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Read this article and take the accompanying test to earn one hour of Minimum Continuing 
Legal Education credit. Follow instructions on test form. This month's article and test provided by the State Bar's Antitrust & Trade Regulation Law Section.


Lost For A Century

State antitrust laws have a stature
comparable to the Sherman Act,
especially here in California

by Jesse Markham

"Yes, Virginia, there are state antitrust laws (and they can have more bite than the Sherman Act)." Indeed, several states enacted antitrust laws as part of the populist movement years before Congress acted in 1890. For nearly a century, however, state antitrust laws were all but forgotten, dwarfed by federal law and law enforcement.

Now, it is not an exaggeration to say that the state antitrust laws have a stature comparable to the Sherman Act, especially here in California. The reasons for this shift are beyond the scope of this article, but include, among many other factors, the federal judiciary's widespread acceptance of conservative "Chicago school" economic theory, under which it is suspected that anticompetitive conduct is self-correcting and infrequent; the advantages of state courts for antitrust plaintiffs, especially the non-unanimous jury; and the California Supreme Court's determination in State ex rel. Van de Kamp v. Texaco, 46 Cal.3d 1147, 252 Cal.Rptr. 221 (1988) that California's Cartwright Act was not (despite earlier contrary statements) patterned after the federal Sherman Act, thus theoretically freeing state court judges from the conservative emerging precedent of federal antitrust jurisprudence.

It is therefore useful to understand the basic rules of California's antitrust laws, and particularly the important differences between the state and federal rules.

California's basic antitrust statute is the Cartwright Act, Business & Professions Code §16720 and the following.

Where the Sherman Act (15 U.S.C. §§1 and 2) prohibits "contracts, combinations and conspiracies" in restraint of trade, as well as monopolization and attempts and conspiracies to monopolize, the Cartwright Act prohibits "trusts."

§16720 defines "trust" to include "a combination of capital, skill or acts by two or more persons" for any of five proscribed purposes. Though textually quite different from its federal counterpart, the Cartwright Act has for many, perhaps most purposes, been construed congruently with §1 of the Sherman Act.

§16727 is a narrower provision, outlawing anticompetitive tying and certain exclusive dealing arrangements, and is essentially identical to §3 of the Clayton Act.

Importantly, the Cartwright Act contains no provision prohibiting unilateral monopolistic conduct as is contained in §2 of the Sherman Act -- the Cartwright Act appears to prohibit only conspiratorial or collusive conduct involving at least two concerns.

Following federal law, the Cartwright Act recognizes two distinct categories of offenses: "per se" violations, and other potentially harmful conduct that is treated under the so-called "rule of reason."

Certain types of conduct are regarded as so inherently anticompetitive that they are treated as per se offenses. These include certain horizontal agreements (i.e., between competitors): price fixing, agreements to allocate customers or markets and group boycotts against customers or suppliers.

Per se offenses also include certain "vertical" arrangements (i.e., between purchaser and supplier): tying and vertical price fixing or resale price maintenance. Price fixing includes any arrangement that directly or indirectly manipulates prices, and the requisite agreement may be inferred even where no express agreement occurs. Oakland-Alameda County Builders' Exchange v. F.P. Lathrop Construction Co., 4 Cal.3d 354, 93 Cal.Rptr. 602 (1971).

Output restrictions, such as a concerted slow-down in production in order to drive prices higher, is a form of price fixing. Market or customer allocations are arrangements whereby competitors divide up competitive turf, thus freeing themselves of competition from one another. LaFortune v. Ebie, 26 Cal.App.3d 72, 102 Cal.Rptr. 588 (1972).

Price fixing and market or customer allocations are the two offenses most likely to result in criminal prosecution.

Group boycotts, sometimes called concerted refusals to deal, are generally in the nature of agreements not to deal with specified customers or suppliers.

For example, a group of retailers might refuse to deal with a particular supplier unless that supplier cuts off a price-cutting retailer. Gianelli Distributing Co. v. Beck & Co., 172 Cal.App.3d 1020, 219 Cal.Rptr. 203 (1985).

Tying is the sale of one ("tying") product on the condition that the purchaser also takes a second ("tied") product that is either unwanted or that the buyer might prefer from another source.

Tying may violate both §§16720 and 16727, and it is per se illegal only when the products are truly separate, and where either the seller has a dominant position in the market for the tying product or a not insubstantial amount of commerce in the tied product is affected. People v. National Association of Realtors, 155 Cal.App.3d 578, 583, 202 Cal.Rptr. 243 (1984).

Vertical price fixing and resale price maintenance include any form of agreement whereby a manufacturer (or other seller) imposes resale prices on its customers.

