California Antitrust & Unfair Competition Law CALIFORNIA ANTITRUST & UNFAIR COMPETITION LAW I. SUMMARY AND OVERVIEW Since the second edition of this book was published over two years - [PDF Document] (2024)



California Antitrust &

Unfair Competition Law

3d. Edition - 2003

Carlton Varner and Thomas Nevins are both partners in the Antitrust and Trade Regu-lation Practice Group at the law firm of Sheppard, Mullin, Richter & Hampton LLP .

Mr. Varner specializes in antitrust counseling and litigation under both state and federalantitrust laws, and other types of complex business litigation. He is currently Vice-Chairof the Antitrust and Unfair Competition Section of the State Bar of California, Chair ofthe ABA Antitrust Section Exemptions Committee, and former Chair of the Los AngelesCounty Bar Antitrust Section. He has represented clients in antitrust cases arising fromthe enforcement of intellectual property rights, as well as unfair competition, price fixing,monopolization, merger, joint venture and price discrimination matters in a wide range ofindustries including pharmaceuticals, health care, electricity, aerospace, and internetsales and distribution.

Carlton Varner can be reached at (213) 617-4146 or email at [emailprotected].

Thomas Nevins specializes in complex business litigation, with an emphasis in antitrust,price discrimination, and unfair competition.

Thomas Nevins can be reached at (415) 774-3284 or email at [emailprotected].

About the Authors

Sheppard, Mullin, Richter & Hampton LLP

Antitrust Attorneys

Los Angeles(213) 620-1780

James M. BurgessSuzanne B. Drennon

Frank FalzettaDavid R. Garcia

Andrea HasegawaDon T. Hibner, Jr.

Kathyleen A. O’BrienMark Riera

Michelle ShermanCarlton A. Varner

Orange County(714) 513-5100

Finley L. Taylor

San Diego(619) 338-6500

James J. MittermillerRobert D. Rose

Timothy B. TaylorFrank Polek

San Francisco(415) 434-9100Gary L. Halling

James L. McGinnisThomas D. Nevins

Michael Scarborough

Washington, D.C.(202) 218-0000

Robert Magielnicki

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Carlton A. Varner Thomas D. Nevins



byCarlton A. VarnerThomas D. Nevins

Sheppard, Mullin, Richter & Hampton LLP




I. SUMMARY AND OVERVIEW ..................................................................... 1

II. JURISDICTIONAL ISSUES ............................................................................ 2

III. COVENANTS NOT TO COMPETE ............................................................ 3

IV. COMBINATION AND COLLUSION ............................................................ 6

V. PRICE FIXING.................................................................................................. 8

VI. TERRITORIAL AND CUSTOMER RESTRICTIONS ................................. 9


VIII. GROUP BOYCOTTS AND REFUSALS TO DEAL................................... 12

IX. MONOPOLIZATION .................................................................................... 13

X. MERGERS AND ACQUISITIONS .............................................................. 13

XI. UPA--BELOW COST PRICING ANDPRICE DISCRIMINATION ........................................................................... 15

A. Below Cost Pricing and Loss Leaders ................................................ 15B. Locality Price Discrimination ............................................................... 18C. Secret Discounts and Rebates ............................................................. 18D. Meeting Competition ............................................................................ 19

XII. UNFAIR COMPETITION LAW .................................................................. 20

A. Unlawful, Unfair or Fradulent Conduct .............................................. 20B. Standing and Nonclass Representative Actions .............................. 23C. Monetary Relief Under The UCL ........................................................ 25D. Other UCL Defenses ............................................................................. 27E. Advertising ............................................................................................. 28

XIII. DEFENSES TO ANTITRUST LIABILITY.................................................. 30

A. Statutory Defenses ................................................................................ 30


1. Public Entities ............................................................................... 302. Filed Rate Doctrine ...................................................................... 303. Labor Activities ............................................................................. 314. The Business of Insurance ........................................................... 325. Agriculture ..................................................................................... 336. Electric Utility Service Areas ..................................................... 347. Natural Gas Producers ................................................................ 348. Professional Associations and Charities ................................. 349. Health Care .................................................................................... 3410. Statute Of Limitations .................................................................. 35

B. Common Law Defenses ........................................................................ 35

1. The Noerr-Pennington Doctrine ................................................ 352. Standing ......................................................................................... 363. Primary Jurisdiction .................................................................... 364. In Pari Delicto ............................................................................... 375. Unclean Hands .............................................................................. 376. Indirect Purchasers ...................................................................... 37

XIV. GOVERNMENT ENFORCEMENT .............................................................. 38

XV. PRIVATE ENFORCEMENT ......................................................................... 39




Since the second edition of this book was published over two yearsago, there have been a number of significant court decisions concerning the scopeand nature of California’s antitrust and unfair competition laws. These include theAguilar decision by the California Supreme Court which embraced both summaryjudgment and conspiracy standards from federal law, and the Chavez case by aCourt of Appeal likewise adopting federal standards for determining when anunlawful vertical price fixing conspiracy exists. Many courts also continue tograpple with issues relating to the scope of the “unfair” prong of UnfairCompetition Law (“UCL”) in light of the Supreme Court’s 1999 decision in Cel-Tech. In recent Korea Supply decision, the California Supreme Court held thatdisgorgement apart from restitution was not a form of monetary relief available inprivate actions under the UCL. This third edition will discuss these courtdecisions, as well as generally review the status of existing law.

California statutory antitrust law is found at Sections 16600 et seq. ofthe Business & Professions Code. It consists of the Cartwright Act, the UnfairPractices Act (“UPA”), and the Unfair Competition Act (“UCL”), as well as variousstatutory restrictions on covenants not to compete. The Cartwright Act prohibitstrusts, which are defined as a combination of capital, skill or acts by two or morepersons to, inter alia, create or carry out restrictions in trade or commerce. Bus. &Prof. Code § 16720. It also prohibits sales or leases of products on the conditionthat the purchaser not deal in the goods of a competitor where the effect is tosubstantially lessen competition or tend to create a monopoly in any line ofcommerce. Bus. & Prof. Code § 16727. The UPA prohibits sales below cost,locality discrimination, and secret rebates or unearned discounts which injurecompetition. Bus. & Prof. Code § 17000 et seq. The UCL generally prohibits anyunlawful, unfair, or fraudulent business act or practice, as well as deceptive ormisleading advertising. Bus. & Prof. Code § 17200 et seq.

The statutes alone, however, are rather vague and one must usuallyresort to case law to determine what is or is not permitted. There is a body ofpublished case law from both California’s Supreme Court and its Courts of Appeal.Although the Cartwright Act is not based on or derived from the federal ShermanAct, (State ex rel. Van de Kamp v. Texaco, 46 Cal 3d 1147, 1162-64 (1988)),California courts have continued to view federal precedents as persuasiveauthority. As exemplified by Aguilar and Chavez, California courts haveincreasingly imported federal standards into California antitrust law.

Like federal antitrust law, California treats some conduct andagreements which presumptively raise prices or restrict output as per se illegal.


Other agreements are analyzed under the rule of reason. An extensive factualanalysis of market conditions and business justifications is necessary to determinetheir legality. California also treats horizontal collusion among competitors moreharshly than vertical restraints and is more likely to apply criminal penalties to suchcollusion.

The most ubiquitous aspect of California antitrust law is the UnfairCompetition Law (“UCL”). Bus. & Prof. Code § 172000 et seq. It generally prohibitsany “unlawful, unfair or fraudulent” conduct and has very lax standing and injuryrequirements. While intended as a public interest statute, the UCL has been usedby some to bring frivolous lawsuits seeking to extort quick settlements and iscurrently the subject of some legislative scrutiny. Although no legislation has yetbeen passed to limit the scope of the UCL, the California Supreme Court recentlyhas issued decisions which limit its scope and monetary remedies. See, e.g., KoreaSupply Co. v. Lockheed Martin, 29 Cal 4th.1134 (2003); Cel-Tech Communicationsv. L. A. Cellular, 20 Cal. 4th.163 (1999).

California’s price discrimination law, the Unfair Practices Act, also hassome unusual wrinkles, particularly with respect to prohibitions on secret rebatesand discounts. ABC International Traders, Inc. v. Matsush*ta Electric Corp., 14Cal. 4th 1247 (1997). Unlike its federal counterpart, the UPA is not limited to pricediscrimination on commodities. It also applies to services and intangibles, and mayinclude intellectual property.

The penalties for violations of California antitrust laws can be severe.Treble damages and recovery of attorney fees are available for both private andgovernment enforcement. Criminal penalties include fines of $1 million forcorporations and $250,000 and imprisonment for up to 3 years for individuals.While the UCL does not allow recovery of damages or attorney fees, it does permitinjunctive relief and restitution. It also allows government enforcers to seek civilpenalties of $2,500 per violation.

Finally, California has aggressive government antitrust enforcement.It includes lawyers from both the Attorney General’s office and district attorneys,particularly in the larger counties. In addition to vigorous civil and criminalprosecution of localized price fixing and other cartel behavior, the stateenforcement authorities actively review mergers and acquisitions in conjunctionwith the federal enforcement agencies.


California antitrust law applies to restraints imposed in interstatecommerce that significantly affect state interests. Younger v. Jensen, 26 Cal. 3d397, 405 (State Attorney General had authority to investigate state and federalantitrust violations in the marketing of natural gas that originates in Alaska); R.E.


Spriggs Co. v. Adolph Coors Co., 37 Cal. App. 3d 653, 659 (1974). The existence ofparallel federal investigations about the same subject does not preclude or preemptstate laws or enforcement. Younger v. Jensen, supra; California v. ARC AmericaCorp., 490 U.S. 93 (1989). In practical terms, this means that California antitrust lawcan be applied to most interstate business activities.

