represents a fair outcome given the facts of the investigation and the strength of CRH's mitigating circumstances.

II. Background and Procedural History

A. The AG's Inquiry

On March 26, 2024, the Washington Attorney General's Consumer Protection Division issued a Civil Investigative Demand ("CID") to Cascade Retail Holdings Inc. pursuant to RCW 19.86.110. The CID was served on CRH's registered agent and promptly forwarded to in-house counsel. The CID contained twenty-three (23) document requests and fourteen (14) interrogatories, each directed at CRH's use of reference pricing across its retail operations.

The central focus of the CID — and the AG's broader inquiry — is CRH's deployment of "compare-at," "original price," and "was/now" reference pricing on its ecommerce platform (cascaderetail.com) and across its one hundred eighty-seven (187) brick-and-mortar retail locations operating in fourteen (14) western U.S. states. Reference pricing, as used in this context, refers to the practice of displaying a higher "original" or "compare-at" price alongside a lower current selling price to communicate a discount or savings to consumers. The AG's investigation concerns whether the reference prices displayed by CRH accurately reflected prices at which the relevant items were genuinely offered for sale in the ordinary course of business.

The investigation was triggered by a substantial volume of consumer complaints. Between January 2023 and February 2024, one hundred forty-seven (147) consumer complaints were filed with the AG's office, each alleging that CRH's "original" or "compare-at" prices were inflated and did not correspond to prices at which the merchandise was actually sold or offered for sale. The complaint volume is noteworthy, as it represents a sustained pattern over a thirteen-month period and crosses multiple product categories.

Of particular concern to the AG is CRH's "Smart Price" promotional program, which was launched on October 15, 2023. The Smart Price program utilizes algorithmically generated reference prices produced by a proprietary pricing model developed and maintained by Praxton Analytics LLC, a third-party data analytics firm. The Praxton model, overseen by Dr. Leila Farzan, draws upon a combination of manufacturer's suggested retail prices (MSRPs), competitor pricing data scraped from publicly available sources, and CRH's own historical pricing records to generate "compare-at" reference prices for display on product listings. The AG's inquiry has focused extensively on the methodology and outputs of this algorithmic model, including the extent to which the generated reference prices diverged from prices at which items were actually offered to consumers.

The AG's inquiry spans six product categories: women's apparel, men's footwear, home textiles, small kitchen appliances, outdoor furniture, and consumer electronics accessories. These categories were identified by the AG based on the concentration of consumer complaints and the prevalence of reference pricing within CRH's merchandising strategy for these product lines.

B. CRH's Response to Date

Calderwood & Harkness LLP was formally engaged as outside counsel on April 9, 2024, pursuant to an engagement letter executed on that date. Prior to C&H's engagement, CRH had consulted with Dunlap, Mercer & Fosse LLP (partner Nora Chisholm) regarding general compliance with the Federal Trade Commission's pricing guidance. Dunlap, Mercer & Fosse advised CRH on FTC pricing-guide compliance in 2022, but was not retained to represent CRH in connection with the AG's investigation. C&H assumed full responsibility for the defense of this matter upon engagement.

On April 11, 2024, CRH provided insurance notice to Elkhorn Mutual Insurance Company under its directors' and officers' liability insurance policy, Policy No. ELK-DO-2024-08817. The policy provides $25 million per occurrence and $50 million in the aggregate, subject to a self-insured retention ("SIR") of $250,000. On April 29, 2024, Elkhorn acknowledged coverage for defense costs incurred in connection with the AG inquiry, subject to the SIR and certain reservations of rights set forth in Elkhorn's acknowledgment letter. The reservations of rights are discussed in greater detail in Section V.C below.

CRH has cooperated fully with the AG's investigation to date. The first CID production was completed on April 23, 2024, comprising approximately 12,400 documents. Document processing, review, and production were handled by Stormfield Document Solutions LLC, a litigation support vendor experienced in large-scale document review projects. A second CID production, consisting of approximately 8,700 additional documents, is currently being finalized for production by May 31, 2024. Upon completion of the second production, CRH's cumulative document production will total approximately 21,100 documents. CRH has not asserted any objections to the scope of the CID's document requests or interrogatories, a point that underscores the Company's cooperative posture and serves as a meaningful leverage point in the AVC negotiations.

C. AG's Preliminary Findings

During the May 14 meet-and-confer, the AG's investigative team shared certain preliminary findings derived from its review of documents produced by CRH and its own independent analysis. Specifically, AG Investigator Sandra Pietsch reviewed a sample of 2,340 stock-keeping units ("SKUs") that were listed on cascaderetail.com and in CRH stores during the period from January 1, 2024 through March 15, 2024.

Of the 2,340 SKUs in the AG's sample, 1,601 — representing 68.4% of the sample — displayed a "compare-at" or "original" price that exceeded the highest price at which the item had actually been offered for sale during the preceding ninety (90)-day period. In other words, for nearly seven out of every ten sampled SKUs, the reference price shown to consumers was higher than any price at which CRH had genuinely offered the item in the prior three months.

The AG's analysis further determined that, for the non-compliant SKUs, the average overstatement was 37.2% above the actual highest offering price within the ninety-day lookback window. This means that, on average, the displayed reference price was more than one-third higher than the highest real price at which the item had been available. This degree of overstatement is substantial and will likely be a central point of emphasis in the AG's negotiating posture.

Based on extrapolation from the sample data and CRH's sales records, the AG estimates that approximately $214 million in gross merchandise sales bore potentially misleading reference-price tags during the five-month period from October 15, 2023 (when the Smart Price program launched) through March 15, 2024. This figure implies approximately $42.8 million per month in affected gross merchandise volume ("GMV"). While CRH may dispute the methodology underlying this extrapolation — and we believe there are credible grounds to do so, as discussed below — the $214 million figure is the AG's current working estimate and will serve as the baseline for the AG's restitution calculations.

D. May 14 Meet-and-Confer Summary

The meet-and-confer took place on May 14, 2024 at the Washington Attorney General's offices in Seattle. Present on behalf of CRH and C&H were Alan Ngo and Patrick Gallagher. Representing the AG were Lead Assistant Attorney General Meredith Calloway-Voss, Investigating Assistant Attorney General Jordan A. Kittridge, and AG Investigator Sandra Pietsch.

The meeting lasted approximately two hours. The AG's team expressed serious concerns about the systemic nature of the pricing discrepancies identified in the investigation, emphasizing that the 68.4% non-compliance rate across the sampled SKUs suggested a pervasive problem rather than isolated incidents of mispricing. The AG was particularly focused on the algorithmic origin of the reference prices, noting that the use of automated systems to generate misleading pricing representations raised distinct policy concerns about accountability and consumer harm at scale.

Despite these concerns, the AG indicated a willingness to resolve the inquiry through an AVC — rather than proceeding to a formal enforcement action — provided that CRH agrees to meaningful prospective pricing reforms, the appointment of an independent compliance monitor, the establishment of a consumer restitution fund, and the payment of a civil penalty. This represents a significant concession by the AG, as a negotiated resolution avoids the time and expense of litigation for both parties and allows for a collaborative approach to compliance reform.

The AG's representatives stated that they expected to circulate draft AVC terms to C&H within the next several weeks — likely by approximately mid-June 2024. No specific dollar figures were exchanged during the meet-and-confer with respect to the restitution fund or civil penalty. However, the AG's representatives signaled their expectation of a "substantial" restitution component and a civil penalty reflecting the scope and duration of the conduct at issue. We interpret these signals to mean that the AG's opening financial demands will be at the higher end of the spectrum, and CRH should be prepared to engage in meaningful negotiation to reach an acceptable resolution.

III. Legal Framework

A. Washington Consumer Protection Act — RCW 19.86

The Washington Consumer Protection Act ("CPA"), codified at RCW 19.86 et seq., is the primary statutory authority governing the AG's inquiry and the anticipated AVC. The CPA is a broadly drafted consumer-protection statute that provides the AG with significant enforcement tools.

RCW 19.86.020 is the central prohibition, declaring that "[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful." The display of inflated reference prices — where the "compare-at" or "original" price does not correspond to a price at which the item was genuinely offered in the ordinary course of business — may constitute a deceptive act or practice under this provision. The AG's theory is that consumers who encounter a reference price naturally understand it to represent the price at which the merchandise was previously or contemporaneously sold, and that inflating this price deceives consumers into believing they are receiving a greater discount than is actually the case.

Critically, the CPA does not impose a scienter requirement for enforcement by the AG. Under the statute, the AG need not prove that CRH intended to deceive consumers or had actual knowledge that the reference prices were inflated. The mere fact that the pricing representations were deceptive — regardless of whether CRH acted in good faith or relied on a third-party vendor — is sufficient to establish a violation. This is an important consideration in assessing CRH's litigation exposure and underscores the value of an AVC resolution, which does not require CRH to admit any violation.

The remedial provisions of the CPA are substantial. Under RCW 19.86.080, the AG may seek injunctive relief to restrain and prevent ongoing violations. Under RCW 19.86.080 and 19.86.090, the AG may seek civil penalties of up to $2,000 per violation, with the potential for enhanced penalties in cases involving vulnerable populations or particularly egregious conduct. The AG may also seek restitution for affected consumers and recovery of the AG's investigative costs and reasonable attorney fees. In a contested enforcement action, these remedies could be imposed by a court and would be a matter of public record.

B. Assurance of Voluntary Compliance — RCW 19.86.100

RCW 19.86.100 authorizes the AG to accept an Assurance of Voluntary Compliance from any person engaged in any method, act, or practice that the AG believes violates the Consumer Protection Act. The AVC mechanism provides a framework for resolving consumer-protection concerns without the need for formal litigation.

Several features of the AVC statute are noteworthy for CRH's negotiation strategy. First, an AVC is expressly not an admission of violation. The statute provides that an AVC shall not be considered an admission of a violation for any purpose. This feature is critical for CRH's public-company disclosure obligations and for mitigating the risk of follow-on private litigation. Second, an AVC is a binding agreement between the AG and the subject entity. Once executed, the AVC can be enforced in court by the AG. Third, a failure to comply with the terms of an AVC constitutes prima facie evidence of a violation of the CPA in any subsequent enforcement proceeding. This means that while an AVC avoids an initial finding of liability, non-compliance with its terms creates a presumption of violation that would be extremely difficult to overcome in any future action. For this reason, it is imperative that CRH negotiate AVC terms that it can realistically and sustainably comply with over the duration of the agreement.

C. FTC Guides Against Deceptive Pricing (16 CFR Part 233)

Although not directly binding on state enforcement proceedings in Washington, the Federal Trade Commission's Guides Against Deceptive Pricing, codified at 16 CFR Part 233, are widely regarded as persuasive authority on the standards for reference pricing. The AG expressly referenced the FTC Guides during the May 14 meet-and-confer, and they are likely to inform the AG's proposed AVC terms.

The FTC Guides provide that a former price used as a reference must reflect the price at which the article was "openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of business, honestly and in good faith." The Guides caution against the use of a "former price" that is fictitious — that is, a price at which the article was not actually offered for sale — and against the use of inflated "comparable value" or "compare-at" prices that do not correspond to prices at which the identical or comparable merchandise is being offered by competitors in the relevant market.

CRH previously received compliance advice from Dunlap, Mercer & Fosse LLP regarding the FTC pricing guides in 2022. While this prior consultation demonstrates CRH's good-faith efforts to comply with applicable standards, it also means that CRH was or should have been aware of the requirements for bona fide reference pricing when the Smart Price program was launched in October 2023. The AG may argue that CRH's prior awareness of these standards makes the subsequent pricing discrepancies more difficult to excuse. We will need to manage this point carefully in the negotiations.

