California Should Amend the Cartwright Act to Address Single-firm Monopolization
| Jurisdiction | California,United States |
| Author | By Kendall MacVey and Wendy Y. Wang |
| Citation | Vol. 33 No. 1 |
| Publication year | 2023 |
By Kendall MacVey and Wendy Y. Wang1
Unlike Section 2 of the Sherman Act, the Cartwright Act, California's principal antitrust statute, does not explicitly prohibit monopolization or attempted monopolization.2 Rather, with the exception of one provision prohibiting a condition on purchasers not to use a competitor's goods or services, the Cartwright Act is silent on monopolization.3
Enacted in 1907, the Cartwright Act made "trusts" unlawful, which are defined as "a combination of capital, skill or acts by two or more persons for" specific purposes.4 California courts at various times have issued decisions that left open whether the Cartwright Act prohibits monopolization.
In 1978, for example, the First Appellate District Court of Appeal in Lowell v. Mother's Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 23 held that the Cartwright Act prohibits monopolization as the Act "prohibits the combination of resources of two or more independent interests for the purpose of restraining commerce and preventing market competition." But in 1988, the California Supreme Court appeared to disagree, examining the legislative history of the Cartwright Act and concluding that the Legislature did not intend the term "combination" to include mergers.5 Subsequent courts have interpreted that holding to mean that the Cartwright Act does not apply to single-firm monopolization.6 Then in 2015, the California Supreme Court confirmed this interpretation:
We begin with the proposition that agreements to establish or maintain a monopoly are restraints of trade made unlawful by the Cartwright Act. . . . Under general antitrust principles, a business may permissibly develop monopoly power, i.e., "the power to control prices or exclude competition" . . . , through the superiority of its product or business acumen. To acquire or maintain that power through agreement and combination with others, however, is quite a different matter.7
An exception to the Cartwright Act's exclusion of monopolization has formed insofar as the Cartwright Act does prohibit some monopolies obtained through agreements. An agreement between competitors to not compete or to divide up the territories or customers violates the Cartwright Act, for example.8 But the Act does not appear to apply to
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single-firm monopolization, including when obtained by mergers. In other words, anticompetitive effects from mergers that equal or exceed anticompetitive effects resulting from agreements among competitors are not currently addressed by the Cartwright Act.
Citing growing concerns over lack of competition, concentration of market power, and problematic monopolies, the California Legislature adopted Assembly Concurrent Resolution No. 95 in 2022 and approved the California Law Revision Commission to study, among other things, whether California law should be revised to outlaw single-firm monopolization.9
As California is poised to overtake Germany as the fourth largest economy in the world,10California needs its own law to address single-firm monopolization and catch up with the times. This article will examine the legislative history of the Cartwright Act and relevant caselaw, earlier legislative attempts to prohibit conducts and agreements leading to monopolies, the growing concerns over monopolies, the need for California to address monopolization, New York State's "Twenty-First Century Anti-Trust Act" and the "Competition and Antitrust Law Enforcement Reform Act of 2021" introduced in the United States Senate.
