California Antitrust Law: Everything You Need to Know
The antitrust laws of the State of California have many similarities to their federal and other state counterparts but do have some marked differences of note.7 min read
by John H. Dresslar
The following summary of California's antitrust laws is designed to provide attorneys with a brief and general introduction to the most prominent many of those laws. Any practitioner facing an issue that potentially involves California antitrust or competition law is advised to seek experienced counsel and/or to refer to California Antitrust Law, a 450-page, a regularly supplemented book published by the Antitrust and Trade Regulation Law Section of the State Bar of California.
The antitrust laws of the State of California have many similarities to their federal and other state counterparts but do have some marked differences of note. As I've noted elsewhere, California's Cartwright Act in many respects parallels (and is interpreted in pari materia with) Section 1 of the Sherman Act, with some specific exceptions noted below. However, the Cartwright Act has no direct analog to the antimonopoly provisions of Section 2 of the Sherman Act, although many monopolistic practices may be challenged by other antitrust statutes or more general tort claims, such as causes of action for interference with prospective business advantage (and of course the ever popular RICO). Further, California's competition statutes go far beyond the limited competition strictures of the Sherman and Clayton Acts, prescribing (for example) the use of loss leaders and locality discrimination in ways that federal antitrust laws do not address.
This summary is divided into the following sections:
- Market Definition Issues
- Cartwright Act
- Horizontal Violations
- Vertical Restraints
- Unfair Practices Act
- - Locality Discrimination
- - Below Cost Sales
- - Loss Leader Sales
- - Affirmative Defenses
- - Secret Rebates
- - Antitrust Injury and Damages
- Unfair Competition Statute Generally Applicability of Federal and Sherman Act Case Authority to California Statutes
Market Definition Issues
California antitrust law has not developed a complete body of decisions on market definition issues and relies largely upon federal case authority. See Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842, 855.
Like its federal counterpart in Sherman Act 1, California's antitrust statute - Bus. & Prof. Code 16720 - bars any agreement among competitors that would serve to fix prices or allocate customers or markets, albeit by way of a more detailed list of transgressions that is set out in the Sherman Act's general prohibitions against "restraints of trade". For recent court interpretations of what may constitute such proscribed horizontal agreements and arrangements, the reader is directed to the following cases: Rosack v. Volvo Corp. of America (1982) 131 Cal.App.3d 741; Mailand v. Burckle (1978) 20 Cal.3d 367; Kolling v. Dow Jones & Co. (1982) 137 Cal.App.3d 709.
Again like its federal counterpart in Section 3 of the Clayton Act, California's antitrust laws - Bus. & Prof. Code 16720, 16727 - ban tying arrangements. However, those statutes may apply to services where the Clayton Act would not apply. Cases applying the tying laws are: Kim v. Servosnax, Inc. (1992) 10 Cal.App.4th 842; Suburban Mobil Homes, Inc. v. Amfac Communities, Inc. (1980) 101 Cal.App.3d 541.
General Rules Governing Pricing Restraints
A buyer who buys a product or service generally may set the price at which it resells the product or service to others. A seller, in the absence of an anticompetitive purpose or effect, may independently
(1) announce minimum resale prices and decide to sell or not to sell to a dealer who has not adhered to those prices; and
(2) choose those to whom it wishes to sell and refuse to sell to any other buyer. Kolling v. Dow Jones & Co. (1982) 137 Cal.App.3d 709, 719, 722. However, a seller of a product may not by contract or coercion set the price at which the buyer may resell the product. Such resale price fixing is always illegal whether or not the price set is reasonable. Mailand v. Burckle (1978) 20 Cal.3d 367, 377.
Unlawful Termination in the Seller's Enforcement of Vertical Price Restraints
When a seller pressures customers or dealers into adhering to its suggested resale price and then cuts off a distributor for refusing to do so, the termination generally is assessed under the "rule of reason". The critical question is whether the refusal is sufficiently anticompetitive, in purpose or effect, or both, as to be an unreasonable restraint of trade. In determining whether the seller's actions were unreasonable, the factfinder is permitted to consider the following factors: the terms of any contract between the seller and the reseller, the value to the reseller of its business relations with the seller, whether the seller has superior bargaining strength or the ability to terminate the relationship with or without advance notice or good cause, any other restrictions the seller imposes on resellers, such as territorial limitations, and any direct efforts to persuade resellers to follow suggested prices. Marin County Board of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 937; Bert G. Gianelli Dist. Co. v. Beck & Co. (1985) 172 Cal.App.3d 1020, 1042-44; Kolling, supra, at 719; R. E. Spriggs Co. v. Adolph Coors Co. (1979) 94 Cal.App.3d 419, cert. den. (1980) 444 U.S. 1076; cf., A.B.A., Model Jury Instructions for Antitrust Cases at S-18-20.
