As of 2012 (at least according to Wikipedia), California was the 12th largest economy in the world. Most national and international firms do at least some business in the Golden State. Like other states, California has laws prohibiting the below-cost pricing of goods and services. Although below-cost pricing claims are not filed with great frequency, they are indeed filed, and they can become a trap for those who are unfamiliar with the law in this area.
In fact, California’s below-cost pricing law features some unique plaintiff-friendly provisions that can, at least in theory, expose your company to more potential liability than the analogous laws of other states. You might unwittingly find yourself on the wrong side of California law, especially if your firm at least on occasion uses discounts, promotions, or rebates. In the next few posts, I will briefly review California’s below-cost pricing law and the top nine things you need to know about it to minimize your exposure to below-cost pricing claims.
1. What statute is at issue?
California Business & Professions Code section 17043 prohibits “sell[ing] any article or product at less than the cost thereof to [a] vendor, or . . . giv[ing] away any article or product, for the purpose of injuring competitors or destroying competition.” Section 17043 is part of California’s Unfair Practices Act, or “UPA.”
California law also expressly prohibits the use of loss leaders. Section 17044 prohibits “sell[ing] or us[ing] any article or product as a ‘loss leader’ as defined in Section 17030 of this chapter.” Section 17030 defines “loss leader” as “any article or product sold at less than cost: (a) Where the purpose is to induce, promote or encourage the purchase of other merchandise; or (b) Where the effect is a tendency or capacity to mislead or deceive purchasers or prospective purchasers; or (c) Where the effect is to divert trade from or otherwise injure competitors.” Although the loss leader provision was probably designed to protect small retailers, the statute is not expressly limited to retailers and it could apply to other links in the distribution chain. For most purposes, you can safely think of a loss leader claim as a specific type of below-cost pricing claim.
2. Why would a statute address below-cost pricing?
California developed the below-cost sections of the UPA during the Great Depression to, among other things, protect existing firms against market price erosion as a result of distress sales, bankruptcy liquidations, and unscrupulous practices. The UPA is in some ways similar to, and in some ways significantly different from, the federal Robinson-Patman Act, 15 U.S.C. § 13, which also concerns itself with, among other things, below-cost pricing. Some of the notable differences between California and federal law are discussed below.
3. What products does the statute cover?
The UPA defines “article or product” broadly to include “any article, product, commodity, thing of value, service or output of a service trade.” Section 17024. One court has written that this definition is “remarkably open-ended.” As such, the UPA may apply to technology or software licensing – which usually does not fall under the federal Robinson-Patman Act because such licensing involves neither commodities nor sales.
4. Do sales below cost themselves violate the statute? Isn’t harm to competition also required?
Proof of harm to competition is one of the major differences between federal law and California law. Under federal law, below-cost sales are only actionable when the seller is likely to recoup the losses at a later time period (e.g., after the seller has driven its competitors out of the market and jacks up the prices). Because likelihood of recoupment is so difficult to prove, below-cost pricing claims under federal law have become relatively rare. California law, however, imposes no such requirement, and so considerably lowers the bar for below-cost pricing claims.
That said, to violate the statute, the seller must act with the purpose, i.e., the desire, of injuring competitors or destroying competition. Such intent could be shown through the seller’s internal documents, which might be obtained in discovery. Often, of course, no such documents exist. Some courts have also indicated, citing Section 17071 of the UPA, that proof of one or more acts of selling or giving away any article or product below cost or at discriminatory prices, together with proof of the injurious effect of such acts, is presumptive evidence of the purpose or intent to injure competitors or destroy competition. Although such evidence can be rebutted, the presumption may make it more difficult for a seller to dismiss at an early stage a below-cost pricing claim.
Up next: What does it mean to sell below “cost?”