California's antitrust laws differ from federal antitrust laws in that the Cartwright Act does not prohibit single-firm monopolization or attempted monopolization. Prior to 1988, numerous California courts, including the California Supreme Court, repeatedly held that the Cartwright Act "is patterned upon the federal Sherman Act" and "federal cases interpreting the Sherman Act are applicable with respect to the Cartwright Act."11The First Appellate District Court of Appeal even held that: "[t]hough not specifically listed [in the Cartwright Act], monopoly is a prohibited restraint of trade."12
However, in 1988, the California Supreme Court re-examined the legislative history of the Cartwright Act and concluded that the Act was not derived from the Sherman Act, but rather from other state laws.13In State of California ex rel. Van de Kamp v. Texaco, Inc. (Texaco) the California Attorney General sued under the Cartwright Act and the Unfair Practices Act to enjoin defendant Texaco, Inc., from acquiring California assets of Getty Oil Company (Getty) pursuant to a merger/acquisition agreement between the two companies.14 Texaco entered into a consent order with the Federal Trade Commission (FTC) in July 10, 1984 wherein Texaco agreed to divest designated assets.15 However, the California Attorney General was unsatisfied with the consent order and asserted that the merger might substantially lessen competition in the state market.16
The Attorney General contended that the Cartwright Act applied to mergers as a merger is a "combination of capital."17 Defendants asserted that the word "combination" applies only to a situation in which separate and independent entities act in concert for a certain purpose and thereafter continue to maintain their separate identities and interests. Thus, a merger would not be a combination, because post-merger, the two merged entities would no longer maintain separate identities and interests.18
To help it interpret the statutory intent behind the word "combination," the California Supreme Court examined state and federal statutes and the body of caselaw interpreting those statutes when the Cartwright Act was adopted.19
The court then concluded that the Cartwright Act was patterned after an alternative bill to what ultimately became the Sherman Act.20 Both bills were introduced to the U.S. Senate in 1888, and in the two years that the competing bills were pending in the Senate, several states enacted their own antitrust laws.21 These new state antitrust laws generally fell into two categories: (1) the Kansas-Maine format, which made illegal "all arrangements, contracts, agreements, trusts or combinations" for certain improper purposes22; and (2) the Texas-Michigan format, which declared "trusts" illegal
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and defined "trust" as a "combination of capital, skill or acts" for certain purposes.23 Following the enactment of those state laws, many courts interpreted the term "combination" as not applying to a merger of two companies.24 In response to this narrow interpretation of "combination," some states subsequently amended their antitrust laws to specifically address monopolies and mergers.25
The Cartwright Act was patterned after the Texas-Michigan format, which was modeled after a failed U.S. Senate Bill introduced in 1888 as an alternative to the eventually adopted Sherman Act. By the time California enacted the Cartwright Act in 1907, there was already a body of caselaw providing a narrow interpretation of "combination," but the California Legislature chose to pattern the state's antitrust laws on the original Texas-Michigan format without incorporating any subsequent anti-monopolization or anti-merger provisions that were adopted by other state legislatures, including Texas, prior to 1907.26 Based on this history, the California Supreme Court concluded that, in adopting the Cartwright Act, the Legislature must have intended the prohibited trust to be "combination" by two separate, independent entities.27
While Texaco concerned a merger-not monopolization-subsequent courts have interpreted Texaco as holding that the Cartwright Act does not apply to single-firm monopolization.28 Although conspiracies or agreements to establish or maintain a monopoly through "combinations" remains unlawful in California,29 the reality is that the California Legislature has never incorporated language similar to Section 2 of the Sherman Act into the Cartwright Act. Until the Legislature makes it clear that it intends to prohibit monopolization or attempted monopolization, actions under the Cartwright Act against such conduct may be successful only if the defendants also run afoul of explicit provisions of the Act by engaging in a prohibited combination, such as engaging in "a horizontal allocation of markets with would-be competitors [by] dividing up territories or customers," or paying "its only potential competitor not to compete in return for a share of the profits that firm can obtain by being a monopolist."30
Following Texaco, the California Legislature considered at least three separate proposals to prohibit single-firm monopolization, but none of these proposals were enacted. Assembly Bill 671 (AB671), introduced in February 1989, would have forbidden "any person to monopolize, or attempt to monopolize, or to combine or conspire with any person to monopolize any part of trade or commerce."31 This bill would have also permitted the California courts to divest assets acquired in a merger.32 California Assembly approved this bill by a vote of 46 to 29. The bill was subsequently referred to the Senate Judiciary Committee, and despite four amendments the bill failed to garner enough votes to proceed out of committee.33 According to a subsequent legislative analysis on a related bill, while the anti-monopoly provision in AB671 was not controversial, there were significant opposition to the merger and divestiture provisions.34
In February 2002, a bill was introduced in the Senate by State Senator Joseph Dunn to prohibit single-firm monopolization or attempted monopolization.35While the Senate passed this bill by a vote of 21 to 15, the Assembly did not adopt it.36 Opponents to the bill were against "the state prohibition on monopoly," thought the bill "would run counter to an established U.S. Supreme Court...
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