D. CRH's Potential Defenses and Mitigating Factors

While the purpose of an AVC negotiation is to reach a resolution without litigating the merits, CRH's potential defenses and mitigating factors are highly relevant to the negotiation calculus. They inform the strength of CRH's bargaining position and the range of outcomes that a court might reach in the event the matter proceeds to litigation.

CRH has several arguments in its favor. First, CRH can assert good-faith reliance on the pricing model developed and maintained by Praxton Analytics LLC. The Smart Price program was designed and implemented based on Praxton's proprietary algorithmic model, and CRH retained a specialized vendor precisely to ensure that reference prices were generated through a data-driven, defensible methodology. CRH can argue that it lacked specific knowledge of the degree to which the algorithmic outputs diverged from actual offering prices and that it reasonably relied on its vendor's expertise. Second, CRH promptly engaged experienced outside counsel upon receipt of the CID and has cooperated fully with the investigation, producing approximately 21,100 documents without objection. This cooperative posture is a significant mitigating factor. Third, the Smart Price program was operational for only approximately five months before the CID was issued, limiting the duration and scope of any consumer harm. Fourth, the affected GMV of $214 million, while substantial in absolute terms, represents approximately 6.2% of CRH's fiscal year 2023 revenue of $3.47 billion. CRH can argue that any penalty should be proportionate to the scope of the conduct relative to the Company's overall business operations.

However, CRH should also be realistic about the limitations of these arguments. As noted above, the CPA does not require proof of intent; the AG need not demonstrate that CRH acted with the purpose of deceiving consumers. CRH bears responsibility for the accuracy of its own pricing representations regardless of whether those representations were generated by a third-party vendor. The use of a third-party algorithm does not insulate CRH from liability for the outputs of that algorithm as displayed to consumers. Additionally, the 68.4% non-compliance rate across the AG's sample is a striking finding. It suggests a systemic problem rather than isolated errors, and it will be difficult for CRH to characterize the discrepancies as minor or aberrational. These countervailing considerations counsel in favor of pursuing a negotiated resolution and tempering expectations about the degree to which defenses will drive down the financial terms.

IV. Recommended Negotiating Positions on Key AVC Terms

Set forth below are our recommended positions on each of the principal terms we anticipate the AG will include in its draft AVC. For each term, we have identified the AG's expected position, CRH's opening position, CRH's target or fallback position, and our assessment of the likely outcome.

A. No Admission of Liability

CRH's Position: This term is non-negotiable for CRH. Any AVC must include an express provision stating that CRH neither admits nor denies any violation of RCW 19.86 or any other law, regulation, or standard. The AVC must further provide that the agreement does not constitute a finding or admission of wrongdoing by CRH and that it may not be used as evidence or an admission of liability in any other proceeding.

Assessment: This is a standard feature of AVC practice, and the statute itself contemplates that an AVC is not an admission of violation. We do not anticipate significant resistance from the AG on this point. The AG's office has included similar no-admission provisions in virtually all recent AVCs, and there is no reason to expect a departure from this practice here.

The no-admission clause is particularly important for CRH given its status as a Nasdaq-listed company (Nasdaq: CRHI). An admission of violation of the Washington CPA could trigger securities-law disclosure obligations, could be cited as evidence in private class-action lawsuits by consumers, and could invite regulatory scrutiny from other state attorneys general. By preserving the no-admission framework, CRH maintains its ability to disclose the AVC in its public filings as a negotiated resolution of an inquiry without acknowledging any legal violation. We recommend that CRH's disclosure counsel review the final AVC language to ensure consistency with the Company's SEC reporting obligations.

B. Prospective Pricing Standards — Lookback Window Duration

The central prospective reform that the AG is expected to require involves the adoption of a mandatory "lookback window" — a defined period during which a product must have been offered at the stated reference price in the ordinary course of business before that price can be displayed as a "compare-at," "original," or "was" price.

AG's Expected Position: We anticipate that the AG will propose a lookback window of one hundred eighty (180) days. Under this standard, CRH would be required to demonstrate that any reference price displayed to consumers reflects a price at which the item was genuinely offered for sale during the preceding 180-day period. A 180-day window is aggressive and would impose significant constraints on CRH's pricing flexibility.

CRH's Opening Position: CRH should propose a lookback window of ninety (90) days.

Rationale: A 90-day lookback window aligns with common retail seasonal cycles and is consistent with the FTC Guides' general concept of a price maintained in the "recent, regular course of business." Many major national retailers use a 90-day standard for reference-price validation, and this timeframe has been accepted in prior FTC and state-level pricing enforcement matters. A 90-day window is sufficient to capture any overstatement within a current selling season and ensures that reference prices are both current and verifiable. For seasonal and fashion-cycle merchandise — categories that constitute a significant portion of the affected product lines (women's apparel and outdoor furniture, in particular) — a 90-day window appropriately reflects the commercial reality that prices naturally adjust as seasons change and merchandise cycles turn over.

CRH's Fallback Position: If the AG is firm on exceeding 90 days, CRH should be prepared to accept a lookback window of one hundred twenty (120) days.

Rationale: A 120-day window represents a reasonable middle ground between CRH's preferred 90-day standard and the AG's anticipated 180-day proposal. A 120-day period covers four months and spans most seasonal transitions, providing the AG with additional assurance that reference prices reflect genuinely sustained offering prices rather than fleeting or promotional price points. We believe 120 days is the likely landing zone for this term and recommend that CRH be prepared to move to this position after initial pushback from the AG.

Assessment: We anticipate that the AG will push back hard on a 90-day window, viewing it as insufficiently protective of consumers. However, the AG's negotiating team is likely to recognize that 180 days is commercially burdensome for a retailer of CRH's scale and product mix. We believe the negotiation will converge on approximately 120 days, and CRH should not accept a 180-day window without securing significant concessions on other terms — particularly the restitution fund amount or the duration of compliance monitoring.

C. Definition of "Bona Fide" Offering Price

The definition of what constitutes a "bona fide" offering price will have significant practical implications for CRH's pricing operations. This term will determine the evidentiary standard CRH must meet to validate any reference price displayed to consumers.

CRH's Position: CRH should advocate for a definition that includes prices at which the item was "openly and actively offered for sale" in the relevant sales channel (online or in-store), rather than a definition tied solely to the actual transacted price or the average sale price. The distinction is important: an item may be listed at a particular price for a sustained period, but the majority of consumers may purchase it at a promotional or sale price. Under CRH's proposed definition, the listed offering price would qualify as a bona fide reference price so long as the item was genuinely available at that price — even if most consumers ultimately purchased at a lower, promotional price.

This approach is consistent with the FTC Guides, which focus on whether the item was "openly and actively offered for sale" rather than on whether any consumer actually purchased the item at the stated price. The Guides recognize that an offering price and a transacted price may differ and that the relevant inquiry is whether the reference price reflects a genuine, non-fictitious price at which the merchandise was available to consumers.

CRH should also seek to address the algorithmic methodology employed by the Smart Price program. Praxton Analytics' model drew reference prices from three principal data sources: manufacturer's suggested retail prices (MSRPs), competitor pricing data, and CRH's own historical pricing records. CRH should seek to preserve its ability to use algorithmic pricing methodologies going forward, provided that the algorithmic outputs are validated against actual offering-price data within the agreed lookback window. The AVC should not prohibit algorithmic pricing per se but should require that any algorithmically generated reference price be verified against bona fide offering data within the applicable lookback period. This approach balances the AG's interest in accurate pricing with CRH's operational need for efficient, scalable pricing systems.

Assessment: The AG is likely to insist on language that ensures reference prices are not merely theoretical or aspirational but instead reflect prices at which consumers could actually purchase the merchandise. We expect the AG to propose a definition that requires the item to have been offered at the reference price for a minimum number of days within the lookback period — for example, at least 28 consecutive days. CRH should be prepared to negotiate the minimum-days requirement but should resist any definition that ties the reference price solely to the average transacted price, as this would effectively eliminate CRH's ability to display meaningful reference pricing for items that are frequently promoted.

D. Scope and Duration of Independent Compliance Monitoring

The appointment of an independent compliance monitor is a standard feature of consumer-protection AVCs involving systemic pricing issues. The key negotiating variables are the frequency of audits, the duration of the monitoring period, and the selection of the monitor.

AG's Expected Position: We anticipate that the AG will propose an independent compliance monitor conducting quarterly audits for a period of thirty-six (36) months. This would result in twelve (12) quarterly audit cycles over the three-year monitoring period — a significant operational and financial commitment.

CRH's Opening Position: CRH should propose semi-annual audits for a period of eighteen (18) months, resulting in three (3) audit cycles.

Rationale: Quarterly auditing imposes a significant operational burden on CRH's merchandising and pricing teams, requiring the allocation of substantial personnel time and internal resources to facilitate each audit cycle. CRH has already demonstrated its commitment to remediation by pausing the Smart Price program pending review, and an 18-month monitoring period is sufficient to demonstrate sustained compliance with the AVC's prospective pricing standards. An 18-month period covers three complete seasonal retail cycles and provides the AG with ample evidence of CRH's compliance trajectory.

CRH's Fallback Position: CRH is willing to accept quarterly audits if the overall monitoring period is limited to twenty-four (24) months, resulting in eight (8) quarterly audit cycles.

Rationale: Twenty-four months covers four complete seasonal retail cycles and two full fiscal years (FY 2025 and FY 2026, assuming an August 2024 AVC effective date). This provides a robust dataset for evaluating CRH's compliance performance. Quarterly audit frequency over a 24-month period is a meaningful concession but limits the total duration of the monitoring obligation compared to the AG's expected 36-month proposal.

Selection of Monitor: CRH should propose Ridgepoint Compliance Solutions Inc. as the independent compliance reviewer. Ridgepoint's engagement partner, Harold Sung, is based at 700 Stewart Street, Suite 1500, Seattle, WA 98101, and has extensive experience with retail compliance audits and pricing-practice reviews. Ridgepoint has conducted similar compliance monitoring engagements for other major retailers and possesses the industry expertise necessary to evaluate CRH's pricing systems and practices in context.

CRH should insist that it has meaningful input into the selection of the monitor or, at a minimum, that CRH's proposed monitor is pre-approved by the AG. The appointment of a monitor who lacks familiarity with retail pricing economics — and particularly with the complexities of algorithmic and dynamic pricing — could result in audit findings that reflect a misunderstanding of legitimate pricing practices rather than genuine compliance deficiencies. If the AG objects to Ridgepoint, CRH should have an alternative candidate prepared (discussed in Section VI.C below) but should advocate firmly for Ridgepoint in the initial proposal.

The costs of the compliance monitoring engagement will be borne by CRH. Based on preliminary discussions with Ridgepoint, we estimate the cost of each quarterly audit cycle at approximately $75,000 to $100,000, depending on the scope and complexity of the audit. Over a 24-month period with quarterly audits, the total monitoring cost would range from approximately $600,000 to $800,000. These costs are separate from and in addition to the AVC's financial terms (restitution fund, civil penalty, and investigative costs) and should be factored into CRH's total cost analysis for the resolution.

E. Compliance Reporting to the AG

In addition to the independent monitor's audit reports, the AG is expected to require CRH to submit its own compliance reports to the Consumer Protection Division on a periodic basis. These reports would typically include a summary of CRH's compliance activities, any identified issues or remediation efforts, and a certification by a responsible CRH officer that the Company is in material compliance with the AVC.

AG's Expected Position: Quarterly written compliance reports submitted directly to the Consumer Protection Division.

