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

Is the California Unfair Practices Act a Free Pass on Motions to Dismiss?

Probably not, but UPA claims can be tough to defeat at the motion to dismiss stage. Witness Rheumatology Diagnostics Laboratory, Inc. v. Aetna, Inc., 2013 U.S. Dist. LEXIS 151128 (N.D. Cal. Oct. 18, 2013) (Orrick, J.), where the court dismissed many of the plaintiffs’ Sherman Act Section 1 and Section 2 claims. However, the court refused to dismiss the plaintiffs’ below-cost pricing claims against Quest Diagnostics under the UPA, reasoning:

The UPA “appears to be a painstaking endeavor by the legislature to combat the abuses which the business interests have deemed unfair practices in the competitive field.” To require the plaintiffs to plead with an unreasonable degree of specificity would undermine the UPA’s admonition that the statute “shall be liberally construed that its beneficial purposes may be subserved.” Cal. Bus. & Prof. Code § 17002. Much of the information that must be pleaded—Quest’s costs and the prices it charges by product—is in Quest’s hands and not easily accessed by the plaintiffs. The Court does not “forget that proceeding to [ ] discovery can be expensive” or that the plaintiffs must meet their burden under Federal Rule of Civil Procedure 8. However, even in a case where the plaintiff “fail[ed] to allege a definite cost of doing business,” the California Court of Appeal held that “it would serve no useful purpose to require a speculative allegation of cost which adds nothing to the notice given by the pleadings in their present state. Accordingly, we view the present pleadings as sufficient under section 17043 and find error in sustaining the demurrer thereto.”

In sum, “the determination of cost is best approached on a case-by-case basis.” So long as the method used was not “arbitrary or irrational,” it is sufficient for pleading purposes. Finding that the plaintiffs adequately plead their UPA claim based on the information alleged in the [complaint] does not mean that the information or calculations provided are necessarily correct or even that the plaintiffs are likely to succeed in proving their claim. Quest may dispute the details of the calculation method later to the trier of fact. However, the purpose of pleading is to put a defendant on sufficient notice of its alleged wrongdoing, and the plaintiffs have done so here.

(Citations omitted). This liberal standard – coupled with the fact that a UPA plaintiff probably need not prove a dangerous probability of recoupment after the predatory period, a requirement under federal law – makes it difficult to target these claims on a motion to dismiss.

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

Fair Pricing

Fair Pricing (Photo credit: Wikipedia)

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?”

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More Evidence that California May No Longer Follow the Per Se Rule in Vertical Pricing Fixing Cases

 In Kaewsawang v. Sara Lee Fresh, Inc., Case No. BC360109 (Cal. Los Angeles Superior Ct. May 6, 2013), the trial court dismissed a challenge to Sara Lee’s pricing practices brought under California’s state antitrust law, the Cartwright Act.

The plaintiffs were a purported class of distributors of Sara Lee products, and challenged Sara Lee agreements with chain retailers that gave Sara Lee the right to set pricing (to the chain stores) for Sara Lee products. The distributor agreements required the distributors to comply with the terms of the Sara Lee-chain store agreements.

In dismissing the claim, the court first ruled that plaintiffs had not alleged a price-fixing allegation. The court’s discussion is somewhat unclear, but it appears to have rejected an argument that there was some sort of horizontal agreement between and among Sara Lee and the chain stores.

The court then turned to the question of per se unlawful vertical price-fixing, and held that, despite the California Supreme Court’s decision in Mailand v. Burckle, 20 Cal. 3d 367 (1978), following the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), “it remains unlikely that the Mailand’s court holding is still applicable . . . .”

The court then rejected the plaintiffs’ rule of reason claim for vertical price fixing.

It is conceivable that the court did not even need to reach the issue.  Unlike the traditional vertical price-fixing scenario, Sara Lee apparently did not agree with its distributors on downstream pricing — it had the power to set the downstream pricing directly.  The distributors were more similar to middlemen or agents than true distributors with pricing authority.

Sara Lee is but one trial court decision, but it is further evidence that California courts will be receptive to arguments based on developments in federal law that vertical price-fixing is not per se unlawful.

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The Critical Importance of Geographic Market Definition

In a recent (and unpublished) decision by the California Court of Appeal for the First District, the court affirmed a summary judgment in favor of a gasoline refiner in a price-discrimination case brought pursuant to California’s Business and Professions Code.  The reason?  The plaintiff had not hired an expert, and did not have evidence to support her claim that her station competed with, and should have been charged the same as, similarly-branded stations located within five miles.

The opinion is hereEl Sineitti v. Conoco Phillips Co. (Aug. 24, 2011).

Enforcing Online Resale Prices Can Be Problematic

Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), held that resale price maintenance – even minimum resale price maintenance – is not per se illegal under federal antitrust laws. However, resale price maintenance, or RPM, remains vulnerable to attack under various state laws. In California v. Bioelements, Inc., Cal. Superior Ct. (Riverside County, Jan. 11, 2011), the California Attorney General reached an agreement with a cosmetics company to resolve charges brought under the Cartwright Act and California’s Unfair Competition Law that the company had engaged in price-fixing by prohibiting retailers from selling products online at a discount from suggested retail prices. The Attorney General did not charge that products sold in brick-and-mortar stores were subject to any similar agreement. The settlement agreement contemplates injunctive relief and civil penalties. Bioelements cautions that RPM remains problematic, and illustrates the limits of what manufacturers can do to address tensions between online and brick-and-mortar distribution – e.g., tensions caused by the perception that online retailers may “free ride” on the efforts of brick-and-mortar distributors.

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