State Antitrust Law in Action

Josh Wright —  15 August 2010

A predatory pricing case in California under Section 17043 results in a $21 million fine awarded to one newspaper, the Bay Guardian, in a suit against a competitor, San Francisco Weekly (HT: Reason).  The suit alleged that the SF Weekly was selling advertising below cost for the purpose of harming a competitor.  A summary of the appellate decision (available here): No recoupment, no market power, no harm to competition, no problem.  One of the benefits of those requirements for predatory pricing claims under the Sherman Act is to minimize the use of litigation to subvert the competitive process.  No such luck under California law.  To get a sense of how different operation of 17043 from conventional federal antitrust analysis, consider the following excerpt from the opinion:

In section 17043, in contrast, the very gravamen of the offense is the purpose underlying the anticompetitive act, rather than the actual or threatened harm to competition. The intent or purpose of the below-cost sale is at the heart of the statute, and distinguishes the violation from a below-cost pricing strategy undertaken for legitimate, nonpredatory business reasons. (Food and G. Bureau of S. California v. United States (9th Cir. 1943) 139 F.2d 973, 974.) Section 17043 “does not make all sales below average total cost illegal per se. Instead, such sales must have been made for the purpose of injuring competitors or destroying competition.” [Citations.]” (William Inglis, etc. v. Itt Continental Baking Co. (9th Cir. 1981) 668 F.2d 1014, 1049; see also Food & G. Bureau, Inc., supra, at pp. 974–975.) The intent requirement imposed by section 17043 is an especially stringent one. “Section 17043 uses the word “purpose,” not “intent,” not “knowledge.” (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., supra, 20 Cal.4th 163, 174.) Therefore, the California Supreme Court has concluded “that to violate section 17043, a company must act with the purpose, i.e., the desire, of injuring competitors or destroying competition.” (Id. at pp. 174–175; see also Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 323 [70 Cal.Rptr. 849, 444 P.2d 481]; Fisherman’s Wharf Bay Cruise Corp. v. Superior Court, supra, 114 Cal.App.4th 309, 330.)

Notice the way that “anticompetitive act” encompasses the below-cost sale which, with purpose of course, takes sales from competitors.  Price-cutting, of course, is the quintessential pro-competitive act.   And anticompetitive seems like such an odd term to use in this context where there is no interest at all on the impact of the sale on competition.  In fact, one need not even demonstrate an effect on the competitor:

Further, section 17043 does not require an anticompetitive impact. “[A]n injurious effect is not an essential element of the violation. The violation is complete when sales below cost are made with the requisite intent and not within any of the exceptions.” (People v. Pay Less Drug Store (1944) 25 Cal.2d 108, 113–114 [153 P.2d 9].) The language of sections 17043 and 17071 make “it sufficiently clear that the Legislature deemed that injury to a competitor or destruction of competition was an “injurious effect,” and therefore within the ban of the act; and that it was not necessary to await success in the monopolistic effort before the measures provided to safeguard the public interest and welfare could be invoked.” (Pay Less Drug, supra, at p. 113.)

Now, the appellate court may have interpreted the statute exactly as intended by the California legislature.  But both anticompetitive wake left by 17043 and similar laws makes a strong case for abolishing these state antitrust laws or harmonization provisions that tie interpretation to the Sherman Act.  Regardless, with all of the focus on federal antitrust law, as well as international antitrust, it is easy to ignore what is going on in the states.  But the states matter a great deal.  Given the evidence discussed in the opinion, and required by the court to uphold the substantial verdict, its hard to imagine that this decision doesn’t have the attention of counsel representing newspapers, magazines, or just about any firm operating in a two-sided market.

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