Below-cost Pricing: Recent Defense-friendly Decisions
| Publication year | 2017 |
| Author | By Ryan M. Sandrock and Stephen Chang |
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
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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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...
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