In some cases, however, federal regulation of an area can be sopervasive as to preempt claims under the Cartwright Act or UCL under principles offield or conflict preemption. In Public Utility District No. 1 of Snohomish County v.Dynegy Power Marketing, 2003 W. L. 261396 (S. D. Cal. 2003), the court held thatexclusive federal jurisdiction over wholesale electricity rates preempted Cartwrightand UCL claims alleging anticompetitive practices with respect to such rates. Butsee Hendricks v. Dynegy Power Marketing, 160 F. Supp. 2d. 1155 (S. D. Cal. 2001)(holding that such exclusive federal jurisdiction did not constitute completepreemption to justify removal of actions to federal court). Likewise, in Partee v. SanDiego Chargers Football Co., 34 Cal. 3d 378, 385 (1983), cert. denied 466 U.S. 904(1984), the Supreme Court held that the Cartwright Act does not apply to NFL rulesgoverning the relationship between players, teams, and the NFL. It reasoned that,under the Commerce Clause, the burden imposed upon interstate commerce byapplying state antitrust laws “outweighs the state interest in applying stateantitrust laws to those relationships.” Id. at 372.

The Unfair Competition Law was initially limited to acts of unfaircompetition “within this state.” The 1992 amendments to that statute deleted thisphrase. (Bus. & Prof. Code § 17203). While this expands the scope of the UCL toinclude some out of state activity, it does not reach claims of nonresidents basedwholly on transactions occurring outside of California. Norwest Mortgage, Inc. v.Superior Court, 72 Cal. App. 4th 214 (1999); See generally Washington MutualBank v. Superior Court, 24 Cal. 4th. 906 (2001).

Other cases, however, show the reach of California law. In Amarel v.Connell, 202 Cal. App. 3d 137 (1988), the court applied California antitrust law torestraints imposed by rice trade with the Republic of Korea. It reversed a trial courtruling sustaining a demurrer on the ground that the application of state antitrustlaw in such circ*mstances would impermissibly intrude on the federal domain offoreign relations and foreign commerce. Where defendant’s only contacts withCalifornia, however, are through the Internet, this is not sufficient for jurisdiction inCalifornia even if defendant knows its conduct may cause injury in California.Pavlovich v. Superior Court, 29 Cal. 4th. 262 (2002).


The enforceability of covenants not to compete in California isgoverned by Section s 16600-16602.5 of the Business & Professions Code. Thebasic rule is that, in the absence of a statutory exception, “every contract by which


anyone is engaged in a lawful profession, trade, or business of any kind is to thatextent void.” Bus. & Prof. Code § 16600. The statutory exceptions are:

• The sale of goodwill of a business by a person who agreesnot to compete. Bus. & Prof. Code § 16601.

• The sale or disposition of all the covenantor’s shares in acorporation. Bus. & Prof. Code § 16601.

• The sale of all or substantially all the operating assets,together with the goodwill of a corporation or its subsidiaryor division Bus. & Prof. Code § 16601.

• Dissolution of a partnership. Bus. & Prof. Code § 16602.• Dissolution of a limited liability company or sale of an

individual’s interest in a limited liability company. Bus. &Prof. Code § 16602.5.

If the covenant falls within one of these statutory exceptions, it isenforceable but only if it is limited to all or part of specified counties or cities inwhich the business has been carried on, and only during the time the sellercontinues to do business there. Bus. & Prof. Code §§ 16601-16602.5.

This statutory scheme is viewed as creating a strong public policyagainst covenants not to compete. California courts are generally hostile tocovenants not to compete and hold them unenforceable unless they literally fallwithin one of the statutory exceptions. Radiant Industries v. Skirvin, 33 Cal. App.3d 401 (1973); but see, Fleming v. Ray Suzuki, 225 Cal. App. 3d 574 (1990). Wherea covenant not to compete is over broad, courts will not sever the objectionableportions and rewrite the covenants so as to render them enforceable. Armendarizv. Foundation Health Psychare Serv., Inc., 24 Cal. 4th 83 (2000); Kolani v. Gluska,64 Cal. App. 4th 402 (1998).

California courts also do not apply a rule of reason balancingapproach in interpreting Bus. & Prof. Code § 16600. Scott v. Snelling & Snelling,Inc., 732 F. Supp. 1034, 1041 (N.D. Cal. 1990). A California employer may notterminate an employee for refusing to sign a confidentiality agreement thatcontains an unlawful agreement not to compete. D’SA v. Playhut, Inc., 85 Cal. App.4th 927 (2000). Neither do the courts tolerate sham arrangements to avoidapplication of Bus. & Prof. Code § 16600. Bosley Medical Group v. Abramson, 161Cal. App. 3d 284 (1984); See also, Vacco Ind. v. Van Den Berg, 5 Cal. App. 4th 34(1992) (limited Bosley to its factual context but held Bus. & Prof. Code § 16601exception applicable even though defendant owned less than 3% of Vacco’sstock); Hill Medical Corp. v. Wyckoff, 103 Cal. Reptr. 2d 779 (2001) (covenantunenforceable where stock transferred was only small portion of the corporation).California law also applies to covenants with nonresidents where the employmentis in California. Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881(1998).


In Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th. 697 (2002),however, the California Supreme Court held that, under the principles of judicialrestraint and comity, a California court could not enjoin a party to a Californialawsuit from taking action in another jurisdiction involving the same dispute. InAdvanced Bionics, an employee of a Minnesota company signed a noncompetewith that company but later left to join a California company. The latter and theemployee filed suit in California seeking to enjoin the Minnesota company fromenforcing the covenant, and a day later the Minnesota company filed suit inMinnesota to enforce the covenant. While the Supreme Court acknowledged theCalifornia has a strong public policy against noncompete covenants, this was notsufficient to override the principles of judicial restraint and comity. Thenoncompete agreement provided that its validity “shall be governed by the laws ofthe state in which the employee was last employed by Medtronic”, i.e., Minnesota.Thus, at least where the law of another state applies, and that state has significantcontacts with the underlying dispute, one cannot seek to enjoin a party to aCalifornia from taking action to enforce the covenant in another state.

In determining what constitutes a “profession, trade or business”within the meaning of Bus. & Prof. Code § 16600, however, some courts haveconcluded it does not apply where one is barred from pursuing only a small orlimited part of the business, trade, or profession. Boughton v. Socony Mobil OilCo., 231 Cal. App. 2d 188 (1964). In General Commercial Packaging, Inc. v. TPSPackage Eng., 126 F. 3d 1131 (9th Cir. 1997), the court held that Bus. & Prof. Code§ 16600 did not invalidate a contract provision that barred a party from courting aspecific named customer. See also, King v. Gerold, 109 Cal. App. 2d 316 (1952). InCampbell v. Board of Trustees, 817 F. 2d 499 (9th Cir. 1987), the court concludedthat a covenant which precluded a psychologist from preparing aptitude tests foruniversities other than Stanford may fall within Bus. & Prof. Code § 16600 eventhough he was free to practice all other aspects of his profession.

Subject to the statutory limitations as to time and geographical scope,a merger between two companies permits the execution of a valid covenant not tocompete, in a related employment contract or otherwise. Hilb, Rogal & HamiltonIns. Servs. v. Robb, 33 Cal. App. 4th 1812 (1995). Likewise, a reasonable payment bydeparting partners who compete with their former law firm has been found to beenforceable. Howard v. Babco*ck, 6 Cal. 4th 409 (1993). Finally, at least absent ashowing of an adverse effect on competition, a covenant in a franchise agreementwhich prohibited the franchisee from engaging in competition with the franchisorduring the life of the franchise has been upheld. Dayton Time Lock Serv. Inc. v.Silent Watchman Corp., 52 Cal. App. 3d 1 (1975). See also Monogram Industries v.Sar Indus., 64 Cal. App. 3d 692 (1976) (covenant enforceable against sellingshareholders by both corporation that purchased the share and corporation fromwhom the shares were purchased since they were engaged in almost identicalbusinesses.)


Finally, in some cases California courts may enforce covenants not tocompete by a departing employee if necessary to protect the employer’s tradesecrets. See, Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App.4th 853, 859 (1994). California has also adopted the Uniform Trade Secrets Act(“USTA”). Civil Code § 3426 et seq. This may permit enforcement of covenants notto compete under the “inevitable disclosure” doctrine. PepsiCo., Inc. v. Redmond,54 F. 3d 1262 (7th Cir. 1995). This doctrine allows a court to enjoin a defectingemployee from working for a competitor for a period of time where his new positionhas similar duties and responsibilities as his former position.


Section 16720 of the Bus. & Prof. Code prohibits trusts, and is theCartwright Act counterpart to Section 1 of the Sherman Act. Trusts are defined inSection 16720 as any “combination” of capital, skill or acts by two or more personsto, inter alia, carry out restrictions in commerce, prevent competition, or fix prices.Section 16720 applies to a wide variety of anticompetitive conduct, but applies onlywhere there is proof of a “combination of resources of two or more independententities for the purpose of restraining competition and preventing marketcompetition.” G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 266 (1983); See alsoChavez v. Whirlpool Corp. 93 Cal. App. 4th. 363 (2001)

In some cases involving horizontal relationships (e.g., competitors orpotential competitors), the existence of a combination or conspiracy may be a factissue. Saxer v. Phillip Morris, Inc., 54 Cal. App. 2d 7, 19-22 (1975) In BiljacAssociates v. First Interstate Bank, 218 Cal. App. 3d 1410 (1990), however, thecourt affirmed a summary adjudication of Cartwright Act and 17200 claims againstbanks which allegedly manipulated interest rates to middle market borrowers bytying them to the prime rate. The key evidence upon which the court relied wasdeclarations by defendants’ own employees in which they denied sharing orreceiving information from competitors in advance of announcing their own ratesto the public. See also Nova Designs, Inc. v. Scuba Retailers Ass’n., 202 F. 3d 1088,1092 (9th Cir. 2000) (granting summary judgment on conspiracy claims). Bycontrast, in Cellular Plus, Inc. v. Superior Court, 14 Cal. App. 4th 1224 (1993) thecourt concluded that meetings among defendants followed by uniform prices wassufficient to defeat a demurrer at the pleading stage. 14 Cal. App. 4th at 1239-40.