CRH's Position: CRH should propose semi-annual compliance reports.

Rationale: If the independent monitor is conducting quarterly audits and generating quarterly audit reports, the submission of separate quarterly compliance reports by CRH itself is duplicative and administratively burdensome. The monitor's quarterly audit reports will provide the AG with real-time visibility into CRH's compliance status. Semi-annual reports from CRH would allow the Company to consolidate findings from two quarterly audit cycles into a single comprehensive report, providing the AG with a more holistic and meaningful assessment of CRH's compliance trajectory over a six-month period.

CRH's Fallback Position: If the AG insists on more frequent reporting, CRH should propose semi-annual reports coupled with an obligation to promptly notify the AG (in writing, within ten business days) of any material compliance deficiency identified in any quarterly audit. This approach gives the AG timely notice of significant issues without requiring CRH to prepare a full compliance report on a quarterly basis.

The first compliance report should be due six months after the AVC effective date, providing CRH with sufficient time to implement the AVC's prospective pricing reforms, establish the compliance monitoring engagement, and conduct the initial audit cycle.

F. Consumer Restitution Fund

The consumer restitution fund will be the single largest financial component of the AVC and the most heavily negotiated term. The AG views the restitution fund as the primary mechanism for remedying consumer harm, while CRH will seek to limit the fund amount to a level that is proportionate to demonstrable consumer impact.

AG's Expected Position: We anticipate that the AG will propose a consumer restitution fund of approximately $4.5 million. This figure is derived from the AG's estimate of $214 million in affected gross merchandise volume during the October 2023 – March 2024 period. At $4.5 million, the proposed fund would represent approximately 2.1% of affected GMV. The AG will argue that even this figure is a modest fraction of the total consumer harm resulting from inflated reference prices and that a more aggressive calculation could yield a significantly higher number.

CRH's Opening Position: CRH should propose a consumer restitution fund of $2.0 million.

Rationale: The AG's $4.5 million figure rests on the assumption that the entire $214 million in affected GMV represents consumer harm. This assumption is flawed for several reasons. First, not all 1,601 non-compliant SKUs in the AG's sample necessarily caused consumer harm. Many consumers may have purchased the merchandise based on the item's absolute price, its quality, its brand, or other factors wholly unrelated to the displayed reference-price discount. The mere presence of an inflated reference price does not establish that every consumer was materially influenced by that price. Second, the AG's sample covers only 2,340 SKUs — a fraction of CRH's total SKU catalog, which comprises tens of thousands of items across multiple product categories. Extrapolating from this sample to the entire universe of affected GMV introduces significant statistical uncertainty and likely overstates the actual consumer impact. Third, restitution should be targeted to consumers who can demonstrate that they were materially influenced by the reference price in making their purchasing decisions. A $2.0 million fund is more than adequate for this purpose, particularly if administered as store credits or partial refunds.

CRH should propose that the fund be administered as store credits or, at the consumer's election, as direct refunds. This approach provides flexibility for consumers while potentially reducing the net cash outlay for CRH (to the extent consumers redeem store credits, CRH retains the consumer relationship and generates incremental sales). CRH should further propose that any undistributed funds remaining after the administration period revert to CRH.

CRH's Target Settlement Range: $2.5 million to $3.0 million. The approximate midpoint of this range is $2.85 million, which we view as a defensible number. At $2.85 million, the restitution fund would represent approximately 1.33% of the AG's estimated affected GMV — a reasonable figure for a restitution component in a pricing-practices matter involving a cooperative defendant with no prior enforcement history.

CRH's Walk-Away Threshold: $3.5 million for the restitution component alone. If the AG insists on a restitution fund in excess of $3.5 million, CRH should carefully evaluate whether a contested enforcement action is preferable, taking into account the additional costs and risks of litigation. A restitution figure above $3.5 million, combined with the civil penalty and investigative costs, would push the total financial commitment to a level that may not be justified by the facts of the investigation.

Administration of the Fund: CRH should propose the following administration framework:

• Administration period: Twelve (12) months from the date the restitution fund is established.

• Fund administrator: CRH itself or a third-party fund administrator approved by the AG. CRH should prefer to self-administer the fund to maintain control over the process and minimize administrative costs, but should be prepared to accept a third-party administrator if the AG insists on independence.

• Notice to affected consumers: Consumers who purchased items bearing affected reference prices during the October 2023 – March 2024 period should be notified via email (using CRH's transactional email records) and through in-store signage at all 187 brick-and-mortar locations. CRH should resist the AG's imposition of additional notice mechanisms (e.g., direct mail, paid advertising) unless necessary to reach consumers for whom email addresses are unavailable.

• Claims process: Consumers should be required to submit a claim, identifying the relevant purchase and the reference price at issue, to receive a store credit or refund. CRH should resist any proposal for automatic distributions to all consumers who purchased affected items, as this would significantly increase the fund's depletion rate and would distribute funds to consumers who may not have been influenced by the reference price.

• Reversion clause: Any undistributed funds remaining after the 12-month administration period should revert to CRH. The AG may resist this provision and propose a cy pres distribution of undistributed funds to a consumer-protection organization or charity. CRH should negotiate firmly on the reversion clause, as the amount of undistributed funds could be substantial given the claims-based administration structure.

G. Civil Penalty

AG's Expected Position: We anticipate a civil penalty demand of approximately $1.5 million. The AG's statutory authority under RCW 19.86.080 and 19.86.090 allows for penalties of up to $2,000 per violation. With 1,601 non-compliant SKUs identified in the AG's sample, the maximum theoretical penalty exposure could reach $3.2 million or more — and if the AG were to calculate violations on a per-transaction or per-consumer basis rather than a per-SKU basis, the theoretical maximum would be substantially higher. The AG typically seeks a round-number penalty reflecting the scale and seriousness of the conduct rather than a formulaic per-violation calculation.

CRH's Opening Position: CRH should propose a civil penalty of $500,000.

Rationale: CRH has no prior consumer-protection violations in Washington or, to our knowledge, in any other jurisdiction. The Company promptly cooperated with the investigation, producing over 21,000 documents without objection or delay. The Smart Price program was in operation for only approximately five months before the CID was issued, limiting the duration of the conduct. CRH voluntarily paused the Smart Price program upon receiving the CID, demonstrating good faith and a commitment to remediation. A penalty of $500,000 appropriately reflects these mitigating circumstances while still acknowledging the seriousness of the AG's concerns.

CRH's Target Range: $500,000 to $750,000. At the upper end of this range, $750,000 represents approximately 0.35% of the AG's estimated affected GMV and roughly $468 per non-compliant SKU in the AG's sample. This per-SKU figure is well below the statutory maximum of $2,000 per violation and reflects a reasonable exercise of prosecutorial discretion in light of CRH's mitigating circumstances.

CRH's Walk-Away Threshold: $1.0 million. A civil penalty above $1.0 million, combined with a substantial restitution fund and investigative costs, would push the total financial commitment to a level that begins to approach the cost of contesting the matter through litigation. While we believe an AVC resolution is materially preferable to litigation (as discussed in Section V.B), there are limits to the premium CRH should pay for the certainty and reputational benefits of a negotiated resolution.

Payment Terms: CRH should request that the civil penalty be payable within thirty (30) days of AVC execution, remitted to the Washington Consumer Protection Account as directed by the AG.

Insurance Note: The civil penalty is a governmental fine and will not be covered by Elkhorn Mutual under Policy No. ELK-DO-2024-08817. The policy contains a standard governmental-fine exclusion that precludes coverage for penalties imposed by governmental authorities. CRH should be aware that the full amount of the civil penalty will be an out-of-pocket cost, regardless of the amount. This should be factored into CRH's internal budget approval and financial planning for the resolution.

H. Attorney General's Investigative Costs and Fees

AG's Expected Position: Full reimbursement of the AG's investigative costs incurred in connection with the CID, document review, SKU sampling analysis, meet-and-confer, and related investigative activities.

CRH's Position: CRH is willing to reimburse the AG's reasonable investigative costs upon receipt of an itemized accounting. Based on the scope of the investigation — including the issuance of the CID, the review and analysis of approximately 21,100 documents produced by CRH, the SKU sampling analysis conducted by Investigator Pietsch, and the preparation for and conduct of the May 14 meet-and-confer — we estimate the AG's investigative costs at approximately $150,000 to $200,000. This estimate accounts for attorney time, investigator time, and any costs incurred for document review technology or analytical tools.

Assessment: Investigative cost reimbursement is generally a low-priority negotiation item. The amounts at issue are relatively modest compared to the restitution fund and civil penalty, and demonstrating reasonableness on this point may generate goodwill that yields concessions on higher-priority terms. We recommend accepting a reasonable figure in the $150,000 to $200,000 range without significant resistance, provided the AG furnishes adequate documentation of the costs incurred. If the AG's claimed costs exceed $200,000, CRH should request a detailed breakdown and negotiate any line items that appear excessive or unsupported.

I. Stipulated Penalties for Breach

Stipulated penalty provisions are standard in AVCs and serve as an enforcement mechanism to incentivize compliance. These provisions specify a per-day penalty that begins to accrue if CRH breaches any term of the AVC.

AG's Expected Position: We anticipate that the AG will propose stipulated penalties in the range of $15,000 to $25,000 per day for any breach of the AVC's terms.

CRH's Opening Position: CRH should propose stipulated penalties of $5,000 per day.

CRH's Target Position: $10,000 per day, subject to two critical qualifications:

• Materiality qualifier: Stipulated penalties should accrue only for "material" breaches of the AVC. A materiality qualifier prevents the AG from triggering penalties over technical, de minimis, or inadvertent instances of non-compliance. For example, a minor data-entry error affecting a single SKU's reference price should not give rise to $10,000-per-day penalties. The materiality threshold should be defined with reasonable specificity — for instance, a breach affecting more than 5% of SKUs in any product category during any calendar quarter, or a breach that results in a systematic overstatement of reference prices across multiple product lines.

• 30-day written-notice-and-cure period: Before stipulated penalties begin to accrue, the AG must provide CRH with written notice of the alleged breach and CRH must have a period of thirty (30) calendar days to cure the breach. If CRH cures the breach within the 30-day period, no penalties accrue. This cure period is essential to protect CRH from exposure arising from inadvertent non-compliance that can be promptly remedied. In a complex retail operation with tens of thousands of SKUs, occasional pricing discrepancies are inevitable even with robust compliance systems, and a cure period ensures that CRH has a reasonable opportunity to identify and correct any issue before financial penalties are imposed.

Assessment: We believe that $10,000 per day with a 30-day cure period and a materiality qualifier is within the range the AG is likely to accept. The AG has a legitimate interest in ensuring that stipulated penalties are meaningful, but the AG's office also recognizes that overly aggressive penalty provisions may discourage cooperation and complicate the negotiation. The cure period, in particular, is a standard feature of regulatory compliance agreements and should not be controversial.

V. Total Financial Exposure Analysis

A. Summary of Projected Settlement Range

The table below summarizes CRH's projected financial exposure under the AVC across the three principal financial components (consumer restitution fund, civil penalty, and AG investigative costs), along with CRH's recommended negotiating positions and the AG's expected demands.

Based on this analysis, we recommend a target for total financial commitment of approximately $3.0 million to $4.5 million, with an ideal resolution at approximately $3.5 million to $3.8 million. At a hypothetical resolution of $3,785,000 total — comprising a restitution fund of $2,850,000, a civil penalty of $750,000, and investigative cost reimbursement of $185,000 — CRH would fall within the favorable portion of the target range. This figure is well below the AG's anticipated opening demand of approximately $6.2 million and represents a resolution that we believe is proportionate to the facts of the investigation and CRH's mitigating circumstances.