Notably, federal law has relaxed this rule considerably in recent years, and it is uncertain whether the Cartwright Act will adopt the federal approach. See Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 108 S.Ct. 1515 (1988), cert. denied, 486 U.S. 1005, 108 S.Ct. 1727 (1988).

If conduct falls within the per se rules, a wide range of defensive evidence is excluded. Essentially, per se offenses are considered illegal irrespective of the benign intentions of the actors and also independent of whether the conduct actually had any adverse effects on competition. For example, parties charged with price fixing cannot defend on the ground that the price, as fixed, was reasonable or even lower than competitive conditions would have generated.

Group boycotts are not defensible on the ground that the target was engaging in consumer fraud. Sellers who have divided customers between themselves cannot evade liability with evidence that competition was ruining both companies and would inexorably have driven them from the market (thus reducing competition).

In sum, per se offenses remove many defenses based upon economics or intent, and thus it is often critical whether conduct is characterized as falling within a per se offense or something else.

One helpful way to distinguish rule of reason offenses is that they are often part of, or ancillary to, a legitimate transaction, so that the context will be examined by the court and the per se rules will not generally apply.

Where the per se rules are inapplicable, the rule of reason takes over. The rule of reason has been observed by many to be inarticulably vague, but in essence it permits the court to balance the procompetitive and anticompetitive effects and intent behind the conduct.

For example, a noncompetition covenant in an agreement for the sale of a business obviously eliminates the seller as a competitor of the business it is selling.

However, this agreement is treated under the rule of reason, because it is ancillary to a legitimate agreement for the sale of a business. If the non-compete clause is fairly limited in geographic and temporal scope, it will be lawful under the rule of reason.

Consequences of violations are severe. The Cartwright Act, like the Sherman Act, recognizes a private right of action for treble damages, and reasonable attorneys' fees and costs are mandatory.

The attorney general and district attorneys are also authorized to bring such civil actions, or they may bring criminal charges. The statute of limitations is four years, but is tolled by active concealment by the conspirators.

Antitrust violations are as varied as the human imagination, but for the general business practitioner, a few cautionary rules will cover most circumstances that raise Cartwright Act risks.

First, whenever competitors strike up any sort of arrangement or engage in discussions on any topic, there should be a review for antitrust concerns. This includes participation in trade association activities, the exchange of sensitive information, the formation of strategic alliances and any contracts with rivals -- all of which may be perfectly lawful, but which may also create unanticipated problems.

Second, when a client proposes to bundle more than one product and has some competitive advantage in the sale of either of them, this should be reviewed for possible tying problems.

The Unfair Practices Act, Business & Professions Code §§17000, et seq., includes four prohibitions:

1. Below-Cost Sales. §17043 prohibits selling any article or product at less than the cost to the vendor, or giving away any article or product "for the purpose of injuring competitors or destroying competition."

In contrast to the trend among federal courts, California law defines "cost" as "fully allocated cost." Cal. Bus. & Prof. Code §17026; William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1048 (9th Cir. 1981), cert. denied, 459 U.S. 825, 103 S.Ct. 57 (1982). Over-head expenses are thus included, defined broadly as all costs incurred in conducting the business. Cal. Bus. & Prof. Code §17029.

Also in contrast to recent federal trends, no proof of injurious or anti-competitive effect is required of plaintiffs. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 2578 (1993).

The "intent to injure competitors or destroy competition" is presumed from one or more instances of a sale below cost coupled with proof of injurious effect, such as sales lost by plaintiff to defendant. Cal. Bus. & Prof. Code §17071; E&H Wholesale, Inc. v. Glaser Bros., 158 Cal.App.3d 728, 735, 204 Cal.Rptr. 838 (1984).

Defenses are recognized for below-cost sales to meet competition, in connection with close-outs, or sales of seasonal, perishable or damaged goods, or outside ordinary channel of trade, such as in bankruptcy or court-ordered sales.

In sum, the Unfair Practices Act imposes liability for sales that are at price levels initiated by the defendant, and which are inadequate to recapture a fair allocation of all costs, fixed and variable, where a competitor is harmed such as by the diversion of trade.

Violations of this rather strict standard would seem to be widespread and economic theory teaches that it is rational to price at levels below total cost, at least over the short run, so long as variable costs are recovered.

2. Loss Leaders. Business & Professions Code §17044 prohibits "loss leaders," defined in §17030 as any product sold below cost where the purpose is to induce, promote or encourage the purchase of other merchandise, or the effect is a capacity or tendency to mislead, or the effect is to divert trade from or otherwise injure competitors.

"Cost" is defined as is for below-cost sales under §17043. The courts have interpreted the statute as requiring some proof of an injurious intent, even though the statutory language does not include this element.