In Aguilar v. Atlantic Richfield Corp., et al., 25 Cal. 4th. 826 (2001),the California Supreme Court affirmed a summary judgment in favor of defendantson a claim that defendant petroleum companies had conspired to raise the price ofCARB gasoline in California. In doing so, the court embraced both the summaryjudgment and conspiracy standards from federal antitrust law as articulated inMatsush*ta Elec. Industrial Co. v. Zenith Radio Corp., 475 US 574 (1986) andMonsanto Co. v. Spray-Rite Serv. Corp., 465 U. S. 752 (1984). Under that standard,the plaintiff must present evidence that tends to exclude the possibility that the


alleged conspirators acted independently, and ambiguous evidence that is asconsistent with competition as conspiracy is insufficient to prove a conspiracy orto defeat a summary judgment motion. In Aguilar the defendants had submitteddetailed declarations from their own officers that they made pricing decisionsindependently which shifted the burden to plaintiffs to show otherwise. Theevidence offered by plaintiff--consisting of the dissemination of price informationthrough a common independent company, use of common consultants to advisethem with respect to pricing issues on CARB gasoline, and that they had frequentlyentered into exchange agreements whereby they traded the same product amongeach other--was deemed ambiguous by the court and was not the type of evidencethat excluded the possibility of independent action.

California courts also require a “high degree of particularity” inpleading conspiracy claims under the Cartwright Act. Freeman v. San DiegoAssociation of Realtors, 77 Cal. App. 4th 171, 196 (1999). Where plaintiffs fail to doso, a demurrer may be sustained. Id. It is not sufficient for a plaintiff to merelyparrot the words of the statute, but must make factual allegations of specificconduct and overt acts. Chicago Title Ins. Co. v. Great Western Financial Corp.,69 Cal. 2d 305, 326-28 (1968); Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93 (1969). Butsee Quelimane v. Stewart Title, 19 Cal. 4th 26 (1998) (allegation that title insurerscombined to refuse to issue title insurance policies on tax defaulted propertiessufficient to withstand demurrer).

With respect to vertical relationships (e.g., parties at different levels ofthe distribution chain), the federal Colgate doctrine applies and California antitrustlaws do not generally prohibit a single trader from unilaterally determining withwhom it will deal and the terms on which it will transact business. Chavez v.Whirlpool Corp., 93 Cal. App. 4th. 363 (2001) (no conspiracy where manufacturerannounces a policy prescribing minimum resale prices for its products, monitorscompliance, and simply terminates noncomplying dealers); Gianelli v. Beck & Co.,172 Cal. App. 3d 1020 (1985) (unilateral termination of dealer for carryingcompetitive products did not violate § 16720). Where, however, the single traderpressures customers or dealers into adhering to resale price restrictions, territorialrestraints, or unlawful exclusive dealing or tying arrangements, or reaches an actualagreement with them to do so, an unlawful combination may be established.G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 267 (1983); See also Chavez, supra, 93Cal. App. 4th. at 365-66. Although some pre-Aguilar and Chavez cases suggestthat a combination may be found where a manufacturer terminates a dealer basedon complaints from other dealers ( See, eg, R.E. Spriggs v. Adolph Coors Co., 94Cal. App. 3d 419 (1979)), the validity of this authority is questionable in light of thefact that in Aguilar, supra, the California Supreme Court embraced the federalMonsanto standard. See also Nova Designs, Inc., supra, 202 F. 3d at 1092 (cannotinfer agreement from existence of complaints). Where the allegations of theComplaint show that the alleged conduct falls within the Colgate doctrine, ademurrer may be sustained to the complaint. Chavez, supra


As does Section 1 of the Sherman Act, Section 16720 requires two ormore independent actors and does not reach single firm conduct. The federalcourts have concluded that a corporation and its wholly owned subsidiaries,divisions, and agents are not separate entities for purposes of Section 1.Copperweld v. Independence Tube Corp., 467 US 752 (1984). California courts nowappear to have embraced the Copperweld rule, although courts may differ in itsapplication to specific entities. Compare Freeman v. San Diego Association ofRealtors, 77 Cal. App. 4th 171, 189-96 (1999) with Freeman v. San DiegoAssociation of Realtors, 2003 DAR 2754 (9th Cir. 2003). See also MacManus v. A.E.Realty Partners, 195 Cal. App. 3d 1106, 1111 (1987) (tying case where courtconcluded that a Cartwright cause of action was stated regardless of whetherdefendants operated as separate entities). 195 Cal. App. 3d at 1112. Other courtsinfer conspiracies only when there are individuals or entities “maintaining separateand independent interests.” Bondi v. Jewels by Edward, Ltd., 267 Cal. App. 2d 672,678 (1968); Roth v. Rhodes, 25 Cal. App. 4th 530, 544 (1994); Kolling v. Dow Jones,137 Cal. App. 3d 709, 720 (1982).


Both horizontal and vertical price fixing are per se illegal underCalifornia law. Price fixing includes any tampering with prices or terms of sale.Mailand v. Burckle, 20 Cal. 3d 367, 376 (1978) (gasoline supplier fixed retail price inexchange for guaranteed profit to dealers). The per se rule also applies to buyerconspiracies where the defendants allegedly acted to depress the prices paid tosellers. Knevelbaard Dairies v. Kraft Foods, Inc., 232 F. 3d 979, 987-88 (9th Cir.2000). An exchange of current or future price information may also violateCalifornia antitrust law, with one court applying the rule of reason to such anexchange of price information. People v. Nat’l Assn. of Realtors, 120 Cal. App. 3d459 (1981); but see Aguilar, supra, 25 Cal. 4th. at 862-63 (noting that thedissemination of such information can sometimes be procompetitive).

Unlike federal law, no California court has yet re-examined the rule thatmaximum vertical price fixing is per se illegal. In Kolling v. Dow Jones, 137 Cal. App.3d 709 (1982), the court affirmed a jury verdict of unlawful maximum price fixingbased on evidence that a newspaper publisher pressured its distributors not to sellin excess of a suggested retail price, a practice called “overpricing.” See also R.E.Spriggs v. Adolph Coors, 94 Cal. App. 3d 419 (1979).

California has, however, adopted the federal Colgate/Monsantostandard for determining the existence of a conspiracy in a vertical price fixing case.Chavez v. Whirlpool Corp., 93 Cal. App. 4th. 363 (2001). In that case the defendantannounced a policy prescribing minimum resale prices for its products, monitoredcompliance, and then terminated non-complying dealers. The court held suchconduct fell within the Colgate doctrine, and affirmed judgment in favor ofdefendant.


In the intellectual property context, however, one federal court heldthat the Cartwright Act did not prohibit, under the per se rule or otherwise, aprovision in a software licensing agreement which prohibited the licensee fromselling the licensed program at less than a certain price to anyone other than thelicensor. LucasArts Entertainment Co. v. Humongous Entertainment Co., 870 F.Supp. 285 (N.D. Cal. 1993). The court relied on a federal decision, United States v.General Electric, 272 U.S. 476 (1926), which held that patent owners had the powerto restrict prices at which licensees sold. Although the General Electric case hasnot been overruled, its continuing validity is questionable, as the United StatesSupreme Court has twice split four to four on whether to overrule it and the federalenforcement authorities decline to follow it.


Agreements between competitors or potential competitors not tocompete for customers or not to sell in designated territories are per se illegal.Guild Wineries v. J. Sosnick & Son, 102 Cal. App. 3d 627 (1980). Such agreementsinvariably have the potential to restrict output and raise prices. By contrast,customer and territorial restrictions are analyzed under the rule of reason when theyare imposed as vertical restraints by a manufacturer on its dealers. Exxon v.Superior Court, 51 Cal. App. 4th 1672, 1681-82 (1997). Thus, in the vertical context,such restraints may be upheld where the defendant lacks market power in thebroader interbrand market (i.e., competing products from other manufacturers), andthe restraints have a legitimate business purpose such as to prevent free riding orassure the manufacturer that its products will be sufficiently marketed. Exxon v.Superior Court, supra; Gianelli v. Beck & Co., 172 Cal. App. 3d 1020, 1047-49(1985); Milton v. Hudson Sales Corp., 152 Cal. App. 2d 418, 443-45 (1957).

In Exxon v. Superior Court, supra, plaintiffs were franchisees ofExxon and alleged that Exxon compelled them to buy gasoline from Exxon at priceshigher than Exxon sold to jobbers who in turn sold to stations competing withplaintiffs. The Exxon jobbers were forbidden to sell to plaintiffs, and the plaintiffswere effectively precluded from buying other brands of gasoline since to do sothey had to install separate tanks and pumps, an economically prohibitivearrangement. Nonetheless, noting that Exxon accounts for less than 10% of thegasoline market, the court reversed a lower court order denying summary judgmentto Exxon. In doing so, it rejected plaintiffs’ arguments that a single brand ofgasoline could constitute a relevant antitrust market, and also held there was no“lock in” to Exxon gas from the perspective of consumers. 51 Cal. App. 4th at 1684-86. The court went on to state that plaintiffs’ real remedy was for oppressiveconduct arising from a contractual relationship, not a claim under the antitrust laws.

In dual distribution situations--where the manufacturer also competeswith its own wholesalers or distributors--one California case, contrary to federallaw, treats territorial and customer restrictions as horizontal and thus per se illegal.In Guild Wineries & Distilleries v. J. Sosnick & Son, 102 Cal. App. 3d 627 (1980),


the defendant manufacturer vertically integrated forward and took over theoperations of one of its wholesalers. It then tried to persuade another wholesalernot to compete with it for the business of a single large customer. The court treatedthis as a per se illegal horizontal restraint, and held that the rule of reason appliesonly when the restriction is “purely vertical.” 102 Cal. App. 3d at 635; compareDimidowich v. Bell & Howell, 803 F. 2d 1473 (9th Cir. 1986), modified on othergrounds, 810 F. 2d 1517 (9th Cir. 1987) (refusing to follow Guild Wineries in aCartwright Act challenge to dual distribution). Although Guild Wineries has notbeen overruled, it is now likely that the federal rule would be adopted for CartwrightAct cases. See Aguilar, supra.


Section 16727 of the Business & Professions Code provides, interalia, that it is unlawful to sell or lease goods, or give a rebate or price discount, onthe condition that the purchaser not deal in goods of a competitor where the effectis to substantially lessen competition or tend to create a monopoly. Section 16727is a carbon copy of Section 3 of the Clayton Act (15 USC § 14). Like its federalcounterpart, it does not prohibit all exclusive dealing contracts. Rather, Californiacourts apply the rule of reason and invalidate only those with the requisiteanticompetitive effects. Gianelli Distributing Co. v. Beck & Co., 172 Cal. App. 3d1020 (1985).