Dual Dealing Distributors
Where a seller not only sells its products to distributors but also sells products directly in competition with those distributors to many of the same customers to whom that distributor sells or seeks to sell, the seller takes a substantial risk if it terminates the distributor and a substantial factor in bringing about the termination is the dealer's refusal to abide by the seller's territorial or customer restrictions. The most recent California appellate case authority on point states that the termination is to be viewed under per se rules. See Guild Wineries and Distilleries v. J. Sosnick & Son (1980) 102 Cal.App.3d 627, 636. Note, however, that more recent federal court authority questions the continued validity of the Guild Wineries decision and opines that the California Supreme Court would overrule its holding and instead apply the rule of reason to dual distribution situations. Dimidowich v. Bell & Howell, 803 F.2d 1473, 1483 (9th Cir. 1986).
Unfair Practices Act
The Unfair Practices Act bans sales of products at different prices in different locations within California with the intent to destroy or prevent competition. See Business and Professions Code 17031; Harris v. Capitol Records Distributing Corp. (1966) 64 Cal.2d 454.
Below Cost Sales
The Act also bans "sales below cost" by selling or offering to sell products at prices below the seller's cost in the intent to injure the complaining party or destroy competition. See Business and Professions Code 17043; Western Union Financial Services, Inc. v. First Data Corp. (1993) 20 Cal.App.4th 1530; Sandler v. Gordon (1949) 94 Cal.App.2d 254.
The evidence that may be used to determine the costs involved is set out in the Business and Professions Code (Business and Professions Code Sections 17071 et. seq.) varies contingent upon the types of components that make up the seller's cost of providing the product.
Loss Leader Sales
The Act also bars "loss leader" sales, defined as sales (1) below cost, (2) to induce, promote or encourage the purchase of other merchandise, and (3) with the intent to injure competitors or destroy competition. Business and Professions Code 17044.
The act contemplates various affirmative defenses to a charge of unlawful loss leader or below cost sales or locality discrimination, including the fact that the sale was a close-out sale or was of damaged or perishable items. Business and Professions Code 17050.
The act also bans the payment of secret rebates or unearned discounts where the payments are not available to all purchasers on the same terms and conditions, where the payments have a tendency to destroy competition. Business and Professions Code 17045. See also E&H Wholesale, Inc. v. Glaser Bros. (1984) 158 Cal.App.3d 728, 738. An excellent discussion of the statute is set out in the recent decision in ABC International Traders, Inc. v. Matsushita Electric Corporation of America (1995) 38 Cal. App. 4th 398., but that opinion has been vacated and is not citable authority.
Antitrust Injury and Damages
The requirements of antitrust injury and damages are set out generally in Business and Professions Code 17070, 16760(d).
Unfair Competition Statute - General
California's Unfair Competition statute (Business and Professions Code 17200) is more of a consumer protection statute than an antitrust statute, although it has been applied to some antitrust situations. Because of the breadth of business actions that may be invoked by the statute, the reader is directed to the California Antitrust Law treatise referenced above for a further discussion of its scope. As a general rule, a party injured by reason of a violation of the Unfair Competition Act may obtain injunctive relief and restitution, but apparently not compensatory or punitive damages. Restitution is available solely as a form of ancillary relief in an injunctive action and may not be recovered absent the issuance of an injunction. See Fletcher v. Security Pacific National Bank (1979) 23 Cal.3d 442, 452-45.
Applicability Of Federal and Sherman Act Case Authority To California Statutes
Notwithstanding the oft-repeated statement that the Sherman Act and the Cartwright Act are to be read in para materia (see Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842), several recent California court decisions have expressly departed from federal precedent in interpreting California's antitrust laws. See: Cellular Plus, Inc. v. Superior Court (1993) 14 Cal.App.4th 1224; and State ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147.
The author is with the Law Offices of John H. Dresslar, San Francisco, CA
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