Western Union Financial Services, Inc. v. First Data Corp., 20 Cal.App. 4th 1530, 25 Cal.Rptr.2d 341 (1993); Hladek v. City of Merced, 69 Cal.App.3d 585, 138 Cal.Rptr. 194 (1977); Dooley's Hardware Mart v. Food Giant Markets Inc., 21 Cal.App.3d 513, 98 Cal.Rptr. 543 (1971).

However, as with below-cost sales, injurious intent is the subject of a presumption from a sale below cost coupled with injurious effect under §17071.

3. Secret Rebates and Discounts. Business & Professions Code §17045 prohibits the secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and tending to destroy competition.

A generally available advantage, such as a quantity discount or volume incentive rebate, is not unlawful if made available to all similarly situated buyers. Harris v. Capitol Records Distributing Corp., 64 Cal.2d 454, 463, 50 Cal.Rptr. 539 (1966).

Functional classifications, such as wholesalers and retailers, are permitted, so that prices may reflect the different burdens borne by various tiers in the chain of distribution.

However, a secret discount, rebate or allowance of any kind, is unlawful if it is unearned, or undisclosed to some purchasers. Diesel Electric Sales & Service Inc. v. Marco Marine San Diego Inc., 16 Cal.App.4th 202, 215-16, 20 Cal.Rptr.2d 62 (1993).

Unlike below-cost sales and loss leaders, there is no requirement of intent for a violation of §17045. Diesel Electric, 16 Cal.App.4th at 215. The requisite injurious effect may be either to competitors of the seller, or of the favored buyer. ABC International Traders Inc. v. Matsushita Electric Corp., 14 Cal.4th 1247, 61 Cal.Rptr.2d 112 (1997).

The meeting competition defense, generally available under the Unfair Practices Act, does not apply to this category of violations. Cal. Bus. & Prof. Code §17050.

4. Locality Discrimination. Business & Professions Code §17040 prohibits any seller from charging discriminatory prices in different localities with a purpose to injure competitors.

The proscription applies only to sales in different locales at different prices. Harris v. Capitol Records Distributing Corp., supra, 64 Cal.2d at 460.

Unlike the prohibition against sales below cost, this prohibition is not violated unless there is proof of intent to injure competition and of injury to competition at the seller's level.

This statute differs markedly from the federal Robinson-Patman Act, 15 U.S.C. §13, which prohibits all forms of price discrimination, injuring competitors of either the seller or its customers.

However, the federal law is routinely invoked by courts interpreting the state provision, and similar defenses are recognized under both laws for cost-justified price differences, differences in grade or quality or quantity and for functional classifications.

The different prohibitions under the Unfair Practices Act must be analyzed separately, because the statute is quite complex in the interrelationships among its various provisions.

For example, alleged below-cost sales, loss leaders or locality discrimination may be defensible as a good faith effort to meet the lawful price of a competitor -- but secret discounts are not defensible on this basis. See §17050.

Other defenses that may apply under the statute, depending upon the type of violation alleged, include sales of close-outs, seasonal, perishable or damaged goods (§17050) and certain sales outside ordinary channels (§17027 and §17028).

There are also important statutory presumptions that apply to establish the requisite intent for violations of below-cost sales and loss-leader prohibitions based upon evidence of one or more below-cost transactions and some actual injury to a competitor (§17071).

The Unfair Practices Act affords treble damages and attorneys' fees and costs to prevailing plaintiffs. Standing is quite broad, and any person or trade association is permitted to bring actions under the act for injunctive relief.

Anyone familiar with federal predatory pricing and price discrimination rules should be cautious in applying that jurisprudence to matters under the Unfair Practices Act.

Despite many similarities and frequent state court citations to federal case authorities to interpret the Unfair Practices Act, the federal rules are generally less restrictive than California's.

For example, discounts do not constitute unlawful price discrimination under the Robinson-Patman Act on the ground that they are "secret," while the Unfair Practices Act singles out secret discounts and rebates or other advantages as unlawful.

Sales "below cost" in federal court mean sales at levels below marginal or average variable cost, but not including overhead expense as are included in Unfair Practices Act claims.

Also, the state law appears not to require the same proof of injury to competition sufficient to adversely affect consumer prices as is required in federal predation claims.

There are other differences as well, and so caution should be exercised whenever problems are considered under both federal and state law.

California Business & Professions Code §§17200-17208 have come to be known as the Unfair Competition Act (although that is not its actual title). The Unfair Competition Act prohibits unfair competition, defined as "unlawful, unfair or fraudulent act or practice and unfair, deceptive, untrue or misleading advertising."