The key issue under the rule of reason in exclusive dealing cases iswhether defendant has market power in the relevant market. Redwood Theatres v.Festival Enterprises, 200 Cal. App. 3d 687 (1988). The relevant market normallyincludes all products that are reasonably interchangeable in price, use and quality.Exxon v. Superior Court, 51 Cal. App. 4th 1672, 1682-84 (1997). If defendant has asmall market share, or otherwise lacks market power, then it is unlikely that theexclusivity requirement will violate the Cartwright Act. Kim v. Servosnax, 10 Cal.App. 4th 1346 (1992). While 10 percent or less of the market is clearly not sufficientfor market power (Exxon v. Superior Court, 51 Cal. App. 4th at 168-83; Roth v.Rhodes, 25 Cal. App. 4th 530 (1994)), one court found that 16 % was enough to raisea triable issue of fact in light of the specific factual situation presented. RedwoodTheatres, supra, 200 Cal. App. 3d at 713.

Exclusive distributorships which prohibit only intrabrand competition(e.g., where manufacturer prohibits its dealers from selling its own products incompetition with each other) are unlikely to violate California antitrust law. R. E.Spriggs v. Adolph Coors, 94 Cal. App. 3d 419 (1979); Martikian v. Kyong WanHong, 164 Cal. App. 3d 1130, 1134 (1985); Great Western Distillery v. John A.Wathen Distillery, 10 Cal. 2d 442 (1937).

One species of exclusive dealing is tying. This occurs when a sellersells one product on the condition that the purchaser also buy a second productfrom it. Tying may be per se illegal if the seller has market power over the first


product and a substantial amount of commerce was affected in the sale of thesecond product. Suburban Mobile Homes v. AMFAC Communities, 101 Cal. App.3d 532 (1980). Tying arrangements may be challenged under either Section 16720 or16727 of the Cartwright Act. Section 16727, however, is limited to commodities.Morrison v. Viacom, 66 Cal. App. 4th 534, 546 (1998). Moreover, in Morrison,supra, the court stated in dicta that the per se rule is satisfied under § 16727 ifeither the market power or substantial commerce tests are satisfied. 66 Cal. App.4th at 542. Under § 16720, both tests must be satisfied. Id.

For tying to exist, however, there must be two separate products. InPeople v. National Association of Realtors, 120 Cal. App. 3d 459 (1981), the courtstated that the two product test is satisfied where the products are sold separatelyas well as together and buyers are, or can be, charged separate prices. Id. at 470-71.It thus concluded that a multiple listing service for real estate was a separateproduct from a real estate board membership for tying purposes. But see Freemanv. San Diego Assn. of Realtors, 77 Cal. App. 4th 171, 183-88 (1999) (multiple listingservice and related services not separate products for tying purposes). In LloydDesign v. Mercedes Benz, 66 Cal. App. 4th 716 (1998), the court held the floor matsplaced in a car by the manufacturer or its distributor was not a separate productfrom the car itself. It reasoned that such “standard equipment” on automobilesshould not be considered a separate product itself for tying purposes. See alsoCorwin v. Los Angeles Newspaper Service Bureau, 4 Cal. 3d 842, 858-59 (1971)(identifies several factors to be evaluated to determine whether separate productsfor tying purposes exist).

California law is more unclear than federal law in determining whatconstitutes market power for tying purposes. Under federal law, the commonformulation is that the defendant must have at least 30% of the market to satisfy themarket power test for tying purposes. Jefferson Parish v. Hyde, 466 U.S. 2, 26-27(1984). In Suburban Mobile Homes, supra, 101 Cal. App. 3d at 544, the court statedthat market power may exist even though it falls short of market dominance andexists only with respect to some buyers due to the desirability of that product tothose buyers, or the uniqueness of its attributes. Exxon v. Superior Court, 51 Cal.App. 4th 1672, 1686 (1997) (10% market share not sufficient).

With respect to the second requirement that substantial commerce beaffected, one California court found it was not affected where the second (tied)product could be obtained free of charge. In Morrison v. Viacom, 66 Cal. App. 4th534 (1998), the plaintiff alleged that the requirement that it obtain broadcastchannels from a cable operator as a condition to getting the premium channels wasan illegal tying agreement. The court held that, under § 16720 which requires bothmarket power and substantial commerce for per se illegality, the latter requirementcould not be met because, absent the alleged tie, plaintiffs would not buy broadcastchannels at all since they are available for free over the air. 66 Cal. App. 4th at 543-44. As to Bus. & Prof. Code § 16727, which requires either market power orsubstantial commerce, the court held that it did not apply because it was limited to


commodities and the products at issue in Viacom were services. 66 Cal. App. 4th at546-48.

Finally, the requirement that the sale of one product be conditioned onthe sale of another may not be satisfied where the purchaser can easily obtain thesecond (tied) product from another source. In Lloyd’s Design v. Mercedes Benz, 66Cal. App. 4th 716 (1998), the court noted that the Mercedes dealers were free to usea different floor mat if requested by a customer. 66 Cal. App. 4th at 721-23. Citingthe Jefferson Parish case, the court noted that a seller’s decision to sell twoproducts as a package does not restrain competition when customers still have theoption to buy them separately and both markets are competitive. See also, Kim v.Servosnax, Inc., 10 Cal. App. 4th 1346 (1992).


When competitors combine to deny a competitor benefits enjoyed bymembers of the group, such horizontal boycotts may give rise to per se liability.This was the case in Oakland-Alameda County Builders Exchange v. F.P.Lathrop Const. Co., 4 Cal. 3d 354 (1971), where contractors who participated in abid depository agreed to boycott contractors who were not participants. See alsoPeople v. Santa Clara Valley Bowling Assn., 238 Cal. App. 2d 225, 233-37 (1965)(bowling association rule designed to induce league bowlers from bowling innonmember houses was per se illegal).

In Marin County Board of Realtors v. Palsson, 16 Cal. 3d 920, 931(1976), however, the court refused to apply per se illegality to a real estateassociation rule that denied part-time agents access to a multiple listing service. Itnoted that, rather than attempting to coerce part-time agents to adoptanticompetitive practices, the rule may have a legitimate business reason in whichthe alleged boycott was only a byproduct of that agreement. Nonetheless, sincedefendants had 75% of the market and the rule had serious anticompetitive effectswithout any business justification, the court invalidated the association rule underthe rule of reason. See also, Amarel v. Connell, 202 Cal. App. 3d 137 (1988)(companies with 75% of market engaged in boycotts and refusals to sell to thosewho purchased from competitors); People v. National Association of Realtors, 120Cal. App. 3d 459 (1981) (rule restricting access to multiple listing service was groupboycott). In Freeman v. San Diego Assn. of Realtors, 77 Cal. App. 4th 171, 196-98(1999), however, the court held that denial of access to ancillary services offered bya multiple listing service did not state a group boycott claim. Where defendants arenot competitors, the per se rule does not apply. Nova Designs, Inc. v. ScubaRetailers Ass’n., 202 F. 3d 1088, 1092 (9th Cir. 2000).

Vertical boycotts -- those among entities at different levels ofdistribution -- may violate the Cartwright Act under a rule of reason analysis. InG.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256 (1983), the plaintiff was a record retailerthat alleged that three of its larger competitors used their market power to coerce


record wholesalers to grant discounts to them, but not plaintiff and other retailers.The court held that the plaintiff stated a claim against one of the large retailers whohad used threats and coercion to induce wholesalers to boycott plaintiff, but notagainst the other two defendants because no acts by them were alleged thatfurthered coercion. 147 Cal. App. 3d at 267-69. See also Redwood Theatres v.Festival Enterprises, 200 Cal. App. 3d 687 (1988) (agreement between movieexhibitor and certain film distribution companies to boycott another exhibitorevaluated under the rule of reason).

As discussed supra in Section IV, a unilateral refusal to deal for alegitimate business reason does not violate California antitrust law. Chavez v.Whirlpool Corp., 93 Cal. App. 4th 363, 365-67 (2001) (adopting Colgate doctrine toprotect unilateral terminations of retailers who do not comply with minimum resaleprices set by manufacturer). Gianelli v. Beck & Co., 172 Cal. App. 3d 1020 (1985).The legality of the refusal to deal is also dependent on the legality of the underlyingrestraint. The refusal to deal is unlikely to trigger antitrust liability if the done toenforce a restraint that is lawful under the rule of reason due to lack of marketpower. Roth v. Rhodes, 25 Cal. App. 4th 530 (1994); Milton v. Hudson Sales, 152Cal. App. 2d 418, 443-45 (1957).


Monopolization and attempted monopolization consists of conductby a single firm with market power to attain or maintain that power by exclusionaryor predatory conduct. California has no monopolization statute analogous toSection 2 of the Sherman Act (15 U.S.C. § 2). One court of appeal has held that theprohibition of “trusts” in Section 16720 includes monopolization. Lowell v.Mother’s Cake & Cookie Co., 79 Cal. App. 3d 13, 23 (1978). In 1988, however, theCalifornia Supreme Court held that Section 16720 only applies to combinationsamong multiple firms that continue as separate entities. State ex. rel. Van deKamp v. Texaco, Inc., 46 Cal. 3d 1147, 1164 n. 17 (1988). While the court did notreach the issue of whether Section 16720 covers monopolization by individualfirms, subsequent decisions have interpreted Texaco as holding that theCartwright Act does not reach single firm conduct, such as monopolization.Freeman v. San Diego Assn. of Realtors, 77 Cal. App. 4th 171, 202 (2000). The NinthCircuit has also held that Section 16720 does not reach monopolization orattempted monopolization, but does encompass conspiracies to monopolizeamong multiple firms. Dimidowich v. Bell & Howell, 803 F. 2d 1473, 1478 (9th Cir.1986).


