BELOW-COST PRICING: RECENT DEFENSE-FRIENDLY DECISIONS

By Ryan M. Sandrock and Stephen Chang¹

A below-cost pricing claim under California’s Unfair Practices Act (UPA) appears at first blush to be easier to plead and prove than a predatory pricing claim under the Sherman Act. The standard refrain under federal law is that discounts are generally pro-competitive and true anticompetitive predatory pricing is rare. Thus, a federal plaintiff must show that the defendant’s below-cost pricing would drive competitors out of the market allowing the defendant to later "recoup" its losses. Unlike a Sherman Act plaintiff, however, a UPA plaintiff need not show recoupment. Moreover, relevant costs under the UPA include additional costs than under federal law—seemingly making it easier to show the price is below-cost. Several recent cases, however, show that, despite the California law’s seemingly easier standard, plaintiffs have had problems prevailing on Section 17043 claims.²

I. CALIFORNIA BELOW-COST PRICING CLAIMS UNDER SECTION 17043

Section 17043 of the UPA provides: "It is unlawful for any person engaged in business within this State to sell any article or product at less than the cost thereof to such vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition."³ The elements of a Section 17043 claim are (1) a below-cost sale; (2) undertaken for the purpose of injuring competitors or destroying competition that; (3) causes a competitive injury.⁴

Below-Cost: California employs a fully allocated cost standard to determine whether a sale has violated section 17043.⁵ Cost for a distributor is the invoice cost, plus the vendor’s full cost of doing business or a markup of six percent on the invoice cost.⁶ Plaintiffs must allege defendant’s sales price, its cost in the product, and its cost of doing business to plead a Section 17043 claim.⁷

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Improper Purpose: A plaintiff must show that defendant acted with the purpose of injuring a competitor. This is a more rigorous requirement than intent.⁸ Under Section 17071, plaintiffs are entitled to a rebuttable presumption of purpose or intent to injure competitors ("improper purpose") if they can show both (a) one or more acts of selling or giving away an article or product below-cost and (b) proof of injurious effect of such acts.⁹ The presumption may be rebutted by showing that the sales were made in good faith and not for the purpose of injuring competitors or destroying competition.¹⁰

Causation: A plaintiff must show a causal connection between the defendant’s below-cost sales and harm to plaintiff.¹¹

Remedies: A plaintiff can recover treble damages, attorney’s fees, and costs for violations of the UPA’s pricing provisions.¹² Criminal misdemeanor fines of up to $1,000 and six months imprisonment are also possible.¹³

Affirmative Defense—Meeting Competition: The UPA’s provisions on below-cost pricing do not apply "to any sale made . . . [i]n an endeavor made in good faith 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."¹⁴

Unlike a predatory pricing claim under federal law, a Section 17043 claim does not require that a plaintiff prove: (1) that defendant had a dangerous probability of recouping its investment in below-cost prices or (2) that prices were below an appropriate measure of defendant’s costs—average variable costs—in the short term.¹⁵

The differences between below-cost pricing under Section 17043 and Section 2 has created a concern that Section 17043 prohibits all discounts. In Fisherman’s Wharf Justice Ruvolo described defendant’s concern that the denial of its motion for summary judgment "sound[ed] the death knell of the blue plate special, the Saturday matinee, and discounted events for the elderly and children."¹⁶ He declared, however, this concern to be "hyperbole [that] ignores the significant evidentiary hurdles [a plaintiff must] overcome in order to prove its predatory pricing claim under section 17043."¹⁷ Recent cases suggest that Justice Ruvolo might have been correct in calling for discounting defendants to rest easy.

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II. MOTIONS TO DISMISS: DEFENSE-FRIENDLY PLEADING DECISIONS IN RECENT SECTION 17043 CASES

Motions to dismiss have proven to be an increasingly difficult hurdle for plaintiffs in Section 17043 cases. This trend is exemplified by three recent defense-friendly Northern District of California decisions where motions to dismiss were granted for failure to adequately plead below-cost pricing.

A White and Yellow Cab v. Uber Technologies, Inc.: In a decision issued on March 30, 2017, Judge Jeffrey S. White granted ride-share company Uber Technologies’s motion to dismiss plaintiff White and Yellow Cab’s Section 17043 below-cost pricing claim.¹⁸ Plaintiff was a "traditional taxi company" based in Santa Ana, California which alleged that Uber operated "de facto taxis" that did not hold a "taxi license or any other form of license."¹⁹ Plaintiffs alleged that Uber "within the meaning of [the UPA] distributed or sold and continue[] to distribute or sell de facto taxicab services through [their] app at charges which are below costs for [Plaintiff] and other authentic taxi companies."²⁰ The Court held that, unlike in G.H.I.I where plaintiffs’ pleadings were found sufficient despite not alleging a "definite cost of doing business," plaintiffs in Uber had not alleged any facts regarding Uber’s prices, the cost of Uber’s product, or Uber’s cost of doing business.²¹