It also includes any act prohibited under §17500 prohibiting false and deceptive advertising. A 1992 amendment added the words "act or" to "practice," overturning a California Supreme Court decision that had limited the statute to "ongoing conduct" as distinct from a single act, such as an anticompetitive merger. State ex rel. Van de Kamp v. Texaco, supra, 46 Cal.3d 1147.

The categories of conduct prohibited under the statute are set forth disjunctively, so that conduct that is unfair, but not unlawful or deceptive, suffices for a violation. Motors Inc. v. Times-Mirror Co., 102 Cal.App.3d 735, 162 Cal.Rptr. 543 (1980).

The lawyer's primary task in analyzing questions arising under the Unfair Competition Act is to determine whether the conduct in question falls within any of the proscribed categories.

1. "Unlawful" Conduct. Business conduct is "unlawful" if it violates any state or federal statute. Thus, a violation of the Cartwright Act constitutes a separate violation of the Unfair Competition Act as well. Manufacturers Life Ins. Co. v. Superior Court, 10 Cal.4th 257, 41 Cal.Rptr.2d 220 (1995).

It is therefore common for Cartwright Act plaintiffs to include causes of action under the Unfair Competition Act, which offers certain procedural advantages (see below).

2. "Fraudulent" Conduct. A fraudulent business act or practice is one that creates a likelihood of public deception. Committee on Children's Television Inc. v. General Foods Corp., 35 Cal. 3d 197, 197 Cal.Rptr. 783 (1983).

There is no requirement to prove actual deception, reliance, or damage, nor any intent to defraud. Id.; see also, People v. Cappuccio Inc., 204 Cal.App.3d 750, 251 Cal.Rptr. 657 (1988).

3. False or Misleading Advertising. Any unfair, deceptive, untrue or misleading advertising, including conduct specifically proscribed under §17500-17577.5, is prohibited.

This broadly includes most statements in connection with the sale of goods or services, "if members of the public are likely to be deceived." Chern v. Bank of America, 15 Cal.3d 866, 127 Cal.Rptr. 110 (1976).

The Unfair Competition Act's standing provisions are unique. Private persons or groups may sue for violations, either to protect their own interests, or for the general public. §§17204, 17535. Plaintiff need not show any injury to itself in order to act for the general public. Rubin v. Green, 4 Cal.4th 1187, 17 Cal.Rptr.2d 828 (1993).

Moreover, where a plaintiff proceeds with allegations of unlawful conduct under some other statute, such as the Cartwright Act, there is standing to do so under the Unfair Competition Act even where the plaintiff would lack standing under that other statute. Midpeninsula Citizens for Fair Housing v. Westwood Investors, 221 Cal.App.3d 1377, 271 Cal.Rptr. 99 (1990); People v. McKale, 25 Cal.3d 626, 159 Cal.Rptr. 811 (1979).

In addition to private plaintiffs, Unfair Competition Act claims may (and frequently are) brought by public agencies, including the attorney general and district attorneys.

Defenses under the Act are limited. However, where liability is predicated upon an alleged violation of another statute, defenses (other than plaintiff's lack of standing) under that other statute are available.

Also, the Unfair Competition Act may be pre-empted in its application in areas that are subject to a detailed federal statutory scheme (such as where employee claims against unfair labor conditions may be pre-empted by federal labor laws). Bloom v. Universal City Studios Inc., 734 F.Supp. 1553 (N.D.Cal. 1990), aff'd, 933 F.2d 1013 (9th Cir. 1991).

Where conduct is challenged as anticompetitive, of course, it may be defended on the ground that competitive benefits from the conduct outweigh attendant harms. The statute of limitations for the Unfair Competition Act is four years from the date the cause of action accrued. Cal. Bus. & Prof. Code §17208.

Remedies are limited to equitable relief (and thus jury trials are unavailable). The court sitting as a court of equity has broad discretion to fashion appropriate remedies, including injunctive relief, restitution, and the appointment of a receiver "as may be necessary" to prevent the unfair competition or to restore "any money or property, real or personal, which may have been acquired by means of such unfair competition." Cal. Bus. & Prof. Code §17203.

Punitive damages are not available, but prosecutors are able to recover civil penalties of up to $2,500 for each violation. The statute does not provide for attorneys' fees, but attorneys' fees may be recoverable in certain instances on other bases. Shadoan v. World Sav. & Loan Ass'n, 219 Cal.App.3d 97, 268 Cal.Rptr. 207 (1990).


Jesse Markham, chair of the State Bar's Antitrust & Trade Regulation Law Section, practices with Jackson Tufts Cole & Black, LLP, in San Francisco. Jeff Shohet and Pam Preovolos assisted with this article.

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