In State ex. rel. Van de Kamp v. Texaco, Inc., 46 Cal. 3d 1147 (1988), theCalifornia Supreme Court held that neither the Cartwright Act nor Section 17200 ofthe UCL reach mergers and acquisitions. The basic rationale of the court was thatSection 16720 of the Cartwright Act applies only to combinations of entities that


are ongoing. The Court held that Section 17200 was limited to “businesspractices,” with that phrase envisioning something more than a single transaction.46 Cal. 3d at 1169-70.

Texaco remains good law with respect to the Cartwright Act. After theTexaco decision, however, Section 17200 was amended to add the words “any” or“act” so that it now applies to “any unlawful, unfair, or fraudulent business act orpractice.” Likewise, Section 17203 of the UCL was amended to provide that relief isavailable against any person who “is engaged, has engaged or proposes toengage” in unfair competition. The Supreme Court has indicated in dicta that thecollective effect of these amendments may be to legislatively overrule the Texacocase as to Section 17200. Stop Youth Addiction v. Lucky Stores, 17 Cal. 4th. 553, 570(1998). The legislative history, however, raises some question about thisinterpretation of the Section 17200 amendments.

In fact, the California Attorney General continues to challengemergers in federal court under Section 7 of the Clayton Act, rather than invoke stateremedies. In State of California v. Sutter Health System, 84 F. Supp. 2d 1057 (N.D.Cal. 2000), the California Attorney General challenged a merger between twohospitals. The court denied a preliminary injunction seeking to enjoin the merger,holding that plaintiff failed to prove a well-defined geographic market and thatdefendants successfully established their failing company defense.

The California Attorney General, either independently or through theNational Association of Attorneys General (“NAAG”), of which it is a signatory,also sometimes conducts pre-filing merger investigations and requests datagathered from the federal premerger notification process. NAAG has its ownmerger guidelines, which vary in some respects from the federal merger guidelines.The NAAG Voluntary Pre-Merger Disclosure Compact allows parties tovoluntarily file with a designated “liaison state” a copy of their initial Hart-Scott-Rodino filings, copies of any subsequent requests for information by the federalenforcement authorities and, upon the request of any member state, the additionalmaterials provided in response to subsequent requests. The initial filing is oftensimultaneous with those of the Department of Justice and the FTC. Theinformation so obtained is kept confidential, and NAAG signatories agree not toserve parties with requests for additional information during the HSR waitingperiod. For practical reasons, merging parties often consent to disclosure of theirHSR data under the NAAG Compact since it helps avoid separate informationrequests from the state enforcement authorities during the HSR review process.

NAAG signatories do not, however, agree to be bound by thedecisions of the federal enforcement agencies. A federal agency’s decision not tochallenge a merger does not prevent a state attorney general from challenging amerger or acquisition in court. In fact, California is one of the few states to do so.California v. American Stores Co., 495 U. S. 271 (1990). In that case, the AttorneyGeneral challenged as a private party under federal antitrust laws a merger that hadgone through the HSR process and been, subject to a consent decree, approved by


the FTC. The Attorney General obtained an injunction, including divestiture ofcertain assets, in the District Court but the Ninth Circuit vacated the injunction onthe ground that private parties could not obtain divestiture under the antitrustlaws. The Supreme Court reversed the Ninth Circuit holding that, so long as thestate could show threatened loss or damage to its own interests as required bySection 16 of the Clayton Act, it could obtain injunctive relief, includingdivestiture. It did note, however, that equitable defenses such as unclean handsand laches would apply, and the concurring opinion noted that failure to act untilafter the HSR waiting period has expired may constitute laches. California stateenforcement authorities have often joined with the federal enforcement agenciesand other states to challenge mergers based on information obtained in the HSRprocess.


The California Unfair Practices Act (“UPA”) is found at Section 17000et seq. of the Business & Professions Code. It deals with certain pricing practices,such as below cost pricing and charging different prices to competing customers.While analogous to federal price discrimination laws, there are some materialdifferences as described below. Thus, companies should proceed carefully indetermining pricing, discount and rebate policies in California. A private plaintiffmay obtain treble damages and injunctive relief for UPA violations. (Bus. & Prof.Code §§ 17070,17082).

In general, the UPA prohibits three basic types of pricing practices invarying situations: 1) below cost pricing and loss leaders; 2) locality discrimination,e.g., selling at lower prices in one area than another; and 3) giving secret, unearneddiscounts or rebates to some purchasers but not others. While the first twoprohibitions apply only to competition at the seller level, the secret rebate/discountprohibition applies to competition at the buyer and seller level. In other words,actions can be filed against the seller and the favored purchasers.

One difference between the UPA and the federal price discriminationlaws is that the UPA is not limited to commodities or physical goods. It applies toservices and other intangibles, excluding motion picture licenses. Bus. & Prof.Code § 17024. Thus, unlike its federal counterpart, it may apply to patents,copyrights and other intellectual property. See Paramount General Hospital v.National Medical Enterprises, 42 Cal. App. 3d. 496 (1974). Since intellectualproperty licenses may have differing royalty rates, and the negotiations and actualrates are often secret, one should carefully consider the UPA prohibitions duringthe negotiation of intellectual property licenses.

A. Below Cost Pricing and Loss Leaders

Section 17043 prohibits selling a product below its cost for thepurpose of injuring competitors or destroying competition. The California SupremeCourt has held that this means that the defendant must act with “the desire of


injuring competitors or destroying competition” as the defendant’s “consciousobjective,” not merely the “knowledge that the injury or destruction will occur.”Cel-Tech Communications v. L.A. Cellular, 20 Cal. 4th 163, 175 (1999). There isalso a statutory meeting competition defense. Bus. & Prof. Code § 17050(d).

In Cel-Tech, the defendant sold cell phones below cost hoping tomake up its losses with increased sales of subscriber services. It adopted thisstrategy to compete with another company which likewise sold both cells andservice. Plaintiff sold cell phones, but not service. Emphasizing that Section 17043uses the word “purpose,” not intent, the Supreme Court held this required a mentalculpability beyond mere knowledge that below cost prices may injure a competitor.Since the conscious objective of the defendant’s below cost pricing was done togain business from its competitor that offered both cells and services rather thaninjure plaintiff, the below cost pricing did not violate Section 17043. Cel-Techapplied the same requirement to the loss leader claim under Section 17044. Asdiscussed infra, however, it did conclude plaintiff could state a claim for unfaircompetition under Section 17200.

In Western Union Financial Services, Inc. v. First Data Corporation,20 Cal. App. 4th 1530 (1993), the court held that a defendant did not violateSection 17043 by targeting its substantially larger competitor, and selling one of itsproducts below cost and on a promotional basis for a five month period where,during the period covered, its sale on all products sold was profitable. In addition,the court held that it did not violate Section 17043 to target a larger rival with belowcost sales, where the intent was not to injure or destroy the competitor, but simplyto take market share and enhance its own business base. Section 17043 andSection 17044 require a specific intent to injure or destroy a competitor, and not justan intent to divert customers from a competitor. Id. at page 1540, note 10. See also,Hladek v. City of Merced, 69 Cal. App. 3d 585, 591 (1977) (intent to injurecompetitors or destroy competition essential element). A persuasive argument canbe made that harm to competition is an essential element of Section 17043 and 17044violations. See, e.g., Cel-Tech, 20 Cal. 4th 163, 186 (citing, inter alia, Section 17001of the Unfair Practices Act for the proposition that “[i]njury to a competitor is notequivalent to injury to competition; only the latter is the proper focus of theantitrust laws”); Turnbull & Turnbull v. ARA Transportation, Inc., 219 Cal. App.3d 811, 826 (1990) (the Unfair Practices Act’s “purpose is basically the same as theSherman Act”).

Loss leaders are defined as selling below cost where the purpose iseither to induce the purchase of other merchandise, mislead purchasers, or divertbusiness from competitors. (Bus. & Prof. Code § 17030). Section 17044 thenprovides that it is unlawful to sell products as loss leaders. As discussed supra,Cel-Tech holds that Section 17044 also requires that the desire to destroycompetitors must be defendant’s conscious objective. Cel-Tech Communicationsv. L.A. Cellular, supra, 20 Cal. 4th at 177. See also, Dooley’s Hardware Market v.


Food Giant, 21 Cal. App. 3d 513 (1971); Ellis v. Dallas, 113 Cal. App. 2d 234 (1952).

Unlike federal law, the “cost” standard for below cost pricing inCalifornia is fully allocated costs, including overhead. Amarel v. Connell, 202 Cal.App. 3d 137 (1988). Bus. & Prof. Code §§ 17026, 17029; Western Union FinancialServices, Inc. v. First Data Corp., 20 Cal. App. 4th 1530 (1993). Where a companysells multiple products, it should allocate overhead costs in a manner reasonablyrelated to the burden imposed by the products on the firm’s overall cost of doingbusiness. Turnbull & Turnbull v. ARA Transportation, Inc., 219 Cal. App. 3d 811,822 (1990). Otherwise, said the Turnbull court, such a seller could spread its fixedcosts disproportionately across products to achieve an artificially low cost forsome products that a single product competitor could not match.

The proper method to allocate costs among multiple products wasalso the subject of the court’s opinion in Pan Asia Venture Capital Corp. v. HearstCorp., 74 Cal.App.4th 424 (1999). In Pan Asia, both parties sold newspapers withadvertising, and plaintiff alleged that defendant had obtained a contract from theCity and County of San Francisco to publish legal notices by submitting a bidbelow its cost. At the trial, court ruled that defendant produced two relevantproducts -- newspapers and advertising -- and the plaintiff’s expert allocated costsbased on the revenues generated by those two products. Using this “revenuemethod to allocate costs,” he thus allocated nearly 85% of defendant’s total coststo the advertising side. By contrast, the defendant’s expert allocated costs basedon the number of inches in the newspaper devoted to advertising and thusallocated only 45% to advertising. 74 Cal.App. at 437-38. While the Pan Asia courtseverely criticized plaintiff’s revenue method, it was not barred as a matter of lawunder the UPA. Thus, the appropriate cost model was a fact issue for the jury.Since the trial court had refused to submit defendant’s cost model to the jury, theCourt of Appeal reversed the judgment in favor of plaintiff based on the flawed juryverdict. See also Kentmaster Manufacturing Co. v. Jarvis Products Corp., 146 F.3d. 691 (9th Cir. 1998) (no predatory intent where original equipment was sold at anartificially low price and losses made up on replacement equipment as they weretreated as a single unit for purposes of determining prices and costs).

