California lawmakers aim to upend decades of legal precedent through a proposed expansion of the state’s antitrust laws, threatening longstanding interpretations of predatory pricing and exclusive dealing, among other issues.
The bill (AB 1776) would expand the state’s antitrust laws to cover conduct by individual companies, a shift from the current focus on two or more companies. It also would relieve plaintiffs of satisfying many of the legal tests that have long been key to advancing such cases.
Any company doing business in the world’s fourth largest economy could see new, unexpected legal liability for common business practices.
The California Law Revision Commission, which crafted the measure, argued in a report to the legislature that the proposal would sharpen the teeth of antitrust laws narrowed by court rulings they contend have favored dominant companies and stifled competition.
“Rigid rules requiring specific fact patterns can unduly restrict enforcement,” the commission said in a January report.
Businesses and the lawyers who advise them counter that the changes to California’s Cartwright Act would unmoor the state’s antitrust laws from the rest of the US.
“It becomes very hard to advise your clients when you can’t look to the years and years of jurisprudence,” said Karen Lent, partner in Skadden’s antitrust practice.
Democratic lawmakers in the state Capitol want to steer California courts away from federal case law on antitrust policy and restore a state law passed over 100 years ago to its original goals.
“From 1907, it seems to me things have changed,” said the bill’s author, Assembly Majority Leader Cecilia Aguiar-Curry (D).
‘Laundry List’
The measure, also known as the COMPETE Act, lists 10 often-crucial elements of claims brought under the federal Sherman Act that plaintiffs pursuing a case under California’s Cartwright Act wouldn’t need to satisfy. Some lawmakers dub it the “laundry list.”
Two of those provisions target case law on predatory pricing, a company undercutting the prices of a rival by selling below cost with the aim of recouping those losses later if the rival is forced out of the market.
Under federal law, a plaintiff bringing a case over predatory pricing might have to prove a company’s price cuts are below cost. They also would need to show that the company has a chance of recouping those losses later. That precedent seeps into antitrust cases in state court.
The proposal in California wouldn’t require a plaintiff to satisfy tests, making it easier for a rival or regulator to sue over predatory pricing. That would open up companies—even firms that don’t dominate a market—to new liability when adjusting prices.
“Just say they’re a 20% player, and they’re lowering prices and a less efficient competitor says, ‘You’re driving me out of business, you’re lowering prices so much,’” said Joe Ostoyich, head of Clifford Chance’s US antitrust litigation practice.
The first company could argue that consumers are better off, but the proposed measure might still leave it open to lawsuits, he said. “Consumers are better off, but why would you lower your prices?”
Search Favorites
A separate provision would create new legal liability for major tech firms that give preference to their own products in search results and in app stores.
Consumer advocates and smaller tech companies have long complained about the practice, but it’s justified by major tech firms as simply providing consumers with the results and services they want.
Major tech companies united to kill a separate measure last month targeting the self-preferencing practice, but backers say the COMPETE Act covers much of the same ground in that it wouldn’t require plaintiffs to show that harm to competition outweighs benefits for others.
“COMPETE, in the plain language and certainly in what’s been contemplated, would address self-preferencing,” said Teri Olle, vice president of the consumer advocacy group Economic Security California Action.
Step Away From the Sherman Act
The laundry list has raised concerns from at least a few legislators that it would create uncertainty around common, long-settled business practices.
“It makes me really nervous because, you know, you want efficient firms that are going to reduce prices. And, frankly, if a firm reduces prices in order to get more business and you have a weaker firm out there, that’s not necessarily a bad thing because we want that competition,” state Assemblymember Rick Chavez Zbur (D) said during an April 7 hearing.
Backers argue that their goal is to make an antitrust law distinct from the federal Sherman Act. To wit, the legislature must provide clear guidance to state judges not to rely on how the Sherman Act has been interpreted.
“If I’m a busy judge and can see federal case law is instructive, then I’m going to rely on it,” said Abiel Garcia, partner at Kesselman Brantly Stockinger.
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