Medina v. Microsoft: Judge Richard Seeborg granted Microsoft’s motion to dismiss plaintiff Antonio Medina’s Section 17043 claim, finding that Medina had not met Section 17043’s pleading standards.²² Medina, a 3D camera inventor who owned the company Multivision, alleged that Microsoft had sold a 3D camera at a "subsidized, below cost price" which "destroyed Multivision’s competition" by impeding the sale of Medina’s 3D camera.²³ Judge Seeborg found that Medina’s complaint did not sufficiently allege a Section 17043 claim as it merely stated that Microsoft sold its camera at a "subsidized, below cost price" and that Microsoft had struck an agreement with other defendants in order to increase its price once Microsoft had a dominant market share.²⁴

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The Court held that, unlike plaintiffs in G.H.I.I where plaintiffs had been in a poor position to speculate about cost allegations, Medina—who owned a 3D printing company—ought to have been capable of making reasonable allegations regarding Microsoft’s sales price, product cost, and cost of doing business based on "his own company’s cost experiences."²⁵ As such, Microsoft suggests that if a plaintiff has reasonable access to cost information—including because they manufacture a similar product—the court will grant motions to dismiss and not provide any lenience in the pleading standard.

Eastman v. Quest Diagnostics Inc. ("QDI"): Plaintiffs alleged that QDI violated Section 17043 by selling testing services in the physician market below cost.²⁶ The Court granted QDI’s motion to dismiss because plaintiffs "[had] not pleaded QDI’s prices or costs, nor did plaintiffs provide any authority in the opposition brief indicating that this is not required."²⁷

Together, Uber, Microsoft, and QDI show that despite case law suggesting that it is easy for a plaintiff to successfully plead a Section 17043 claim,²⁸ it is defendants in recent cases that have successfully won motions to dismiss by asserting that plaintiffs did not plead below-cost pricing with sufficient detail. Simply reciting the term "below-cost" is not enough.

III. IMPROPER PURPOSE AND CAUSATION: DIXON GAS & RDL

Two recent defense-friendly cases show the significant evidentiary hurdles plaintiffs face in proving the causation and improper purpose requirements in Section 17043 claims.

A. Dixon Gas Club v. Safeway, Inc.: Failure to Prove Improper Purpose

Plaintiff Dixon Gas Club, LLC operated a retail fuel station off the I-80 exit in the City of Dixon in Northern California.²⁹ Safeway, which in addition to operating a large chain of grocery stores also operates a number of retail fuel stations, recognized three types of gas station competitors: (1) "Majors" such as Shell, Chevron, and Texaco who operated at higher costs than Safeway; (2) "Pricers" such as Arco or Racetrack that operated at lower prices and (3) "Hypermarkets" that, like Safeway, sold food in addition to fuel.³⁰ Safeway had a general practice between 2004 and 2006 to survey on a daily basis the fuel prices of select nearby stations and then set prices based on the surveyed price.³¹

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Safeway’s practice was to set "retail" prices two cents per gallon higher than the price of its lowest surveyed competitor if fuel margins were positive. If Safeway had negative fuel margins, it would set retail prices at four cents per gallon higher than the price of its lowest surveyed target competitor.³² From 2004 to 2012, Safeway offered a promotion that provided Safeway Club Card holders a savings of three cents below street price. Thus, under Safeway’s general pricing policy Club Card holders paid one cent less when fuel margins were positive and one cent more when fuel margins were negative.³³

Internal Safeway documents and Safeway employees verified that the core focus of the company was its grocery business, such that the goal of the fuel business was to "maximize traffic in the main store, not necessarily to maximize revenue per gallon of gas sold."³⁴ Safeway accounting documents confirmed that the fuel discount promotional programs led to increased grocery store revenue.³⁵ At trial, Safeway produced evidence that several grocery store competitors had similar fuel-discount promotions in the Northern California area.³⁶

Safeway moved for judgment pursuant to California Code of Civil Procedure Section 631.8 after Dixon’s case-in-chief. The trial court granted the motion despite finding that there was evidence that Safeway had engaged in below-cost sales during at least some relevant periods of time to Dixon’s detriment.³⁷ Dixon timely appealed after the trial court entered judgment for Safeway.³⁸ The Court of Appeal ultimately found that Safeway did not act with the purpose of injuring its competitors, but with the purpose of improving its grocery business and to compete against fuel-based discounts offered by grocery competitors.³⁹

Justice Jenkins emphasized that the harsh remedies under the UPA were likely designed by the legislature to apply only when below-cost sales and loss leader pricing are done with the purpose of injuring competitors.⁴⁰ The Court relied on Cel-Tech, a case that emphasized the difficulty of meeting this requirement under California law. In Cel-Tech, the California Supreme Court analyzed the improper purpose requirement, noting that Section 17043 specifically used the word purpose rather than rather than merely "intent" or "knowledge."⁴¹