California has not yet determined whether to adopt the recoupmentrequirement found in federal predatory pricing cases. Brooke Group v. Brown &Williamson Tobacco Corp., 509 U.S. 209 (1993). Recoupment requires an analysisof market structure to determine whether it will permit a defendant to recoup thelosses it initially sustains from below cost pricing by means of higher prices aftercompetitors have been eliminated from the market. Given the fully allocated coststandard of the UPA, however, a reasonable argument can be made that a showingof recoupment should be required. Some support for such an argument can befound in Cel-Tech itself, where the California Supreme Court noted that low pricesbenefit consumers, and courts must be careful not to prohibit vigorous pricecompetition. 20 Cal. 4th at 189-90.


B. Locality Price Discrimination

Locality price discrimination in the UPA is defined as a pricediscrimination in which the seller sells an article or service at a lower price in onesection of a city or community than in another Section for the purpose ofdestroying competition. (Bus. & Prof. Code §§ 17031,17040). Discrimination issimply a price difference, and such price differences may be justified on the basis ofthe quality and grade of the product, as well differing manufacturing or deliverycosts. (Bus. & Prof. Code § 17041). Other defenses include close out sales ofperishable or seasonal goods, and price differences based on differing functionalclassifications such as wholesalers or brokers. (Bus. & Prof. Code §§ 17042,17050).The meeting competition defense also applies to locality discrimination.(Bus. &Prof. Code §§ 17040, 17050(d)).

The scope of the locality discrimination law was severely reduced inHarris v. Capitol Records Distributing Corp., 64 Cal. 2d 454 (1966). In Harris, thecourt held that an alleged violator must sell from two different locations and mustsell at a lower price in one location than another. This effectively exempts singleoutlet sales at differing prices from the scope of the law. Harris also held that aplaintiff claiming locality discrimination must operate at the same level as the seller,thus eliminating claims by disfavored purchasers. These two limitations haveoperated to substantially reduce the scope of viable claims under the localitydiscrimination law.

C. Secret Discounts and Rebates

Section 17045 of the UPA prohibits the “secret payment” of rebatesand unearned discounts, or secretly extending to certain purchasers specialservices or privileges not extending to all purchasers purchasing on like terms andconditions, to the injury of a competitor and where such payment tends to destroycompetition. This Section applies to competition at both the seller and thepurchaser level. ABC International Traders, Inc. v. Matsush*ta Electric Corp., 14Cal. 4th 1247 (1997); Diesel Electric Sales and Service, Inc. v. Marco Marine SanDiego, Inc., 16 Cal. App. 4th 202 (1993). Although the statute itself is unclear, thebetter view is that the “like terms and conditions” clause applies to secret rebatesand unearned discounts, as well as to special services and privileges. G.H.I. I. v.MTS, Inc., 147 Cal. App. 3d. 256, 272 (1983).

A key predicate for Section 17045 to apply, however, is that thediscount or rebate must be secret. In Diesel Electric, this element was satisfiedsince the manufacturer had expressly told plaintiff that it was getting the “samepricing” as the favored distributor when this was not the case. 16 Cal. App. 4th at121-23. Absent such misrepresentations, however, it is not necessary for themanufacturer to affirmatively disclose the terms of the favored deal to thedisfavored purchaser to avoid a secrecy finding. Rather, it is sufficient to disclose


the preferential rebates and unearned discounts to the public or the tradegenerally. ABC International, supra, 14 Cal. 4th at 1253. Thus a manufacturer maybe able to avoid a secrecy finding by simply making its discount/rebate listavailable to all dealers or distributors. Nicolosi Dist. Co. v. Finishmaster, Inc., 2000WL 41222 at 3 (N.D. Cal. 2000); California Wholesale Electric Co. v. MicroSwitch,Honeywell, Inc., 1983-1 CCH Trade Cas. ¶ 65,253 (C.D. Cal. 1984).

Section 17042 of the Business & Professions Code also exempts fromSection 17045 a price differential between customers in different functional classes,such as retailers and distributors. See Harris v. Capitol Records, 64 Cal.2d. 454,463-64 (1966). Thus, discounts to retailers may not need to be extended todistributors, and vice-versa.

A Section 17045 violation also requires an intent to injure competitorsor destroy competition. Ellis v. Dallas, 113 Cal. App. 2d 234 (1952). The Ellisdecision was cited with approval by the California Supreme Court in its 1999 Cel-Tech decision, and thus presumably the “conscious objective” standard of Cel-Tech also applies to Section 17045 actions.

D. Meeting Competition

The UPA contains a statutory meeting competition defense. Bus. &Prof. Code §§ 17040, 17050. For example, Section 17050(d) exempts prices offeredto meet the lawful prices of a competitor from the prohibitions of the Act. People v.Pay Less Drug Stores, 25 Cal. 2d 108, 117 (1944) (defense established when“defendants shall have endeavored ‘in good faith’ to meet the legal prices of acompetitor”).

The purpose of the meeting competition defense is to promote andencourage competition. Harris v. Capitol Records Distributing Corp., 64 Cal. 2d454, 461 (1966) (“Equally apparent is the Legislature’s concern to allow the seller tomeet in good faith the prices of his competitors (§§ 17040, 17050), thereby fosteringthe competition promoted by § 17001").

The meeting competition defense has sometimes been appliedliberally in California. Dooley’s Hardware Mart v. Food Giant Markets, Inc., 21Cal. App. 3d 513, 518 (1971) (defense established where defendant’s purpose “wasto meet the competition of supermarket competitors who advertised the same orsubstantially similar supermarket items below cost in limited quantity”); Sandler v.Gordon, 94 Cal. App. 2d 254, 257-58 (1940) (meeting competition defenseestablished by testimony that seller merely sought new customers and did not actwith malice toward any particular competitor); Compare, E&H Wholesale, Inc. v.Glaser Bros., 158 Cal. App. 3d 728, 737 (1984) (defense failed where seller beat,rather than met, the lower prices of a competitor); People v. Gordon, 105 Cal. App.2d 711, 724 (1951) (defense not successful where “appellant wholly disregarded the


question of the legality of the low prices of his competitors”). The meetingcompetition defense also may not apply if the competitor’s price is itself below costand illegal. Page v. Bakersfield Uniform & Towel Supply Co., 239 Cal. App. 2d 762(1966).

The meeting competition defense in both Sections 17040 and 17050expressly applies to locality discrimination and Section 17050 to below cost pricingand loss leaders as well. The absence of a statutory reference to Section 17045 ledone court to conclude there is no meeting competition defense in secret rebate orunearned discount claims. Diesel Electric, supra, 16 Cal. App. 4th at 217-18. Dieselrecognizes, however, that the prima facie element in Section 17045 of harm tocompetition may not exist if there is a legitimate meeting competition defense, as doother courts. See, E&H Wholesale v. Glaser Bros., 158 Cal. App. 3d 728, 739 (1984)(secret rebates that “meet the demands of the marketplace” do not destroycompetition). Given the recent pronouncements of the California Supreme Court inCel-Tech and ABC on competitive injury, it is likely to conclude that the meetingcompetition defense applies to Section 17045 claims, as well as other UPA claims.See, eg, Kentmaster Manufacturing Co. v. Jarvis Products Corp., 146 F. 3d. 691(9th. Cir. 1998).


Perhaps the most far reaching aspect of California antitrust law is theUnfair Competition Law (“UCL”) found at Section 17200 et seq. of the Bus. & Prof.Code. It defines “unfair competition” as any “unlawful, unfair, or fraudulentbusiness practice “and any unfair, deceptive or misleading advertising plus any actprohibited by Section 17500 et seq. It is not necessary to show scienter or that thedefendant intended to injure anyone. State Farm Fire & Casualty Co. v. SuperiorCourt, 45 Cal. App. 4th 1093, 1102 (1996).

With a series of amendments in 1992, the UCL now applies to a singleact of unfair competition, as well as past and ongoing conduct. The UCL does notreach claims of nonresidents based on transactions occurring outside of California.Norwest Mortgage, Inc. v. Superior Court, 72 Cal.App. 4th 214, 227 (1999). Where,however, the transactions have sufficient interests with California a nationwideclass may be permitted subject to the resolution of choice of law issues. SeeWashington Mutual Bank v. Superior Court, 24 Cal. 4th. 906 (2001)

A. Unlawful, Unfair or Fraudulent Conduct

The “unlawful, unfair or fraudulent” prongs of the UCL include a widerange of conduct. An unlawful business activity includes “anything that canproperly be called a business practice and that at the same time is forbidden bylaw.” Barquis v. Merchants Collection Ass’n, 7 Cal. 3d. 94, 113 (1972). To meet the“unlawful” prong, the person suing under Section 17200 just “borrows” violations


of other laws and treats them as unlawful practices independently actionable underSection 17200. Saunders v. Superior Court, 27 Cal. App. 4th 832 (1994). Any law,civil or criminal, state or federal, can serve as the predicate. State Farm fire andCasualty Co. v. Superior Court, 45 Cal. App. 4th. 1093, 1102-03; Roskind v.Morgan Stanley Dean Witter & Co., 80 Cal. App. 4th 345, 352 (2000). The UCLprovides a remedy even where the underlying statute has no private right of action.Stop Youth Addiction v. Lucky Stores, 17 Cal. 4th. 553, 561-567.

The California Supreme Court has cautioned, however, that the UCL isnot “an all purpose substitute for a tort or contract action.” Korea Supply Co. v.Lockheed Martin Corp., 29 Cal. 4th.1134, 1151 0(2003). Conduct which merelycreates nonstatutory civil liability may not be sufficient to satisfy the unlawfulprong of the UCL. Klein v. Earth Elements, 59 Cal.App. 4th 965 (1997). Likewise, abreach of contract involving only private harm may not be actionable. RosenbluthInt’l v. Superior Court, 101 Cal. App. 4th 1073 (2002). The unlawful prong is notsatisfied where the predicate statute does not define unlawful conduct but merelyentrusts regulation of the conduct to a public agency. Samura v. KaiserFoundation Health Plan, 17 Cal.App.4th 1284, 1299-1302 (1993). If a statute doesnot have explicit language proscribing a particular act, then the unlawful prongcannot be satisfied. California Medical Assn. v. Aetna Healthcare of California,94 Cal. App. 4th. 151 (2002).