It should be noted that the financial figures set forth above do not include certain ancillary costs associated with the AVC resolution, including: (i) independent compliance monitor costs (estimated at $600,000 to $800,000 over a 24-month monitoring period); (ii) internal costs of implementing prospective pricing reforms (including modifications to the Praxton Analytics algorithmic model); (iii) C&H legal fees and costs (estimated at $400,000 to $475,000 by matter close); and (iv) restitution fund administration costs. When these ancillary costs are factored in, CRH's total all-in cost for the AVC resolution may reach approximately $5.0 million to $5.5 million. Even at this level, the AVC resolution remains materially preferable to litigation, as discussed below.

B. Comparison to Litigation Exposure

If the AG elects to file a formal enforcement action rather than resolve the matter through an AVC, CRH's financial and reputational exposure increases significantly. In a contested enforcement proceeding, CRH would face:

• Civil penalties of up to $2,000 per violation under RCW 19.86.080 and 19.86.090. Depending on how the AG defines and counts "violations" — per SKU, per transaction, per consumer, or per day — the maximum penalty exposure could range from $3.2 million (1,601 SKUs × $2,000) to a substantially higher figure.

• Restitution that could exceed the amount negotiated in an AVC, particularly if the court adopts the AG's methodology for calculating consumer harm and applies it to the full universe of affected transactions rather than the sampled SKU dataset.

• Injunctive relief that could be more prescriptive and more burdensome than the prospective pricing reforms negotiated in an AVC, as the court would have broad discretion to fashion equitable remedies.

• Attorney fees and costs payable to the AG under RCW 19.86.080.

• Defense costs estimated at $1.5 million to $2.5 million, including expert witness fees, document review and management costs, and trial preparation expenses. These costs would be incurred over a period of 18 to 30 months, depending on the pace of litigation.

• Public exposure and reputational harm. A filed enforcement action would become a matter of public record and would generate media coverage. CRH's pricing practices would be subject to public scrutiny, and the Company would be required to disclose the litigation in its SEC filings. The reputational impact on a Nasdaq-listed company with a market capitalization of approximately $5.1 billion could be significant, potentially affecting consumer confidence, investor sentiment, and CRHI share price.

When these factors are considered in the aggregate, an AVC resolution in the range of $3.5 million to $3.8 million is materially preferable to a contested enforcement action from both a financial and reputational standpoint. The AVC provides certainty of outcome, avoids public adjudication of liability, and allows CRH to control the narrative around the resolution.

C. Insurance Considerations

CRH's directors' and officers' liability insurance policy with Elkhorn Mutual Insurance Company (Policy No. ELK-DO-2024-08817) is relevant to the AVC financial analysis, although its applicability to certain AVC components is limited or uncertain.

Defense costs: Elkhorn Mutual has acknowledged coverage for defense costs (C&H legal fees and related expenses) above the $250,000 self-insured retention. CRH's C&H fees and costs are approximately $200,000 to date and are expected to reach $400,000 to $475,000 by the close of the matter, within the agreed fee budget of $350,000 to $475,000. CRH will bear the first $250,000 of defense costs under the SIR, and Elkhorn will reimburse costs in excess of the SIR, subject to the policy's terms, conditions, and reservations of rights.

Civil penalty ($750,000 target): The civil penalty is a governmental fine and is not covered under the Elkhorn policy. The policy contains a standard exclusion for fines, penalties, and sanctions imposed by governmental authorities. CRH should plan for the civil penalty as an entirely out-of-pocket cost.

Restitution fund ($2,850,000 target): Coverage for the consumer restitution fund is uncertain. In its April 29, 2024 acknowledgment letter, Elkhorn reserved rights regarding whether consumer restitution constitutes a covered "loss" under the policy. The policy defines "loss" to include damages, settlements, and judgments, but the definition contains exceptions that may exclude restitution payments — particularly if Elkhorn characterizes the restitution as disgorgement of ill-gotten gains rather than damages. This is a live issue and one that may require separate analysis and potentially coverage litigation. CRH should not rely on insurance reimbursement for the restitution component in its negotiation calculus or its internal budgeting for the AVC resolution.

Elkhorn's coverage counsel, Brenda Whitacre, should be kept informed of AVC terms as they develop. We recommend that CRH provide Ms. Whitacre with copies of the AG's draft AVC and CRH's proposed redline, redacted as appropriate to preserve privilege, so that Elkhorn can evaluate the coverage implications of the specific terms under negotiation. Failure to keep Elkhorn informed could jeopardize CRH's coverage rights and potentially provide Elkhorn with a basis to disclaim coverage for defense costs.

VI. Tactical Recommendations

A. Sequencing of Negotiations

We recommend that CRH allow the AG to circulate its draft AVC first, rather than submitting CRH's own proposed terms proactively. The AG indicated at the May 14 meet-and-confer that it expects to circulate draft AVC terms within the next several weeks — we estimate by approximately June 12, 2024. By allowing the AG to present its draft first, CRH gains several tactical advantages:

• CRH can respond to specific proposed terms rather than making initial proposals that may be lower than what the AG would have proposed, thereby inadvertently anchoring the negotiation at a higher level.

• CRH can assess the AG's overall negotiating posture and priorities by reviewing the totality of the draft terms, identifying areas where the AG's positions are firm and areas where there may be flexibility.

• CRH can prepare a comprehensive redline of the AG's draft incorporating CRH's proposed revisions, accompanied by a detailed cover memorandum explaining the rationale for each change. This approach is more efficient and more persuasive than exchanging position papers without a common reference document.

We anticipate one to two rounds of negotiation following the initial exchange of drafts before the parties reach agreement on the principal terms. Each round will likely involve the submission of written redlines and brief telephonic or in-person discussions to address specific points of disagreement.

B. Leverage Points

CRH brings several significant leverage points to the AVC negotiation that should be emphasized throughout the process:

• Cooperation. CRH has cooperated fully and promptly with the AG's investigation, producing approximately 21,100 documents without objection to the scope of the CID. This level of cooperation is not universal among subjects of AG consumer-protection inquiries, and it demonstrates CRH's good faith and respect for the investigative process.

• Voluntary remediation. CRH has voluntarily suspended (or is willing to suspend) the Smart Price program pending algorithmic reforms. This proactive step demonstrates CRH's commitment to addressing the AG's concerns and reduces the risk of ongoing consumer harm during the negotiation period.

• No prior enforcement history. CRH has no prior consumer-protection violations in Washington or, to our knowledge, in any other jurisdiction. This is a significant mitigating factor that supports CRH's argument for a proportionate resolution.

• Willingness to accept structural reforms. CRH's willingness to accept an independent compliance monitor, to implement prospective pricing reforms, and to establish a consumer restitution fund demonstrates that the Company is taking the AG's concerns seriously and is committed to meaningful reform.

These leverage points should be woven into all communications with the AG's office, including in the cover memorandum accompanying CRH's redline of the draft AVC.

C. Areas of Concession

Strategic concessions on lower-priority terms can generate goodwill and create space for firmer positions on higher-priority terms. We recommend that CRH be prepared to make the following concessions:

• Lookback window. CRH should be prepared to move from 90 days to 120 days relatively early in the negotiation. This concession demonstrates flexibility and reasonableness while preserving a commercially viable pricing standard. By conceding on the lookback window, CRH may create leverage for firmer positions on the restitution fund and civil penalty.

• AG investigative costs. CRH should agree to a reasonable investigative cost reimbursement in the $150,000 to $200,000 range without extended negotiation. The amounts at issue are relatively modest, and demonstrating reasonableness on this point may yield concessions elsewhere.

• Monitor selection. If the AG objects to Ridgepoint Compliance Solutions Inc., CRH should have an alternative candidate prepared. We suggest Westgate Advisory Group LLC (Seattle) as a fallback option. However, CRH should push for Ridgepoint initially, as Ridgepoint's retail industry expertise will result in a more efficient and better-informed monitoring engagement.

D. Areas of Firmness

Certain terms are of sufficient importance to CRH's business interests and legal posture that they should not be conceded without significant countervailing benefits:

• No admission of liability. This is non-negotiable, as discussed in Section IV.A above. CRH must not agree to any language that could be construed as an admission of violation of the CPA or any other legal standard.

• 30-day cure period for stipulated penalties. The cure period is essential to protect CRH from punitive exposure arising from inadvertent or minor non-compliance. This term should be maintained even if other concessions are necessary to secure it.

• Restitution fund ceiling. The restitution fund should not exceed $3.0 million. If the AG insists on a higher figure, CRH should seek offsetting concessions on the civil penalty (e.g., reducing the penalty from the AG's expected $1.5 million to $500,000 or less) to keep the total financial commitment within the target range.

• Lookback window ceiling. The lookback window should not exceed 120 days. A 180-day lookback window is commercially unreasonable for seasonal merchandise, and accepting this term could force CRH to fundamentally restructure its pricing operations across multiple product categories.

E. Communication Strategy

Maintaining disciplined communication channels is critical to the success of the negotiation. We recommend the following protocols:

All substantive communications with the AG's office — including telephone calls, emails, written correspondence, and in-person meetings — should be conducted exclusively through Alan Ngo or Patrick Gallagher of Calderwood & Harkness LLP. No CRH personnel should communicate directly with the AG's office regarding any aspect of the investigation or the AVC negotiation unless specifically authorized to do so by outside counsel. Unauthorized communications create a risk of inadvertent disclosure of privileged information or negotiation strategy and could undermine CRH's bargaining position.

Raymond Soo, CRH's Vice President of Marketing & Pricing Strategy, and Dr. Leila Farzan of Praxton Analytics should be available to provide factual context on the Smart Price algorithm, its design, its data sources, and its operational implementation. This factual context may be necessary to support CRH's positions on the lookback window, the definition of bona fide offering price, and the algorithmic pricing methodology. However, neither Mr. Soo nor Dr. Farzan should communicate directly with the AG or the AG's investigative staff. All factual information should be channeled through C&H counsel, who will de

