What Every Lawyer Should Know about California Price Discrimination Laws
by Thomas A. Miller
(County Bar Update, January 2007, Vol. 27, No. 1)

What Every Lawyer Should Know about California Price Discrimination Laws

By Thomas A. Miller, a partner with Robins, Kaplan, Miller & Ciresi L.L.P. in Los Angeles where he handles antitrust, unfair competition, and employment matters. The opinions expressed are his own.

In recent years, the laws governing price discrimination have been criticized as often as they have been litigated. The criticism has been leveled, in part, because the laws governing price discrimination create an anomaly among the antitrust laws. The federal Robinson-Patman Act prohibits a seller’s price discrimination between competing buyers even when consumers might ultimately receive a lower price. Because of such criticism, the current Antitrust Modernization Commission recently voted to recommend repeal of the RPA.

Regardless of whether the RPA is laid to rest, lawyers and businesses in California need to be aware of state laws affecting discriminatory pricing by sellers and need to consider them both when negotiating transactions and when litigating in the sales context.

1. California’s Unfair Practices Act prohibits seller discrimination involving pricing practices.
Although sometimes confused with the Unfair Competition Law,¹ the Unfair Practices Act is found in the Business and Professions Code starting at Section 17000. Unlike federal price discrimination law, the UPA is not limited to commodities but also applies to services as well as a wide variety of intangible property such as copyrights and other intellectual property.² The UPA prohibits below-cost pricing and the related concept of “loss leaders.” It also prohibits giving secret and unearned rebates or discounts to only some competing buyers.³ A seller can be sued for engaging in any of these practices, and a favored buyer can be sued for receiving secret and unearned rebates or discounts.

2. Bargains can be costly: Below-cost pricing and loss leaders.
Selling below cost is prohibited if the purpose is to injure a competitor or to destroy competition.⁴ It is also unlawful to sell goods or services using loss leaders if the purpose is to influence, promote, or encourage the purchase of other merchandise, deceive potential purchasers, or take away business from a competitor.⁵ For both below-cost pricing and loss leaders, the California Supreme Court has held that a prohibited purpose must be a conscious objective of the sale, not just an obvious by-product of the action.⁶ A seller obviously can defend a price discrimination case by proving the sale is neither below cost nor a loss leader. However, under California law, the cost of an item is based on its fully allocated cost, which includes such things as overhead, rather than only marginal or variable cost, as is common under federal law.⁷

3. Secret and unearned rebates or discounts.
Just because a rebate or discount is not available to all competing purchasers does not necessarily mean that it is illegal. The same is true where a seller provides only selected customers with special services or privileges. If a particular purchaser or class of purchasers does something to earn a rebate or price discount, that rebate or discount might not be illegal under Business & Professions Code Section 17045.

However, the recent decision in Eddins v. Sumner Redstone, et al.⁸ contained a number of surprises for many practitioners and breathed new life into the UPA. That court held, among other things, that a plaintiff need not purchase on like terms and conditions to state an actionable claim and that an arrangement can be deemed secret if any of the key economic points are not made known to all purchasers.  Although intent can be shown from the totality of circumstances, intent to injure competitors or destroy competition is required to prove a violation of Section 17045.  And that intent must be a conscious objective, not simply a by-product of the actions.⁹

4. A way out: Defenses to UPA claims.
In addition to the requirement that the defendant have as its conscious objective the injury of competitors or destroying competition,¹⁰ two other defenses to these UPA claims are notable. Section 17050 provides a “meeting competition” defense to claims of below-cost pricing and loss leaders. That is, where pricing below a seller’s cost is justified by a commercial need to meet the competition’s price, these practices generally will not be illegal. However, the Eddins opinion refused to apply the meeting-competition defense to secret and unearned rebates or discounts.¹¹ Nevertheless, a seller’s desire to meet competition by granting a secret or unearned rebate or discount may be persuasive evidence that can be used to defeat proof of an intent to harm a competitor or destroy competition.

Business and Professions Code Section 17042 creates a second defense to price discrimination where the difference in price is merely a “functional discount.” This discount exists where there is a bona fide functional difference between competing buyers—for instance, treating bona fide wholesalers differently than retailers—or where a buyer assumes a real and valuable risk from the seller.¹² In the latter case, the risk incurred or service performed must be worthy of the discount or rebate.

5. The payoff.
Business and Professions Code Sections 17070 and 17082 provide that a private plaintiff can recover treble damages (both for its own damages and those of any assignor of a right to sue) and injunctive relief for UPA violations. The injunctive relief available includes such orders as are necessary to “deter the defendant from, and insure against, his committing a future violation,” and thus need not be limited to the present form of illegal price discrimination.¹³ Plus, attorney fees and costs of suit shall be awarded when judgment is entered against the defendant.¹⁴

¹ Bus. & Prof. Code §§17200 et seq.

² Bus. & Prof. Code §17024.

³ Selling at different prices in different areas (locality discrimination) is prohibited by Business and Professions Code Sections 17031 and 17040 but is not discussed here.

⁴ Bus. & Prof. Code §17043.

⁵ Bus. & Prof. Code §17044. “Loss leader” is defined at Business and Professions Code Section 17030. See also CACI 3302.

⁶ Cel-Tech Communications v. L.A. Cellular (1999) 20 Cal. 4th 163, 175.

⁷ Bus. & Prof. Code §§17026, 17029; see also CACI 3303, CACI 3306; Pan Asia Venture Capital Corp. v. Hearst Corp. (1999) 74 Cal.App.4th 424, 432; G.H.I.I. v. MTS Inc. (1983) 147 Cal.App.3d 256, 275.

⁸ Eddins v. Sumner Redstone (2005) 134 Cal. App. 4th 290, rev. denied Feb. 8, 2006.

⁹ See Cel-Tech Communications v. L.A. Cellular (1999) 20 Cal. 4th 163, 175-177 (discussing Ellis v. Dallas (1952) 113 Cal. App. 2d 234).

¹⁰ It can be argued that only injury to competition is sufficient to meet the requirement since that is the proper focus of the antitrust laws; see, e.g., Turnbull & Turnbull v. ARA Transportation, Inc. (1990) 219 Cal. App. 3d 811, 826.

¹¹ The defense also was not allowed by Diesel Electric Sales and Service, Inc. v. Marco Marine San Diego, Inc. (1993) 16 Cal. App 4th 202, 217-218.

¹² Bus. & Prof. Code §17042.

¹³ Bus. & Prof. Code §17079.

¹⁴ Bus. & Prof. Code §17082.

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