Under the UCL, however, lawful conduct may still be “unfair” andthereby actionable. In Cel-Tech Communications v. L.A. Cellular, 20 Cal. 4th 163(1999), the Supreme Court formulated some general standards as to the meaning ofunfair under the UCL. In Cel-Tech, it held that below cost pricing not actionableunder the UPA may constitute “unfair” conduct under the UCL. While the courtconcluded that plaintiff may not bring an action under the UCL if some otherprovision of law bans such a claim, the other provision must actually bar it,however, and not merely fail to allow it. 20 Cal. 4th at 182. See also Schnall v. Hertz,78 Cal. App. 4th. 1144 (2000) (avoidable refueling charge not “unfair” under UCLsince the Civil Code specifically authorized the charges). If no statute providessuch a “safe harbor,” then a court must determine whether the challenged conductis unfair under the following test (20 Cal. 4th at 186):

“When a plaintiff who claims to have suffered injury from a directcompetitor’s ‘unfair’ act or practice under Section 17200, the word‘unfair’ in that Section means conduct that threatens an incipientviolation of an antitrust law, or violates the policy or spirit of one ofthose laws because its effects are comparable to or the same as aviolation of law, or otherwise significantly threatens or harmscompetition.”

In formulating this test, the court criticized as “amorphous” theformulation of unfair conduct in earlier decisions by courts of appeal such as those


in State Farm & Casualty v. Superior Court, 45 Cal. App. 4th 1093 (1996) andPeople v. Casa Blanca Homes, 159 Cal. App. 3d 509 (1954). Casa Blanca, forexample, described “unfair” conduct as conduct that offends public policy, or isimmoral, unethical, oppressive, unscrupulous or substantially injurious toconsumers.

The Cel-Tech court, however, limited this standard for “unfair”conduct to actions by competitors alleging anticompetitive conduct. 20 Cal. 4th at187, n. 12. Subsequent cases have used the Cel-Tech standard to dismisscompetitor claims under the UCL. Carter v. Variflex, 101 F. Supp. 2d. 1261,1270(C.D. Cal. 2000). Courts have continued to apply the broader unfairness test fromcases such as Casa Blanca to consumer actions. Renne v. Servantes, 86 Cal. App.4th. 1081 (2001); Smith v. State Farm Auto Ins. Co., 93 Cal. App. 4th. 700, 720 n. 23(2001); Knevelbaard Dairies v. Kraft Foods, Inc., 232 F. 3d 979, 993 (9th Cir. 2000)(Cel-Tech unfairness test does not apply to action by sellers alleging horizontalprice-fixing); Sun Microsystems v. Microsoft, 87 F. Supp. 2d. 992, 999 (N. D. Cal.2000). One case suggested, however, that the Cel-Tech limitation on the unfairprong should extend to consumer cases. Churchill Village v. General ElectricCompany, 169 F. Supp. 2d. 1119, 1130 n. 10 (stating that the lack of distinctionbetween competitor and consumer actions in the language of the UCL renders Cel-Tech’s definition equally valid in the consumer context).

In Chavez v. Whirlpool Corporation, 93 Cal. App. 4th. 363 (2001),however, the court held that the unfair prong of the UCL did not reach conduct ina consumer action which it concluded as a matter of law was permissible under theCartwright Act. In Chavez, the plaintiff consumer alleged that the minimum resaleprice policy of defendant with respect to its retailers violated the Cartwright Act.Citing U. S. v. Colgate & Co., 250 U. S. 300 (1919) and Monsanto v. Spray-RiteService Corp., 465 U. S. 752 (1984), the court held that there was no unlawfulcombination under the Cartwright Act because the manufacturer only unilaterallyannounced its resale prices in advance and refused to deal with those who failed tocomply. As to the claim that the conduct violated the “unfair” prong of 17200 evenif it was not unlawful, the court held that, although it did not decide whether Cel-Tech applied to consumer actions, “conduct permissible under the Colgatedoctrine cannot be deemed unfair under the unfair competition law.” 93 Cal. App.4th. at 368.

Another possible limitation on the “unfair” prong of the UCL is thatpractices accepted as appropriate by regulatory agencies are not unfair under theUCL. People v. Duz-Mor Diagnostic Lab, 68 Cal. App. 4th.654 (1998). In Duz-Morthe court found that defendant laboratory’s practice of offering discounts tophysicians’ private pay patients was not unfair since the practice was known toand accepted as appropriate by federal and state agencies. Such a practice,concluded the court, could not be said to offend public policy, or be immoral orunethical, since it has agency approval.


The “fraudulent” prong of the UCL does require a showing that thestatement is likely to deceive the public from the standpoint of the reasonableconsumer. Haskell v. Time, Inc., 857 F. Supp. 1392, 1398 (1994). In Lavie v. Proctor& Gamble, 105 Cal. App. 4th. 496 (2003), the court, held that the reasonableconsumer standard applied to UCL claims, and rejected an argument by theAttorney General as amincus curiae, that the “least sophisticated consumer”standard should apply. In doing so, the court held that RTC interpretations of thestandards under its act were persuasive authority under the UCL. 105 Cal. App.4th. at 503. See also Searle v. Wyndham Int’l, 102 Cal. App. 4th. 1327 (2002) (failureof a hotel to tell its patrons that a 17% service charge was actually a gratuity paid tothe server was neither unfair nor fraudulent). Unintentional or accidental conductthat is quickly remedied by the defendant also does not constitute unfair orfraudulent conduct. Klein v. Earth Elements, 59 Cal. App. 4th 965 (1997).

Absent an agency relationship, courts have held there is no vicariousliability under the UCL. Emery v. Visa Int’l Service Assn., 95 Cal. App. 4th. 952(2002) (Visa not liable for a scheme by lottery merchants using the Visa logo sinceit has no relationship with them). Likewise, a court held that an internet auction sitecould not be liable for wrongful activities of its users. Gentry v. eBay, Inc., 99 Cal.App. 4th. 816 (2002).

Despite the broad range of conduct covered by the UCL, however,courts do require a plaintiff alleging a UCL claim to state “with reasonableparticularity the facts supporting the statutory elements of the violation.” Khouryv. Maly’s of California, Inc., 14 Cal.App.4th 612, 618 (1993): Failure to do so mayresult in summary dismissal. Silicon Knights, Inc. v. Crystal Dynamics, Inc., 983 F.Supp. 1303, 1316 (N.D. Cal. 1997) and some courts have sustained demurrers to UCLclaims and dismissed them at the pleading stage. Korea Supply Co. v. LockheedMartin, 29 Cal. 4th. 1134 (2003); Searle v. Wyndham Int’l, 102 Cal. App. 4th. 1327(2002).

B. Standing and Nonclass Representative Actions

Actions for injunctive relief and restitution under the UCL can bebrought by “any person acting for the interests of itself, its members or the generalpublic” (§ 17204), as well as the Attorney General, district attorneys, and certaincity attorneys. Injunctive relief is not, however, a prerequisite to restitution. ABCInt’l Traders, 14 Cal. 4th at 1268-71. Such actions, however, need not be brought asclass actions and this has led to a number of court decisions concerning the natureof these “nonclass” representative actions, particularly as to standing and howdue process safeguards should apply.

Private actions for injunctive relief may be brought even thoughplaintiff was not harmed by the alleged conduct. See, e.g., Stop Youth Addiction v.Lucky Stores, Inc., 17 Cal. 4th 553, 561 (1998). When plaintiff seeks restitution,


however, injury may be required for a plaintiff to have standing to bring arepresentative action on behalf of the public. See, e.g., Kraus v. TrinityBroadcasting, 23 Cal. 4th 116 (2000) (noting that courts have discretion to imposea “competent plaintiff” requirement in representative actions). Lazar v. TransUnion LLC, 195 F.R.D. 665 (C.D. Cal. 2000).

Federal courts have concluded, however, that an individual who hassuffered no injury cannot maintain a UCL claim for either injunctive orrestitutionary relief in federal court. MAI Sys. Corp. v. UIPS, 856 F. Supp. 538, 541(N.D. Cal. 1994). Mangini v. R.J. Reynolds Tobacco Co., 793 F. Supp. 925, 928-30(N.D. Cal. 1992). The rationale of such federal court decisions is that, absent injury,there is no constitutional standing under Article III of the Constitution, and statescannot expand standing to sue in federal court beyond the Article III requirements.

In Rosenbluth Int’l, Inc. v. Superior Court, 101 Cal. App. 4th. 1073(2002), the court held that an individual could not bring a UCL representativeaction on behalf of large, sophisticated corporations who could themselves bringtheir own contract actions to remedy defendants alleged fraud. It held that UCLactions were to protect the public interest in general, and not to remedy privateharm to entities that had direct contracts with the alleged wrongdoers and werecapable of bringing their own actions.

Representative or “private attorney general” actions on behalf of thegeneral public under the UCL also raise special issues with respect to the dueprocess protections afforded defendants and nonparties. Because no class needbe certified, principles of res judicata and collateral estoppel may not apply to barsubsequent actions by other plaintiffs. This raises serious due process concerns,in that defendants could be subject to multiple liability for the same wrong. The resjudicata effect of a judgment entered in a “private attorney general” suit has notbeen definitively addressed. One court reversed a lower court decision awardingrestitution to absent persons holding that it violated the due process rights of bothdefendant and the injured non-parties. Bronco Wine Co. v. Frank A. LogolusoFarms, 214 Cal.App.3d. 699, 720-21 (1989).