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the attorney work-product doctrine. It is intended solely for the use of the addressees and those persons identified in the distribution list. Any disclosure, distribution, or copying of this memorandum or its contents to any person not authorized to receive it is strictly prohibited. If you have received this document in error, please contact Calderwood & Harkness LLP immediately.
MEMORANDUM
May 20, 2024
FROM: Alan Ngo, Partner, and Patrick Gallagher, Associate Calderwood & Harkness LLP 1201 Third Avenue, Suite 4400 Seattle, WA 98101
TO: Diana Prescott-Levy, General Counsel, and Terence Ashford, Chief Compliance Officer Cascade Retail Holdings Inc. 4500 Overlake Boulevard, Suite 800 Bellevue, WA 98004
RE: AVC Negotiation Strategy and Framework — Washington AG Consumer-Protection Inquiry (C&H Matter No. 1038-00004)
CC: Sylvia Hartwell (Calderwood & Harkness LLP); Simone Laroche (Calderwood & Harkness LLP)
I. Executive Summary
The purpose of this memorandum is to outline Cascade Retail Holdings Inc.'s ("CRH" or the "Company") strategic negotiating framework for the anticipated Assurance of Voluntary Compliance ("AVC") with the Washington State Attorney General's Consumer Protection Division (the "AG" or the "Division"). This memorandum follows the May 14, 2024 meet-and-confer between Calderwood & Harkness LLP ("C&H") counsel and the AG's investigative team and is intended to provide CRH management with a comprehensive roadmap for the negotiation phase that lies ahead.
At the May 14 meet-and-confer, Lead Assistant Attorney General Meredith Calloway-Voss and Investigating Assistant Attorney General Jordan A. Kittridge signaled the AG's willingness to resolve the pending consumer-protection inquiry through an AVC rather than filing a formal enforcement action under the Washington Consumer Protection Act, RCW 19.86 et seq. This development represents a meaningful and favorable shift in the trajectory of the investigation. An AVC would allow CRH to resolve the matter without litigation, without a public adjudication of liability, and without the attendant reputational risk that accompanies a contested enforcement proceeding — considerations of particular importance for a Nasdaq-listed company with a market capitalization of approximately $5.1 billion.
While the AG's willingness to negotiate is encouraging, the terms of any AVC will require careful attention. The AG is expected to seek prospective pricing reforms, the appointment of an independent compliance monitor, the establishment of a consumer restitution fund, and the payment of a civil penalty. Each of these terms presents opportunities for negotiation and, in some cases, significant financial exposure if CRH is unable to secure favorable provisions.
This memorandum addresses the following topics in detail: (i) the background and procedural history of the AG's inquiry; (ii) the applicable legal framework; (iii) our recommended negotiating positions on each key AVC term; (iv) a comprehensive financial exposure analysis; (v) tactical recommendations for the conduct of negotiations; and (vi) open questions that require input from CRH management. We project that the total financial settlement will fall in the range of $3.0 million to $4.5 million, and we recommend a target resolution in the range of approximately $3.5 million to $3.8 million. We believe this range is achievable and represents a fair outcome given the facts of the investigation and the strength of CRH's mitigating circumstances.
II. Background and Procedural History
A. The AG's Inquiry
On March 26, 2024, the Washington Attorney General's Consumer Protection Division issued a Civil Investigative Demand ("CID") to Cascade Retail Holdings Inc. pursuant to RCW 19.86.110. The CID was served on CRH's registered agent and promptly forwarded to in-house counsel. The CID contained twenty-three (23) document requests and fourteen (14) interrogatories, each directed at CRH's use of reference pricing across its retail operations.
The central focus of the CID — and the AG's broader inquiry — is CRH's deployment of "compare-at," "original price," and "was/now" reference pricing on its ecommerce platform (cascaderetail.com) and across its one hundred eighty-seven (187) brick-and-mortar retail locations operating in fourteen (14) western U.S. states. Reference pricing, as used in this context, refers to the practice of displaying a higher "original" or "compare-at" price alongside a lower current selling price to communicate a discount or savings to consumers. The AG's investigation concerns whether the reference prices displayed by CRH accurately reflected prices at which the relevant items were genuinely offered for sale in the ordinary course of business.
The investigation was triggered by a substantial volume of consumer complaints. Between January 2023 and February 2024, one hundred forty-seven (147) consumer complaints were filed with the AG's office, each alleging that CRH's "original" or "compare-at" prices were inflated and did not correspond to prices at which the merchandise was actually sold or offered for sale. The complaint volume is noteworthy, as it represents a sustained pattern over a thirteen-month period and crosses multiple product categories.
Of particular concern to the AG is CRH's "Smart Price" promotional program, which was launched on October 15, 2023. The Smart Price program utilizes algorithmically generated reference prices produced by a proprietary pricing model developed and maintained by Praxton Analytics LLC, a third-party data analytics firm. The Praxton model, overseen by Dr. Leila Farzan, draws upon a combination of manufacturer's suggested retail prices (MSRPs), competitor pricing data scraped from publicly available sources, and CRH's own historical pricing records to generate "compare-at" reference prices for display on product listings. The AG's inquiry has focused extensively on the methodology and outputs of this algorithmic model, including the extent to which the generated reference prices diverged from prices at which items were actually offered to consumers.
The AG's inquiry spans six product categories: women's apparel, men's footwear, home textiles, small kitchen appliances, outdoor furniture, and consumer electronics accessories. These categories were identified by the AG based on the concentration of consumer complaints and the prevalence of reference pricing within CRH's merchandising strategy for these product lines.
B. CRH's Response to Date
Calderwood & Harkness LLP was formally engaged as outside counsel on April 9, 2024, pursuant to an engagement letter executed on that date. Prior to C&H's engagement, CRH had consulted with Dunlap, Mercer & Fosse LLP (partner Nora Chisholm) regarding general compliance with the Federal Trade Commission's pricing guidance. Dunlap, Mercer & Fosse advised CRH on FTC pricing-guide compliance in 2022, but was not retained to represent CRH in connection with the AG's investigation. C&H assumed full responsibility for the defense of this matter upon engagement.
On April 11, 2024, CRH provided insurance notice to Elkhorn Mutual Insurance Company under its directors' and officers' liability insurance policy, Policy No. ELK-DO-2024-08817. The policy provides $25 million per occurrence and $50 million in the aggregate, subject to a self-insured retention ("SIR") of $250,000. On April 29, 2024, Elkhorn acknowledged coverage for defense costs incurred in connection with the AG inquiry, subject to the SIR and certain reservations of rights set forth in Elkhorn's acknowledgment letter. The reservations of rights are discussed in greater detail in Section V.C below.
CRH has cooperated fully with the AG's investigation to date. The first CID production was completed on April 23, 2024, comprising approximately 12,400 documents. Document processing, review, and production were handled by Stormfield Document Solutions LLC, a litigation support vendor experienced in large-scale document review projects. A second CID production, consisting of approximately 8,700 additional documents, is currently being finalized for production by May 31, 2024. Upon completion of the second production, CRH's cumulative document production will total approximately 21,100 documents. CRH has not asserted any objections to the scope of the CID's document requests or interrogatories, a point that underscores the Company's cooperative posture and serves as a meaningful leverage point in the AVC negotiations.
C. AG's Preliminary Findings
During the May 14 meet-and-confer, the AG's investigative team shared certain preliminary findings derived from its review of documents produced by CRH and its own independent analysis. Specifically, AG Investigator Sandra Pietsch reviewed a sample of 2,340 stock-keeping units ("SKUs") that were listed on cascaderetail.com and in CRH stores during the period from January 1, 2024 through March 15, 2024.
Of the 2,340 SKUs in the AG's sample, 1,601 — representing 68.4% of the sample — displayed a "compare-at" or "original" price that exceeded the highest price at which the item had actually been offered for sale during the preceding ninety (90)-day period. In other words, for nearly seven out of every ten sampled SKUs, the reference price shown to consumers was higher than any price at which CRH had genuinely offered the item in the prior three months.
The AG's analysis further determined that, for the non-compliant SKUs, the average overstatement was 37.2% above the actual highest offering price within the ninety-day lookback window. This means that, on average, the displayed reference price was more than one-third higher than the highest real price at which the item had been available. This degree of overstatement is substantial and will likely be a central point of emphasis in the AG's negotiating posture.
Based on extrapolation from the sample data and CRH's sales records, the AG estimates that approximately $214 million in gross merchandise sales bore potentially misleading reference-price tags during the five-month period from October 15, 2023 (when the Smart Price program launched) through March 15, 2024. This figure implies approximately $42.8 million per month in affected gross merchandise volume ("GMV"). While CRH may dispute the methodology underlying this extrapolation — and we believe there are credible grounds to do so, as discussed below — the $214 million figure is the AG's current working estimate and will serve as the baseline for the AG's restitution calculations.
D. May 14 Meet-and-Confer Summary
The meet-and-confer took place on May 14, 2024 at the Washington Attorney General's offices in Seattle. Present on behalf of CRH and C&H were Alan Ngo and Patrick Gallagher. Representing the AG were Lead Assistant Attorney General Meredith Calloway-Voss, Investigating Assistant Attorney General Jordan A. Kittridge, and AG Investigator Sandra Pietsch.
The meeting lasted approximately two hours. The AG's team expressed serious concerns about the systemic nature of the pricing discrepancies identified in the investigation, emphasizing that the 68.4% non-compliance rate across the sampled SKUs suggested a pervasive problem rather than isolated incidents of mispricing. The AG was particularly focused on the algorithmic origin of the reference prices, noting that the use of automated systems to generate misleading pricing representations raised distinct policy concerns about accountability and consumer harm at scale.
Despite these concerns, the AG indicated a willingness to resolve the inquiry through an AVC — rather than proceeding to a formal enforcement action — provided that CRH agrees to meaningful prospective pricing reforms, the appointment of an independent compliance monitor, the establishment of a consumer restitution fund, and the payment of a civil penalty. This represents a significant concession by the AG, as a negotiated resolution avoids the time and expense of litigation for both parties and allows for a collaborative approach to compliance reform.
The AG's representatives stated that they expected to circulate draft AVC terms to C&H within the next several weeks — likely by approximately mid-June 2024. No specific dollar figures were exchanged during the meet-and-confer with respect to the restitution fund or civil penalty. However, the AG's representatives signaled their expectation of a "substantial" restitution component and a civil penalty reflecting the scope and duration of the conduct at issue. We interpret these signals to mean that the AG's opening financial demands will be at the higher end of the spectrum, and CRH should be prepared to engage in meaningful negotiation to reach an acceptable resolution.
III. Legal Framework
A. Washington Consumer Protection Act — RCW 19.86
The Washington Consumer Protection Act ("CPA"), codified at RCW 19.86 et seq., is the primary statutory authority governing the AG's inquiry and the anticipated AVC. The CPA is a broadly drafted consumer-protection statute that provides the AG with significant enforcement tools.
RCW 19.86.020 is the central prohibition, declaring that "[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful." The display of inflated reference prices — where the "compare-at" or "original" price does not correspond to a price at which the item was genuinely offered in the ordinary course of business — may constitute a deceptive act or practice under this provision. The AG's theory is that consumers who encounter a reference price naturally understand it to represent the price at which the merchandise was previously or contemporaneously sold, and that inflating this price deceives consumers into believing they are receiving a greater discount than is actually the case.
Critically, the CPA does not impose a scienter requirement for enforcement by the AG. Under the statute, the AG need not prove that CRH intended to deceive consumers or had actual knowledge that the reference prices were inflated. The mere fact that the pricing representations were deceptive — regardless of whether CRH acted in good faith or relied on a third-party vendor — is sufficient to establish a violation. This is an important consideration in assessing CRH's litigation exposure and underscores the value of an AVC resolution, which does not require CRH to admit any violation.
The remedial provisions of the CPA are substantial. Under RCW 19.86.080, the AG may seek injunctive relief to restrain and prevent ongoing violations. Under RCW 19.86.080 and 19.86.090, the AG may seek civil penalties of up to $2,000 per violation, with the potential for enhanced penalties in cases involving vulnerable populations or particularly egregious conduct. The AG may also seek restitution for affected consumers and recovery of the AG's investigative costs and reasonable attorney fees. In a contested enforcement action, these remedies could be imposed by a court and would be a matter of public record.
