08.31.2010

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Updates

On August 11, 2010, a California appeals court upheld most of a $21 million predatory pricing judgment against a Bay Area alternative weekly newspaper in Bay Guardian Co. Inc. v. New Times Media L.L.C., No. A122448, 2010 WL 3156631 (Cal. Ct. App. Aug. 11, 2010).  The case reinforced the need for companies doing business in California to tread lightly when considering pricing below cost, as the court based its ruling in part on the wide-reaching nature of California’s Unfair Practices Act.

The Bay Guardian ("Guardian") and the San Francisco Weekly ("SF Weekly") are competing alternative newspapers in the San Francisco Bay Area.  Each paper relies on advertising revenue in large part to sustain its publication.  The SF Weekly offered advertising, particularly to advertisers in key categories, at rates at least 20% below those charged by the Guardian.  As a result of reduced-price advertising offered by the SF Weekly, the Guardian consistently lost other advertising customers and revenue to SF Weekly after 1995, even though the Guardian had 20% greater distribution in San Francisco.  Consequently, the Guardian sued SF Weekly for violations of the Unfair Practices Act (California Business and Professions Code Section 17043) based on sales of advertising at rates below average total cost for the purpose of harming a competitor.  In 2008 the Guardian won a jury verdict of approximately $16 million.

SF Weekly’s parent company, New Times Media LLC (now known as Village Voice Media Holdings LLC), and others appealed the decision.  Defendants argued that the court failed to assess whether defendants could recoup their losses from below-cost pricing and further compounded its error by instructing the jury that it was not required to find that defendants would likely be able to do so..  Defendants claimed that, under the Robinson-Patman Act, Section 2 of the Sherman Act, and predatory pricing laws enacted by other states, a defendant’s ability to recoup losses following below-cost pricing is an essential element of proof of a violation of California’s Unfair Practices Act.  Referring to “parallel federal and state predatory pricing laws,” defendants argued that the Guardian should have been required to establish an “objectively reasonable probability of recouping” losses through later monopoly pricing.

The Court of Appeals rejected the defendants' arguments.  First, it determined that the language of Section 17043 does not expressly discuss or require recoupment.  More significantly, the court held that Section 17043 could not be interpreted based on federal and other state laws, because the laws are not analogous.  While the federal laws may ban discriminatory or below-cost pricing, the focus of the laws is on the monopolistic impact and potential harm that results from a predatory pricing scheme.  The court held that Section 17043 differs from federal and other state laws by focusing on the intent or purpose underlying the anticompetitive act, rather than the actual or threatened harm to competition.  In light of the distinctions between Section 17043 and federal and sister-state laws, the court declined to imply a recoupment element in the statute.  

California’s Unfair Practices Act has always presented unique challenges for businesses in California similar to its cousin, the Unfair Competition Law (California Business and Professions Code section 17200).  Bay Guardian, if upheld on appeal, reaffirms California courts’ focus on the purpose and intent of the below-cost sales rather than the traditional federal focus on the competitive effects of below-cost pricing.  Moreover, in addition to dispensing with proof of recoupment and other likely anticompetitive effects, Section 17043 differs from federal and other states’ laws in using average total cost, as opposed to marginal or variable cost, as the standard for below-cost pricing.  These variations place a premium for those companies making sales in California on documenting the business justifications for pricing changes in order to be ready with a defense to a charge of below-cost pricing.  In particular, any plan to price below average total cost should include documentation of any and all reasons why below-cost sales are necessary, such as to meet a competitor’s prices.  It would also be helpful for any analysis of such pricing changes to reflect any benefit to consumers and other business justifications that precipitated the change, such as increased competition, the emergence of new disruptive technologies or reductions in production costs.  Such documentation could help prove that the pricing, if challenged, was not intended for “the purpose of injuring competitors or destroying competition.”
 

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