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The Court of Appeal found that substantial evidence existed to support the trial court’s finding that Safeway did not act with the purpose to injure or destroy competition in the fuel market when setting its fuel prices.⁴² Justice Jenkins pointed to Safeway documents and testimony which revealed that the company was looking to attract grocery customers and compete against other supermarkets that had implemented fuel-pricing discounts.⁴³ In a footnote, the Court noted that Dixon was likely entitled to a presumption of improper purpose, but that the trial court had a sufficient evidentiary basis for finding that Safeway had rebutted this presumption.⁴⁴

Dixon shows that even if a plaintiff can show all the other elements of a below-cost pricing claim, they can still fall short if a defendant can provide evidence that the pricing was simply an attempt to compete.

B. Rheumatology Diagnostics Laboratory, Inc., et al. v. Aetna, et al. ("RDL v. QDI"): Failure to Connect Claimed Below-Cost Pricing to Lost Sales

Several companies that provide clinical laboratory test services sued their competitor Quest Diagnostics Incorporated (QDI).⁴⁵ Plaintiffs alleged that QDI violated the UPA by selling laboratory services below-cost "for the purposes of injuring plaintiffs and destroying competition" leading to plaintiffs’ loss of actual and potential customers.

Plaintiffs’ below-cost pricing claims largely survived the motion to dismiss, and the parties proceeded to discovery. QDI then moved for summary judgment, challenging plaintiffs’ evidence regarding causation and purpose.⁴⁶ On causation, QDI argued that plaintiffs had failed to connect particular instances of below-cost pricing to lost sales.⁴⁷ The Court agreed with QDI as to some of plaintiffs’ claims, finding that plaintiffs had not provided sufficient evidence and analysis of the causation requirement.⁴⁸ The court accepted for purposes of the motion that there were below-cost prices but faulted plaintiffs for not providing sufficient evidence to show the impact of those prices. For example, the court noted that some plaintiffs did not submit declarations specific to their claimed losses and instructed their expert to assume, rather than show causation.⁴⁹

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The Court’s decision shows that identifying below-cost prices is just the start for plaintiffs. Plaintiffs must then present evidence connecting those prices to lost sales. What evidence is sufficient will vary depending on each case. And, of course, plaintiffs must also provide evidence of improper purpose, a hurdle that tripped up plaintiffs in the Dixon case as set forth above.

IV. CONCLUSION

Plaintiffs face significant difficulties pleading below-cost pricing, as well as significant evidentiary challenges in establishing that any below-cost pricing actually caused injury and that the defendant acted with an actual improper purpose. These requirements go a long way toward insuring that the blue plate special and Saturday matinee remain lawful pricing practices.

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Notes:

^1. Ryan Sandrock is a partner in the San Francisco office of Sidley Austin LLP, a member of the firm’s Antitrust Practice Group, and was one of the lawyers for QDI in the RDL case. Stephen Chang is an associate in the same office.

^2. More detailed background regarding the differences between the state and federal standards is set forth in Ara Jabagchourian & David Meyer, Proving Wrongful Purpose Under the Unfair Practices Act: Plaintiff and Defense Perspectives, 22 No. 2 Competition: J. Anti. & Unfair Comp. L. Sec. St. B. Cat. 40 (Fall 2013). That Article also provides detail regarding the stringent "purpose" requirement under Section 17043.

^3. Cal. Bus. & Prof. Code § 17043.

^4. Bay Guardian Co. v. New Times Media LLC, 187 Cal. App. 4th 438, 453 (2010).

^5. G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 275 (1983); Blue Sky the Color of Imagination, LLC v. Mead Westvaco Corp., No. 10-cv-02175, 2010 WL 4366849, at *5 (C.D. Cal. Sept. 23, 2010).

^6. Cal. Bus. & Prof. Code §§ 17026, 17029. Cost as applied to production is the "cost of raw materials, labor and all overhead expenses of the producer." Id.

^7. G.H.I.I., 147 Cal. App. 3d at 275. See also Code Rebel, LLC v. Aqua Connect, Inc., No. CV-13-4539, 2014 WL 46696 (C.D. Cal. Jan. 3, 2014) (dismissing 17043 claim for failure to allege defendant’s sales price and costs). Section II infra contains an extensive discussion of recent cases discussing pleading standards for Section 17043 claims.

^8. Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137, 1153-54 (9th Cir. 2008).

^9. Cal. Bus. & Prof. Code § 17071.

^10. William Inglis & Sons Baking Co. v. ITT Cont’l Baking Co., 668 F.2d 1014, 1049 (9th Cir. 1981).