B. Assurance of Voluntary Compliance — RCW 19.86.100
RCW 19.86.100 authorizes the AG to accept an Assurance of Voluntary Compliance from any person engaged in any method, act, or practice that the AG believes violates the Consumer Protection Act. The AVC mechanism provides a framework for resolving consumer-protection concerns without the need for formal litigation.
Several features of the AVC statute are noteworthy for CRH's negotiation strategy. First, an AVC is expressly not an admission of violation. The statute provides that an AVC shall not be considered an admission of a violation for any purpose. This feature is critical for CRH's public-company disclosure obligations and for mitigating the risk of follow-on private litigation. Second, an AVC is a binding agreement between the AG and the subject entity. Once executed, the AVC can be enforced in court by the AG. Third, a failure to comply with the terms of an AVC constitutes prima facie evidence of a violation of the CPA in any subsequent enforcement proceeding. This means that while an AVC avoids an initial finding of liability, non-compliance with its terms creates a presumption of violation that would be extremely difficult to overcome in any future action. For this reason, it is imperative that CRH negotiate AVC terms that it can realistically and sustainably comply with over the duration of the agreement.
C. FTC Guides Against Deceptive Pricing (16 CFR Part 233)
Although not directly binding on state enforcement proceedings in Washington, the Federal Trade Commission's Guides Against Deceptive Pricing, codified at 16 CFR Part 233, are widely regarded as persuasive authority on the standards for reference pricing. The AG expressly referenced the FTC Guides during the May 14 meet-and-confer, and they are likely to inform the AG's proposed AVC terms.
The FTC Guides provide that a former price used as a reference must reflect the price at which the article was "openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of business, honestly and in good faith." The Guides caution against the use of a "former price" that is fictitious — that is, a price at which the article was not actually offered for sale — and against the use of inflated "comparable value" or "compare-at" prices that do not correspond to prices at which the identical or comparable merchandise is being offered by competitors in the relevant market.
CRH previously received compliance advice from Dunlap, Mercer & Fosse LLP regarding the FTC pricing guides in 2022. While this prior consultation demonstrates CRH's good-faith efforts to comply with applicable standards, it also means that CRH was or should have been aware of the requirements for bona fide reference pricing when the Smart Price program was launched in October 2023. The AG may argue that CRH's prior awareness of these standards makes the subsequent pricing discrepancies more difficult to excuse. We will need to manage this point carefully in the negotiations.
D. CRH's Potential Defenses and Mitigating Factors
While the purpose of an AVC negotiation is to reach a resolution without litigating the merits, CRH's potential defenses and mitigating factors are highly relevant to the negotiation calculus. They inform the strength of CRH's bargaining position and the range of outcomes that a court might reach in the event the matter proceeds to litigation.
CRH has several arguments in its favor. First, CRH can assert good-faith reliance on the pricing model developed and maintained by Praxton Analytics LLC. The Smart Price program was designed and implemented based on Praxton's proprietary algorithmic model, and CRH retained a specialized vendor precisely to ensure that reference prices were generated through a data-driven, defensible methodology. CRH can argue that it lacked specific knowledge of the degree to which the algorithmic outputs diverged from actual offering prices and that it reasonably relied on its vendor's expertise. Second, CRH promptly engaged experienced outside counsel upon receipt of the CID and has cooperated fully with the investigation, producing approximately 21,100 documents without objection. This cooperative posture is a significant mitigating factor. Third, the Smart Price program was operational for only approximately five months before the CID was issued, limiting the duration and scope of any consumer harm. Fourth, the affected GMV of $214 million, while substantial in absolute terms, represents approximately 6.2% of CRH's fiscal year 2023 revenue of $3.47 billion. CRH can argue that any penalty should be proportionate to the scope of the conduct relative to the Company's overall business operations.
However, CRH should also be realistic about the limitations of these arguments. As noted above, the CPA does not require proof of intent; the AG need not demonstrate that CRH acted with the purpose of deceiving consumers. CRH bears responsibility for the accuracy of its own pricing representations regardless of whether those representations were generated by a third-party vendor. The use of a third-party algorithm does not insulate CRH from liability for the outputs of that algorithm as displayed to consumers. Additionally, the 68.4% non-compliance rate across the AG's sample is a striking finding. It suggests a systemic problem rather than isolated errors, and it will be difficult for CRH to characterize the discrepancies as minor or aberrational. These countervailing considerations counsel in favor of pursuing a negotiated resolution and tempering expectations about the degree to which defenses will drive down the financial terms.
IV. Recommended Negotiating Positions on Key AVC Terms
Set forth below are our recommended positions on each of the principal terms we anticipate the AG will include in its draft AVC. For each term, we have identified the AG's expected position, CRH's opening position, CRH's target or fallback position, and our assessment of the likely outcome.
A. No Admission of Liability
CRH's Position: This term is non-negotiable for CRH. Any AVC must include an express provision stating that CRH neither admits nor denies any violation of RCW 19.86 or any other law, regulation, or standard. The AVC must further provide that the agreement does not constitute a finding or admission of wrongdoing by CRH and that it may not be used as evidence or an admission of liability in any other proceeding.
Assessment: This is a standard feature of AVC practice, and the statute itself contemplates that an AVC is not an admission of violation. We do not anticipate significant resistance from the AG on this point. The AG's office has included similar no-admission provisions in virtually all recent AVCs, and there is no reason to expect a departure from this practice here.
The no-admission clause is particularly important for CRH given its status as a Nasdaq-listed company (Nasdaq: CRHI). An admission of violation of the Washington CPA could trigger securities-law disclosure obligations, could be cited as evidence in private class-action lawsuits by consumers, and could invite regulatory scrutiny from other state attorneys general. By preserving the no-admission framework, CRH maintains its ability to disclose the AVC in its public filings as a negotiated resolution of an inquiry without acknowledging any legal violation. We recommend that CRH's disclosure counsel review the final AVC language to ensure consistency with the Company's SEC reporting obligations.
B. Prospective Pricing Standards — Lookback Window Duration
The central prospective reform that the AG is expected to require involves the adoption of a mandatory "lookback window" — a defined period during which a product must have been offered at the stated reference price in the ordinary course of business before that price can be displayed as a "compare-at," "original," or "was" price.
AG's Expected Position: We anticipate that the AG will propose a lookback window of one hundred eighty (180) days. Under this standard, CRH would be required to demonstrate that any reference price displayed to consumers reflects a price at which the item was genuinely offered for sale during the preceding 180-day period. A 180-day window is aggressive and would impose significant constraints on CRH's pricing flexibility.
CRH's Opening Position: CRH should propose a lookback window of ninety (90) days.
Rationale: A 90-day lookback window aligns with common retail seasonal cycles and is consistent with the FTC Guides' general concept of a price maintained in the "recent, regular course of business." Many major national retailers use a 90-day standard for reference-price validation, and this timeframe has been accepted in prior FTC and state-level pricing enforcement matters. A 90-day window is sufficient to capture any overstatement within a current selling season and ensures that reference prices are both current and verifiable. For seasonal and fashion-cycle merchandise — categories that constitute a significant portion of the affected product lines (women's apparel and outdoor furniture, in particular) — a 90-day window appropriately reflects the commercial reality that prices naturally adjust as seasons change and merchandise cycles turn over.
CRH's Fallback Position: If the AG is firm on exceeding 90 days, CRH should be prepared to accept a lookback window of one hundred twenty (120) days.
Rationale: A 120-day window represents a reasonable middle ground between CRH's preferred 90-day standard and the AG's anticipated 180-day proposal. A 120-day period covers four months and spans most seasonal transitions, providing the AG with additional assurance that reference prices reflect genuinely sustained offering prices rather than fleeting or promotional price points. We believe 120 days is the likely landing zone for this term and recommend that CRH be prepared to move to this position after initial pushback from the AG.
Assessment: We anticipate that the AG will push back hard on a 90-day window, viewing it as insufficiently protective of consumers. However, the AG's negotiating team is likely to recognize that 180 days is commercially burdensome for a retailer of CRH's scale and product mix. We believe the negotiation will converge on approximately 120 days, and CRH should not accept a 180-day window without securing significant concessions on other terms — particularly the restitution fund amount or the duration of compliance monitoring.
C. Definition of "Bona Fide" Offering Price
The definition of what constitutes a "bona fide" offering price will have significant practical implications for CRH's pricing operations. This term will determine the evidentiary standard CRH must meet to validate any reference price displayed to consumers.
CRH's Position: CRH should advocate for a definition that includes prices at which the item was "openly and actively offered for sale" in the relevant sales channel (online or in-store), rather than a definition tied solely to the actual transacted price or the average sale price. The distinction is important: an item may be listed at a particular price for a sustained period, but the majority of consumers may purchase it at a promotional or sale price. Under CRH's proposed definition, the listed offering price would qualify as a bona fide reference price so long as the item was genuinely available at that price — even if most consumers ultimately purchased at a lower, promotional price.
This approach is consistent with the FTC Guides, which focus on whether the item was "openly and actively offered for sale" rather than on whether any consumer actually purchased the item at the stated price. The Guides recognize that an offering price and a transacted price may differ and that the relevant inquiry is whether the reference price reflects a genuine, non-fictitious price at which the merchandise was available to consumers.
CRH should also seek to address the algorithmic methodology employed by the Smart Price program. Praxton Analytics' model drew reference prices from three principal data sources: manufacturer's suggested retail prices (MSRPs), competitor pricing data, and CRH's own historical pricing records. CRH should seek to preserve its ability to use algorithmic pricing methodologies going forward, provided that the algorithmic outputs are validated against actual offering-price data within the agreed lookback window. The AVC should not prohibit algorithmic pricing per se but should require that any algorithmically generated reference price be verified against bona fide offering data within the applicable lookback period. This approach balances the AG's interest in accurate pricing with CRH's operational need for efficient, scalable pricing systems.
Assessment: The AG is likely to insist on language that ensures reference prices are not merely theoretical or aspirational but instead reflect prices at which consumers could actually purchase the merchandise. We expect the AG to propose a definition that requires the item to have been offered at the reference price for a minimum number of days within the lookback period — for example, at least 28 consecutive days. CRH should be prepared to negotiate the minimum-days requirement but should resist any definition that ties the reference price solely to the average transacted price, as this would effectively eliminate CRH's ability to display meaningful reference pricing for items that are frequently promoted.
D. Scope and Duration of Independent Compliance Monitoring
The appointment of an independent compliance monitor is a standard feature of consumer-protection AVCs involving systemic pricing issues. The key negotiating variables are the frequency of audits, the duration of the monitoring period, and the selection of the monitor.
AG's Expected Position: We anticipate that the AG will propose an independent compliance monitor conducting quarterly audits for a period of thirty-six (36) months. This would result in twelve (12) quarterly audit cycles over the three-year monitoring period — a significant operational and financial commitment.
CRH's Opening Position: CRH should propose semi-annual audits for a period of eighteen (18) months, resulting in three (3) audit cycles.
Rationale: Quarterly auditing imposes a significant operational burden on CRH's merchandising and pricing teams, requiring the allocation of substantial personnel time and internal resources to facilitate each audit cycle. CRH has already demonstrated its commitment to remediation by pausing the Smart Price program pending review, and an 18-month monitoring period is sufficient to demonstrate sustained compliance with the AVC's prospective pricing standards. An 18-month period covers three complete seasonal retail cycles and provides the AG with ample evidence of CRH's compliance trajectory.
