Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

The Top Nine Things You Need to Know About Below-Cost Pricing Law in California : Part II

This is the second of two posts on California below-cost pricing law.  The first post is here.

5. What does it mean to sell below “cost?”

Unlike federal law, California law expressly defines the concept of below-cost sales (although there remain many questions about how California law applies in practice and in detail). Under California law, the cost referred to in the UPA is a fully allocated cost or fully distributed cost.

For distribution, cost means the invoice or replacement cost, whichever is lower, of the article or product to the distributor and vendor, plus the cost of doing business by the distributor and vendor. So here’s an example: if you are a distributor and you are selling product X, the cost will be the invoice/replacement cost of X, plus an appropriate allocation to product X of a portion of your overhead costs (including lease costs, depreciation, maintenance costs, insurance and advertising costs, administrative costs, labor costs, etc.). Developing proof of the appropriate cost allocation can be time-consuming and complex.

In the absence of proof of cost of doing business, a markup of six percent on such invoice or replacement cost is prima facie proof of such cost of doing business. Thus, absent actual evidence, a plaintiff can still make out a case by establishing that your pricing is below invoice cost plus six percent. This is another relatively unique feature of California law that makes it more difficult to secure early dismissals of below-cost claims.

6. What if I lower my prices temporarily – can’t I average them over time?

Although there are good arguments that you should be able to average out temporary price reductions, the case law in this area is somewhat conflicting and unclear. Therefore, you should not simply assume that you can lower prices for a few days or weeks and enjoy immunity because over a period of months or years your prices are above cost. Before deciding on such a pricing strategy, you should consider its legal implications more closely.

7. Does California law average costs over time?

Here, the answer is a bit better for sellers. At least one California appellate court has held that the costs of selling items should be measured as the average costs over a reasonable time, rather than the cost of the item on a particular occasion. Thus, if your costs happen to temporarily increase, you may be able to argue that the costs should be measured over a longer period of time (and thus are lower than the dip prices). This is important, because you want your pricing to be above your cost.

8. Are there defenses to below-cost pricing claims?

Yes. Both Section 17043 and Section 17044 are subject to an affirmative defense for sales made in good faith in an endeavor to meet the legal prices of a competitor selling the same article or product, in the same locality or trade area and in the ordinary channels of trade. This is the so-called “meeting competition” defense. Note that the defense allows you to meet (not beat) competitive pricing, and it only applies when you meet the legal prices of a competitor. Thus, if two sellers know they are each selling below cost and nevertheless pursue a price war, the defense will probably not apply.

There are other less important defenses as well. For example, you can engage in below cost sales of perishable goods to close out your stock, or price below cost when goods are damaged or deteriorated in quality.

9. What are the remedies for a violation of California’s below-cost pricing statute?

For violations of the UPA’s pricing provisions, a plaintiff can recover treble damages, attorney’s fees, and costs. A plaintiff can also secure injunctive relief against the pricing practices at issue. Violations can also amount to criminal misdemeanors and subject violators to fines and imprisonment, but the UPA is almost never enforced in this manner.

Conclusion

It may be surprising to some that companies cannot price as they wish, but that is in fact the case. In California, below-cost pricing remains actionable, and below-cost pricing suits are filed almost every year. Because California does not require proof of the possibility of recoupment, because it provides plaintiffs with powerful (but rebuttable) presumptions, and because the defenses to a below-cost claim under California law are limited, companies that do business in California should make sure that aggressive promotions, discounts, or rebates do not violate California’s below-cost pricing law.

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