^11. Fisherman’s Wharf Bay Cruise Corp. v. Superior Court, 114 Cal. App. 4th 309, 330 (2003); Dealers Wholesale Supply, Inc., v. Pac. Steel and Supply Co., No. C-81-3038, 1984 WL 775 (N.D. Cal. July 6, 1984).

^12. Cal. Bus. & Prof. Code § 17082.

^13. Cal. Bus. & Prof. Code § 17100.

^14. Cal. Bus. & Prof. Code § 17050.

^15. See Bay Guardian, 187 Cal. App. 4th at 459 (declining to find an implied recoupment requirement within Section 17043); Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (U.S. 1993) (defining recoupment under federal law); Int’l Travel Arrangers v. NWA, Inc., 991 F.2d 1389, 1394 (8th Cir. 1993) (describing federal average variable cost requirement).

^16. Fisherman’s Wharf, 114 Cal. App. 4th at 330.

^17. Id. (noting that plaintiffs must also prove causation and improper purpose to prevail on their Section 17043 claim).

^18. A White & Yellow CAB, Inc. v. Uber Techs., Inc., No. 15-CV-05163, 2017 WL 1208384, at *11 (N.D. Cal. Mar. 31, 2017). The Court granted the motion with leave to amend plaintiff’s Section 17043 claim. Id. at *12.

^19. Id. at *3.

^20. Id. at

^21. Id.

^22. Medina v. Microsoft Corp., No. C 14-0143, 2014 WL 4243992, at *5 (N.D. Cal. Aug. 26, 2014). The Court granted the motion with leave to amend plaintiff’s Section 17043 claim. Id.

^23. Id. at *2.

^24. Id. at *5.

^25. Id.

^26. Eastman v. Quest Diagnostics Inc., 108 F. Supp. 3d 827, 837-38 (N.D. Cal. 2015). The Court granted the motion with leave to amend plaintiff’s Section 17043 claim. Id. at 838.

^27. Id.

^28. See, e.g., G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 276 (1983) (finding pleadings sufficient when plaintiffs were in a poor position to speculate regarding defendant’s costs); Solyndra Residual Tr., by & through Neilson v. Suntech Power Holdings Co., 62 F. Supp. 3d 1027, 1047 (N.D. Cal. 2014).

^29. Dixon Gas Club, LLC v. Safeway Inc., No. A139283, 2015 WL 4557388, at *2 (Cal. Ct. App. July 29, 2015), reh’g denied (Aug. 18, 2015), review denied (Oct. 14, 2015). Dixon is an unpublished opinion and citation is restricted under California Rules of Court Rules 8.1105, 8.1110, and 8.1115.

^30. Id. at *2.

^31. Id.

^32. Id.

^33. Id. at *3.

^34. Id.

^35. Id.

^36. Id. at *4.

^37. Id.

^38. Id.

^39. Id.

^40. Id. at *5 (citing Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 179 (1999)).

^41. Cel-Tech, 20 Cal. 4th at 174-75.

^42. Dixon, 2015 WL 4557388, at *8.

^43. Id.

^44. Id. at *8 n.10.

^45. Other defendants, including Aetna, were named in the lawsuit, but the predatory pricing claims were raised only against QDI. Rheumatology Diagnostics Lab., Inc. v. Aetna, Inc., No. 12-CV-05847, 2013 WL 5694452, at *16 (N.D. Cal. Oct. 18, 2013) ("RDL I"). The Court dismissed other claims unrelated to plaintiffs’ UPA claims. Id. at 10.

^46. The Court denied the motion as to purpose for claims where plaintiffs showed causation, finding that the Section 17071 presumption applied. Rheumatology Diagnostics Lab., Inc v. Aetna, Inc., No. 12-CV-05847, 2015 WL 1744330, at *21 (N.D. Cal. Apr. 15, 2015) ("RDL II"). In a later ruling, the Court denied plaintiffs’ request for a ruling that QDI could not rebut that presumption. Rheumatology Diagnostics Lab, Inc v. Aetna, Inc., No. 12-CV-05847, 2015 WL 3826713, at *6 (N.D. Cal. June 19, 2015) ("RDL III").

^47. RDLII, 2015 WL 1744330, at *13 (citing Dealers Wholesale, 1984 WL 775, at *9 (granting summary judgment for defendant on UPA claim where plaintiff "failed to establish the existence of any causal link between actions taken by the defendants and harm caused to the plaintiff."); Judicial Council of California Civil Jury Instructions § 3301 ("Below Cost Sales—Essential Factual Elements") (requiring plaintiff to establish "that [name ofplaintiff] was harmed" and "that [name of defendant’s conduct was a substantial factor in causing [name of plaintiff]’s harm")).48 RDL II, 2015 WL 1744330, at * 13-20.

^49. Id. at *18.