CRH's Fallback Position: CRH is willing to accept quarterly audits if the overall monitoring period is limited to twenty-four (24) months, resulting in eight (8) quarterly audit cycles.
Rationale: Twenty-four months covers four complete seasonal retail cycles and two full fiscal years (FY 2025 and FY 2026, assuming an August 2024 AVC effective date). This provides a robust dataset for evaluating CRH's compliance performance. Quarterly audit frequency over a 24-month period is a meaningful concession but limits the total duration of the monitoring obligation compared to the AG's expected 36-month proposal.
Selection of Monitor: CRH should propose Ridgepoint Compliance Solutions Inc. as the independent compliance reviewer. Ridgepoint's engagement partner, Harold Sung, is based at 700 Stewart Street, Suite 1500, Seattle, WA 98101, and has extensive experience with retail compliance audits and pricing-practice reviews. Ridgepoint has conducted similar compliance monitoring engagements for other major retailers and possesses the industry expertise necessary to evaluate CRH's pricing systems and practices in context.
CRH should insist that it has meaningful input into the selection of the monitor or, at a minimum, that CRH's proposed monitor is pre-approved by the AG. The appointment of a monitor who lacks familiarity with retail pricing economics — and particularly with the complexities of algorithmic and dynamic pricing — could result in audit findings that reflect a misunderstanding of legitimate pricing practices rather than genuine compliance deficiencies. If the AG objects to Ridgepoint, CRH should have an alternative candidate prepared (discussed in Section VI.C below) but should advocate firmly for Ridgepoint in the initial proposal.
The costs of the compliance monitoring engagement will be borne by CRH. Based on preliminary discussions with Ridgepoint, we estimate the cost of each quarterly audit cycle at approximately $75,000 to $100,000, depending on the scope and complexity of the audit. Over a 24-month period with quarterly audits, the total monitoring cost would range from approximately $600,000 to $800,000. These costs are separate from and in addition to the AVC's financial terms (restitution fund, civil penalty, and investigative costs) and should be factored into CRH's total cost analysis for the resolution.
E. Compliance Reporting to the AG
In addition to the independent monitor's audit reports, the AG is expected to require CRH to submit its own compliance reports to the Consumer Protection Division on a periodic basis. These reports would typically include a summary of CRH's compliance activities, any identified issues or remediation efforts, and a certification by a responsible CRH officer that the Company is in material compliance with the AVC.
AG's Expected Position: Quarterly written compliance reports submitted directly to the Consumer Protection Division.
CRH's Position: CRH should propose semi-annual compliance reports.
Rationale: If the independent monitor is conducting quarterly audits and generating quarterly audit reports, the submission of separate quarterly compliance reports by CRH itself is duplicative and administratively burdensome. The monitor's quarterly audit reports will provide the AG with real-time visibility into CRH's compliance status. Semi-annual reports from CRH would allow the Company to consolidate findings from two quarterly audit cycles into a single comprehensive report, providing the AG with a more holistic and meaningful assessment of CRH's compliance trajectory over a six-month period.
CRH's Fallback Position: If the AG insists on more frequent reporting, CRH should propose semi-annual reports coupled with an obligation to promptly notify the AG (in writing, within ten business days) of any material compliance deficiency identified in any quarterly audit. This approach gives the AG timely notice of significant issues without requiring CRH to prepare a full compliance report on a quarterly basis.
The first compliance report should be due six months after the AVC effective date, providing CRH with sufficient time to implement the AVC's prospective pricing reforms, establish the compliance monitoring engagement, and conduct the initial audit cycle.
F. Consumer Restitution Fund
The consumer restitution fund will be the single largest financial component of the AVC and the most heavily negotiated term. The AG views the restitution fund as the primary mechanism for remedying consumer harm, while CRH will seek to limit the fund amount to a level that is proportionate to demonstrable consumer impact.
AG's Expected Position: We anticipate that the AG will propose a consumer restitution fund of approximately $4.5 million. This figure is derived from the AG's estimate of $214 million in affected gross merchandise volume during the October 2023 – March 2024 period. At $4.5 million, the proposed fund would represent approximately 2.1% of affected GMV. The AG will argue that even this figure is a modest fraction of the total consumer harm resulting from inflated reference prices and that a more aggressive calculation could yield a significantly higher number.
CRH's Opening Position: CRH should propose a consumer restitution fund of $2.0 million.
Rationale: The AG's $4.5 million figure rests on the assumption that the entire $214 million in affected GMV represents consumer harm. This assumption is flawed for several reasons. First, not all 1,601 non-compliant SKUs in the AG's sample necessarily caused consumer harm. Many consumers may have purchased the merchandise based on the item's absolute price, its quality, its brand, or other factors wholly unrelated to the displayed reference-price discount. The mere presence of an inflated reference price does not establish that every consumer was materially influenced by that price. Second, the AG's sample covers only 2,340 SKUs — a fraction of CRH's total SKU catalog, which comprises tens of thousands of items across multiple product categories. Extrapolating from this sample to the entire universe of affected GMV introduces significant statistical uncertainty and likely overstates the actual consumer impact. Third, restitution should be targeted to consumers who can demonstrate that they were materially influenced by the reference price in making their purchasing decisions. A $2.0 million fund is more than adequate for this purpose, particularly if administered as store credits or partial refunds.
CRH should propose that the fund be administered as store credits or, at the consumer's election, as direct refunds. This approach provides flexibility for consumers while potentially reducing the net cash outlay for CRH (to the extent consumers redeem store credits, CRH retains the consumer relationship and generates incremental sales). CRH should further propose that any undistributed funds remaining after the administration period revert to CRH.
CRH's Target Settlement Range: $2.5 million to $3.0 million. The approximate midpoint of this range is $2.85 million, which we view as a defensible number. At $2.85 million, the restitution fund would represent approximately 1.33% of the AG's estimated affected GMV — a reasonable figure for a restitution component in a pricing-practices matter involving a cooperative defendant with no prior enforcement history.
CRH's Walk-Away Threshold: $3.5 million for the restitution component alone. If the AG insists on a restitution fund in excess of $3.5 million, CRH should carefully evaluate whether a contested enforcement action is preferable, taking into account the additional costs and risks of litigation. A restitution figure above $3.5 million, combined with the civil penalty and investigative costs, would push the total financial commitment to a level that may not be justified by the facts of the investigation.
Administration of the Fund: CRH should propose the following administration framework:
• Administration period: Twelve (12) months from the date the restitution fund is established.
• Fund administrator: CRH itself or a third-party fund administrator approved by the AG. CRH should prefer to self-administer the fund to maintain control over the process and minimize administrative costs, but should be prepared to accept a third-party administrator if the AG insists on independence.
• Notice to affected consumers: Consumers who purchased items bearing affected reference prices during the October 2023 – March 2024 period should be notified via email (using CRH's transactional email records) and through in-store signage at all 187 brick-and-mortar locations. CRH should resist the AG's imposition of additional notice mechanisms (e.g., direct mail, paid advertising) unless necessary to reach consumers for whom email addresses are unavailable.
• Claims process: Consumers should be required to submit a claim, identifying the relevant purchase and the reference price at issue, to receive a store credit or refund. CRH should resist any proposal for automatic distributions to all consumers who purchased affected items, as this would significantly increase the fund's depletion rate and would distribute funds to consumers who may not have been influenced by the reference price.
• Reversion clause: Any undistributed funds remaining after the 12-month administration period should revert to CRH. The AG may resist this provision and propose a cy pres distribution of undistributed funds to a consumer-protection organization or charity. CRH should negotiate firmly on the reversion clause, as the amount of undistributed funds could be substantial given the claims-based administration structure.
G. Civil Penalty
AG's Expected Position: We anticipate a civil penalty demand of approximately $1.5 million. The AG's statutory authority under RCW 19.86.080 and 19.86.090 allows for penalties of up to $2,000 per violation. With 1,601 non-compliant SKUs identified in the AG's sample, the maximum theoretical penalty exposure could reach $3.2 million or more — and if the AG were to calculate violations on a per-transaction or per-consumer basis rather than a per-SKU basis, the theoretical maximum would be substantially higher. The AG typically seeks a round-number penalty reflecting the scale and seriousness of the conduct rather than a formulaic per-violation calculation.
CRH's Opening Position: CRH should propose a civil penalty of $500,000.
Rationale: CRH has no prior consumer-protection violations in Washington or, to our knowledge, in any other jurisdiction. The Company promptly cooperated with the investigation, producing over 21,000 documents without objection or delay. The Smart Price program was in operation for only approximately five months before the CID was issued, limiting the duration of the conduct. CRH voluntarily paused the Smart Price program upon receiving the CID, demonstrating good faith and a commitment to remediation. A penalty of $500,000 appropriately reflects these mitigating circumstances while still acknowledging the seriousness of the AG's concerns.
CRH's Target Range: $500,000 to $750,000. At the upper end of this range, $750,000 represents approximately 0.35% of the AG's estimated affected GMV and roughly $468 per non-compliant SKU in the AG's sample. This per-SKU figure is well below the statutory maximum of $2,000 per violation and reflects a reasonable exercise of prosecutorial discretion in light of CRH's mitigating circumstances.
CRH's Walk-Away Threshold: $1.0 million. A civil penalty above $1.0 million, combined with a substantial restitution fund and investigative costs, would push the total financial commitment to a level that begins to approach the cost of contesting the matter through litigation. While we believe an AVC resolution is materially preferable to litigation (as discussed in Section V.B), there are limits to the premium CRH should pay for the certainty and reputational benefits of a negotiated resolution.
Payment Terms: CRH should request that the civil penalty be payable within thirty (30) days of AVC execution, remitted to the Washington Consumer Protection Account as directed by the AG.
Insurance Note: The civil penalty is a governmental fine and will not be covered by Elkhorn Mutual under Policy No. ELK-DO-2024-08817. The policy contains a standard governmental-fine exclusion that precludes coverage for penalties imposed by governmental authorities. CRH should be aware that the full amount of the civil penalty will be an out-of-pocket cost, regardless of the amount. This should be factored into CRH's internal budget approval and financial planning for the resolution.
H. Attorney General's Investigative Costs and Fees
AG's Expected Position: Full reimbursement of the AG's investigative costs incurred in connection with the CID, document review, SKU sampling analysis, meet-and-confer, and related investigative activities.
CRH's Position: CRH is willing to reimburse the AG's reasonable investigative costs upon receipt of an itemized accounting. Based on the scope of the investigation — including the issuance of the CID, the review and analysis of approximately 21,100 documents produced by CRH, the SKU sampling analysis conducted by Investigator Pietsch, and the preparation for and conduct of the May 14 meet-and-confer — we estimate the AG's investigative costs at approximately $150,000 to $200,000. This estimate accounts for attorney time, investigator time, and any costs incurred for document review technology or analytical tools.
Assessment: Investigative cost reimbursement is generally a low-priority negotiation item. The amounts at issue are relatively modest compared to the restitution fund and civil penalty, and demonstrating reasonableness on this point may generate goodwill that yields concessions on higher-priority terms. We recommend accepting a reasonable figure in the $150,000 to $200,000 range without significant resistance, provided the AG furnishes adequate documentation of the costs incurred. If the AG's claimed costs exceed $200,000, CRH should request a detailed breakdown and negotiate any line items that appear excessive or unsupported.
I. Stipulated Penalties for Breach
Stipulated penalty provisions are standard in AVCs and serve as an enforcement mechanism to incentivize compliance. These provisions specify a per-day penalty that begins to accrue if CRH breaches any term of the AVC.
AG's Expected Position: We anticipate that the AG will propose stipulated penalties in the range of $15,000 to $25,000 per day for any breach of the AVC's terms.
CRH's Opening Position: CRH should propose stipulated penalties of $5,000 per day.
CRH's Target Position: $10,000 per day, subject to two critical qualifications:
• Materiality qualifier: Stipulated penalties should accrue only for "material" breaches of the AVC. A materiality qualifier prevents the AG from triggering penalties over technical, de minimis, or inadvertent instances of non-compliance. For example, a minor data-entry error affecting a single SKU's reference price should not give rise to $10,000-per-day penalties. The materiality threshold should be defined with reasonable specificity — for instance, a breach affecting more than 5% of SKUs in any product category during any calendar quarter, or a breach that results in a systematic overstatement of reference prices across multiple product lines.
• 30-day written-notice-and-cure period: Before stipulated penalties begin to accrue, the AG must provide CRH with written notice of the alleged breach and CRH must have a period of thirty (30) calendar days to cure the breach. If CRH cures the breach within the 30-day period, no penalties accrue. This cure period is essential to protect CRH from exposure arising from inadvertent non-compliance that can be promptly remedied. In a complex retail operation with tens of thousands of SKUs, occasional pricing discrepancies are inevitable even with robust compliance systems, and a cure period ensures that CRH has a reasonable opportunity to identify and correct any issue before financial penalties are imposed.
Assessment: We believe that $10,000 per day with a 30-day cure period and a materiality qualifier is within the range the AG is likely to accept. The AG has a legitimate interest in ensuring that stipulated penalties are meaningful, but the AG's office also recognizes that overly aggressive penalty provisions may discourage cooperation and complicate the negotiation. The cure period, in particular, is a standard feature of regulatory compliance agreements and should not be controversial.
V. Total Financial Exposure Analysis
A. Summary of Projected Settlement Range
The table below summarizes CRH's projected financial exposure under the AVC across the three principal financial components (consumer restitution fund, civil penalty, and AG investigative costs), along with CRH's recommended negotiating positions and the AG's expected demands.
Based on this analysis, we recommend a target for total financial commitment of approximately $3.0 million to $4.5 million, with an ideal resolution at approximately $3.5 million to $3.8 million. At a hypothetical resolution of $3,785,000 total — comprising a restitution fund of $2,850,000, a civil penalty of $750,000, and investigative cost reimbursement of $185,000 — CRH would fall within the favorable portion of the target range. This figure is well below the AG's anticipated opening demand of approximately $6.2 million and represents a resolution that we believe is proportionate to the facts of the investigation and CRH's mitigating circumstances.
It should be noted that the financial figures set forth above do not include certain ancillary costs associated with the AVC resolution, including: (i) independent compliance monitor costs (estimated at $600,000 to $800,000 over a 24-month monitoring period); (ii) internal costs of implementing prospective pricing reforms (including modifications to the Praxton Analytics algorithmic model); (iii) C&H legal fees and costs (estimated at $400,000 to $475,000 by matter close); and (iv) restitution fund administration costs. When these ancillary costs are factored in, CRH's total all-in cost for the AVC resolution may reach approximately $5.0 million to $5.5 million. Even at this level, the AVC resolution remains materially preferable to litigation, as discussed below.
B. Comparison to Litigation Exposure
If the AG elects to file a formal enforcement action rather than resolve the matter through an AVC, CRH's financial and reputational exposure increases significantly. In a contested enforcement proceeding, CRH would face:
• Civil penalties of up to $2,000 per violation under RCW 19.86.080 and 19.86.090. Depending on how the AG defines and counts "violations" — per SKU, per transaction, per consumer, or per day — the maximum penalty exposure could range from $3.2 million (1,601 SKUs × $2,000) to a substantially higher figure.
• Restitution that could exceed the amount negotiated in an AVC, particularly if the court adopts the AG's methodology for calculating consumer harm and applies it to the full universe of affected transactions rather than the sampled SKU dataset.
• Injunctive relief that could be more prescriptive and more burdensome than the prospective pricing reforms negotiated in an AVC, as the court would have broad discretion to fashion equitable remedies.
• Attorney fees and costs payable to the AG under RCW 19.86.080.
• Defense costs estimated at $1.5 million to $2.5 million, including expert witness fees, document review and management costs, and trial preparation expenses. These costs would be incurred over a period of 18 to 30 months, depending on the pace of litigation.
• Public exposure and reputational harm. A filed enforcement action would become a matter of public record and would generate media coverage. CRH's pricing practices would be subject to public scrutiny, and the Company would be required to disclose the litigation in its SEC filings. The reputational impact on a Nasdaq-listed company with a market capitalization of approximately $5.1 billion could be significant, potentially affecting consumer confidence, investor sentiment, and CRHI share price.
When these factors are considered in the aggregate, an AVC resolution in the range of $3.5 million to $3.8 million is materially preferable to a contested enforcement action from both a financial and reputational standpoint. The AVC provides certainty of outcome, avoids public adjudication of liability, and allows CRH to control the narrative around the resolution.
C. Insurance Considerations
CRH's directors' and officers' liability insurance policy with Elkhorn Mutual Insurance Company (Policy No. ELK-DO-2024-08817) is relevant to the AVC financial analysis, although its applicability to certain AVC components is limited or uncertain.
Defense costs: Elkhorn Mutual has acknowledged coverage for defense costs (C&H legal fees and related expenses) above the $250,000 self-insured retention. CRH's C&H fees and costs are approximately $200,000 to date and are expected to reach $400,000 to $475,000 by the close of the matter, within the agreed fee budget of $350,000 to $475,000. CRH will bear the first $250,000 of defense costs under the SIR, and Elkhorn will reimburse costs in excess of the SIR, subject to the policy's terms, conditions, and reservations of rights.
Civil penalty ($750,000 target): The civil penalty is a governmental fine and is not covered under the Elkhorn policy. The policy contains a standard exclusion for fines, penalties, and sanctions imposed by governmental authorities. CRH should plan for the civil penalty as an entirely out-of-pocket cost.
Restitution fund ($2,850,000 target): Coverage for the consumer restitution fund is uncertain. In its April 29, 2024 acknowledgment letter, Elkhorn reserved rights regarding whether consumer restitution constitutes a covered "loss" under the policy. The policy defines "loss" to include damages, settlements, and judgments, but the definition contains exceptions that may exclude restitution payments — particularly if Elkhorn characterizes the restitution as disgorgement of ill-gotten gains rather than damages. This is a live issue and one that may require separate analysis and potentially coverage litigation. CRH should not rely on insurance reimbursement for the restitution component in its negotiation calculus or its internal budgeting for the AVC resolution.
Elkhorn's coverage counsel, Brenda Whitacre, should be kept informed of AVC terms as they develop. We recommend that CRH provide Ms. Whitacre with copies of the AG's draft AVC and CRH's proposed redline, redacted as appropriate to preserve privilege, so that Elkhorn can evaluate the coverage implications of the specific terms under negotiation. Failure to keep Elkhorn informed could jeopardize CRH's coverage rights and potentially provide Elkhorn with a basis to disclaim coverage for defense costs.
VI. Tactical Recommendations
A. Sequencing of Negotiations
We recommend that CRH allow the AG to circulate its draft AVC first, rather than submitting CRH's own proposed terms proactively. The AG indicated at the May 14 meet-and-confer that it expects to circulate draft AVC terms within the next several weeks — we estimate by approximately June 12, 2024. By allowing the AG to present its draft first, CRH gains several tactical advantages:
• CRH can respond to specific proposed terms rather than making initial proposals that may be lower than what the AG would have proposed, thereby inadvertently anchoring the negotiation at a higher level.
• CRH can assess the AG's overall negotiating posture and priorities by reviewing the totality of the draft terms, identifying areas where the AG's positions are firm and areas where there may be flexibility.
• CRH can prepare a comprehensive redline of the AG's draft incorporating CRH's proposed revisions, accompanied by a detailed cover memorandum explaining the rationale for each change. This approach is more efficient and more persuasive than exchanging position papers without a common reference document.
We anticipate one to two rounds of negotiation following the initial exchange of drafts before the parties reach agreement on the principal terms. Each round will likely involve the submission of written redlines and brief telephonic or in-person discussions to address specific points of disagreement.
B. Leverage Points
CRH brings several significant leverage points to the AVC negotiation that should be emphasized throughout the process:
• Cooperation. CRH has cooperated fully and promptly with the AG's investigation, producing approximately 21,100 documents without objection to the scope of the CID. This level of cooperation is not universal among subjects of AG consumer-protection inquiries, and it demonstrates CRH's good faith and respect for the investigative process.
• Voluntary remediation. CRH has voluntarily suspended (or is willing to suspend) the Smart Price program pending algorithmic reforms. This proactive step demonstrates CRH's commitment to addressing the AG's concerns and reduces the risk of ongoing consumer harm during the negotiation period.
• No prior enforcement history. CRH has no prior consumer-protection violations in Washington or, to our knowledge, in any other jurisdiction. This is a significant mitigating factor that supports CRH's argument for a proportionate resolution.
• Willingness to accept structural reforms. CRH's willingness to accept an independent compliance monitor, to implement prospective pricing reforms, and to establish a consumer restitution fund demonstrates that the Company is taking the AG's concerns seriously and is committed to meaningful reform.
These leverage points should be woven into all communications with the AG's office, including in the cover memorandum accompanying CRH's redline of the draft AVC.
C. Areas of Concession
Strategic concessions on lower-priority terms can generate goodwill and create space for firmer positions on higher-priority terms. We recommend that CRH be prepared to make the following concessions:
• Lookback window. CRH should be prepared to move from 90 days to 120 days relatively early in the negotiation. This concession demonstrates flexibility and reasonableness while preserving a commercially viable pricing standard. By conceding on the lookback window, CRH may create leverage for firmer positions on the restitution fund and civil penalty.
• AG investigative costs. CRH should agree to a reasonable investigative cost reimbursement in the $150,000 to $200,000 range without extended negotiation. The amounts at issue are relatively modest, and demonstrating reasonableness on this point may yield concessions elsewhere.
• Monitor selection. If the AG objects to Ridgepoint Compliance Solutions Inc., CRH should have an alternative candidate prepared. We suggest Westgate Advisory Group LLC (Seattle) as a fallback option. However, CRH should push for Ridgepoint initially, as Ridgepoint's retail industry expertise will result in a more efficient and better-informed monitoring engagement.
D. Areas of Firmness
Certain terms are of sufficient importance to CRH's business interests and legal posture that they should not be conceded without significant countervailing benefits:
• No admission of liability. This is non-negotiable, as discussed in Section IV.A above. CRH must not agree to any language that could be construed as an admission of violation of the CPA or any other legal standard.
• 30-day cure period for stipulated penalties. The cure period is essential to protect CRH from punitive exposure arising from inadvertent or minor non-compliance. This term should be maintained even if other concessions are necessary to secure it.
• Restitution fund ceiling. The restitution fund should not exceed $3.0 million. If the AG insists on a higher figure, CRH should seek offsetting concessions on the civil penalty (e.g., reducing the penalty from the AG's expected $1.5 million to $500,000 or less) to keep the total financial commitment within the target range.
• Lookback window ceiling. The lookback window should not exceed 120 days. A 180-day lookback window is commercially unreasonable for seasonal merchandise, and accepting this term could force CRH to fundamentally restructure its pricing operations across multiple product categories.
E. Communication Strategy
Maintaining disciplined communication channels is critical to the success of the negotiation. We recommend the following protocols:
All substantive communications with the AG's office — including telephone calls, emails, written correspondence, and in-person meetings — should be conducted exclusively through Alan Ngo or Patrick Gallagher of Calderwood & Harkness LLP. No CRH personnel should communicate directly with the AG's office regarding any aspect of the investigation or the AVC negotiation unless specifically authorized to do so by outside counsel. Unauthorized communications create a risk of inadvertent disclosure of privileged information or negotiation strategy and could undermine CRH's bargaining position.
Raymond Soo, CRH's Vice President of Marketing & Pricing Strategy, and Dr. Leila Farzan of Praxton Analytics should be available to provide factual context on the Smart Price algorithm, its design, its data sources, and its operational implementation. This factual context may be necessary to support CRH's positions on the lookback window, the definition of bona fide offering price, and the algorithmic pricing methodology. However, neither Mr. Soo nor Dr. Farzan should communicate directly with the AG or the AG's investigative staff. All factual information should be channeled through C&H counsel, who will de

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