In Kraus v. Trinity Management Services, Inc., 23 Cal. 4th 116 (2000),the Supreme Court addressed the due process concerns in a non-classrepresentative action. The Kraus court stated that trial courts have the inherentpower to dismiss representative actions, either because there is a “potential forharm” or because “the action is not one brought by a competent plaintiff . . .,” aconcept analogous to the adequacy of representation or typicality requirements ofa class action. 23 Cal. 4th at 138. The court also pointed out that a defendant couldcondition payment of restitution on the execution of an acknowledgment ofpayment and otherwise present evidence to the court to avoid paying twice. 23Cal.4th at 138-39.


Cortez v. Purolater Air Filter, 23 Cal.4th 163 (2000), a companion caseto Kraus, suggested further procedural protections for defendants in the form ofequitable defenses, such as laches, waiver or estoppel, in assessing theappropriate remedy under the UCL. 23 Cal. 4th at 179-81. Consideration ofequitable defenses, for example, could permit a court to deny relief based on thesame business conduct that was the subject of an earlier action in which defendanthad already paid restitution, thus alleviating some of the due process concernsarising from the risk of multiple liability in non-class representative actions. Thus,while the door is still open to multiple liability in non-class representative action,the Kraus and Cortez decisions provide procedural mechanisms by whichdefendants may protect themselves.

California courts have also shown some reluctance to permit non-class representative actions where proof of liability or injury will vary amongmembers of the public. In South Bay Chevrolet v. General Motors AcceptanceCorp., 72 Cal. App. 4th 861, 894-97 (1999), the court affirmed dismissal of a privateattorney general claim because proof of knowledge of defendant’s practice wouldrequire mini-trials for each of the dealerships. Accord Lazar v. Trans Union LLC,195 F.R.D. 665, 672-74 (C.D. Cal. 2000) (citing Kraus and noting that non-classrepresentative actions should be limited to cases in which the circ*mstances ofindividuals in the proposed class are similar).

C. Monetary Relief Under The UCL

In contrast to the broad liability and lax standing requirements, themonetary remedies under the UCL are limited to restitution and civil penalties.Korea Supply v. Lockheed Martin, 29 Cal. 4th. at 1144 (2003). Traditionalcompensatory and punitive damages are not available to a private plaintiff. Bank ofthe West v. Superior Court, 2 Cal. 4th. 1254, 1266 (1992); Dean Witter Reynolds v.Superior Court, 211 Cal. App. 3d. 758 (1989). Recovery of attorney fees is also notpermitted unless certain public interest standards are satisfied. Notrica v. StateCompensation Ins. Fund, 70 Cal. App. 4th. 911, 954-55 (1999) (permitting recoveryof attorney fees as “private attorney general” under CCP 1021.5 if injunctive reliefconfers a significant benefit on the public). Public law enforcement officials mayimpose civil penalties of up to $2,500 per violation, and $6,000 per violation forintentional violations issued pursuant to Section 17203. Bus. & Prof. Code § 17206,17207.

The distinction between permissible monetary relief under the UCLand impermissible compensatory damages is sometimes difficult to draw. In Cortezv. Purolator Air Filter Prods., 23 Cal. 4th. 163 (2000), discussed infra, the CaliforniaSupreme Court held that the plaintiffs claims for failure to pay overtime wages waspermissible restitutionary relief rather than compensatory damages since theplaintiff had an “ownership interest” in the unpaid wages. By contrast, in KoreaSupply, supra, 29 Cal. 4th. at 1149-50 (2003), the court stated that a claim for a lost


sales commission resembles a claim for damages not permitted by the UCL since itwas not money taken from plaintiff by defendant or in which plaintiff had anownership interest since the lost commission was only a contingent expectancy ofpayment from a third party. Courts also have often found the monetary reliefsought by plaintiffs, such as lost profits, to be impermissible compensatorydamages. MAI Systems Corp. supra, 856 F. Supp. at 542 (damages for lost businessopportunity); Baugh v. CBS, 828 F. Supp. 745, 757-58 (N.D. Cal. 1994) (damages forembarassment and emotional distress).

In Kraus v. Trinity Management Services, Inc., 23 Cal.4th 116 (2000),the California Supreme Court restricted the type of monetary relief available in non-class UCL representative actions. It held that, absent a certified class action, themonetary relief in UCL representative actions is limited to restitution to identifiablevictims who actually suffered a loss as a result of the challenged conduct. 23Cal.4th at 137, 172. Accordingly, in Kraus, the Supreme Court set aside adisgorgement award into a fluid recovery fund.

Kraus and the companion Cortez case also dealt with the nature of therestitution remedy under the UCL. Both cases described the restitution remedy asone limited to the return of money taken from a person who has an ownershipinterest in it. Disgorgement, by contrast said the court, is a broader remedy whichmay compel a defendant to surrender all money or profits obtained from an unfairbusiness practice even though not all is to be restored to the persons from whom itwas obtained. In Kraus and Cortez, the court then went on to limit the monetaryrelief in nonclass representative actions to restitution excluding disgorgement. InKraus the monetary relief authorized was the return of tenant security deposits onapartments, and in Cortez the failure to pay overtime wages mandated by law. Inboth cases the court noted that the plaintiffs, the tenants in Kraus and the unpaidemployees in Cortez, had a property interest in the moneys sought and this meanttheir claims were for restitution, not disgorgement or compensatory damages. 23Cal.4th at 171.

Section 17203 itself also limits monetary relief to that necessary to“restore” funds to the victims and makes no mention of disgorgement. One courtnoted that Section 17203 “operates only to return to a person those measurableamounts which are wrongfully taken by means of an unfair business practice.” Dayv. AT&T, 63 Cal. App. 4th. 325, 338-39 (1998). The “ownership interest” requirementfrom Cortez has also been cited by other courts as the basis to eliminateimpermissible compensatory damage claims. Watson Labs, Inc. v. Rhone-PoulencRorer, Inc., 178 F. Supp. 2d. 1099 (C. D. Cal. 2001) (UCL does not authorizerestitution where the alleged victim was never in possession of the money sought).

In Korea Supply Company v. Lockheed Martin Corporation, 29 Cal.4th. 1134 (2003) the Supreme Court explicitly held that disgorgement apart fromrestitution was not available under the UCL. The plaintiff in Korea Supply was a


broker who represented a company that lost a military hardware sale to the Republicof Korea to the defendant. Plaintiff sought recovery of its lost $30 millioncommission alleging that it was restitution. The court reviewed its Kraus andCortez decisions and the legislative history of the UCL and concluded that the onlymonetary relief authorized under the UCL was restitution to those from whommoney was directly taken or who otherwise have an ownership interest in withheldfunds as in Cortez. Since the defendant had not taken the commission fromplaintiff, and it was merely a “contingent expectancy of payment from a third party”in which plaintiff had no ownership interest, the court concluded that its recoverywas not available under the UCL holding that “nonrestitutionary disgorgement ofprofits is not an available remedy in an individual action under the UCL.”

Thus, it is quite clear from Kraus, Cortez, and Korea Supply that themonetary relief remedies in private individual or nonclass representative actionsunder the UCL are limited to restitution and do not include either disgorgement ordamages. It is likewise clear from prior decisions, as well as this trilogy, that theprohibition on damages also applies to UCL class actions. Although footnote 6 inthe Korea Supply decision notes that the issue of whether its reasoning ondisgorgement applies to class actions is “not before us”, much of the reasoning ofKorea Supply would apply to bar the disgorgement remedy in class actions as well.Cf. Corbett v. Superior Court, 101 Cal. App. 4th. 649 (2002) (a pre-Korea Supplycase concluding that disgorgement was a permissible remedy in a UCL classaction.)

D. Other UCL Defenses

In addition to the equitable defenses suggested by Kraus and Cortez,there are other defenses that may be asserted in UCL actions.

The UCL has a four year statute of limitations. (§ 17208). Cortez heldthis four year statute controls over a shorter limitation periods in the underlyingstatutes. 23 Cal.4th at 178-79. In Stutz Motor Car of America v. Reebok Int’l., Ltd.,909 F. Supp. 1353 (C.D. Cal. 1995), the court held that the UCL limitations statutebegins to run when the cause of action accrues “irrespective of whether plaintiffknew of its accrual, unless plaintiff can successfully invoke the equitable tollingdoctrine.” Id. at 1363.

The primary jurisdiction doctrine may be invoked to stay a UCL claimpending review and comment by an administrative agency. Farmers Ins. Exchangev. Superior Court, 2 Cal. 4th 377 (1992). The primary jurisdiction doctrine mayapply whenever enforcement of a claim requires the resolution of issues whichhave been placed within the special competence of an administrative body. Id. at390. The trial court has discretion to invoke the primary jurisdiction doctrine if it willbenefit from administrative expertise and if such deference will promote the uniformapplication of regulatory laws. Id.


Where the conduct which allegedly violates Section 17200 is subjectto federal law and regulation, there may be preemption. In Lopez v. WashingtonMutual Bank, Inc., 302 F. 3d. 900 (9th. Cir. 2002) the court held that the FederalHome Owner’s Loan Act preempted state claims for unfair competition. Likewise, inPublic Utility District No. 1 v. Snohomish County v. Dynegy Power Marketing,2003 W.L. 261396 (S.D. Cal. 2003), the court held that exclusive jurisdiction by afederal agency over wholesale electricity rates preempted UCL claims. CompareKodadek v. MTV Network, 152 F. 3d 1209, 1212 (9th Cir. 1998) (unfair competitionclaim preempted by copyright laws) with Roskind v. Morgan Stanley Dean Witter& Co., 80 Cal. App. 4th 345, 353 (2000) (no preemption in securities law case).

For regulated industries, such as health, banking or insurance, thecourt may abuse its discretion by granting any relief under Section 17200. SeePeople v. Duz-Mor Diagnostic Lab. Inc., 68 Cal. App. 4th. 654, 662 (1998).Imposing injunctive relief may be “an inappropriate exercise of judicial authority”in cases involving economic policy or highly regulated industries. CaliforniaGrocers Ass’n. v. Bank of America, 22 Cal. App. 4th 205 (1994); Wolfe v. State FarmFire & Casualty Ins. Co., 46 Cal. App. 4th 554 (1996). The courts cannot usurplegislative or regulatory oversight. Samura v. Kaiser Foundation Health Plan, 17Cal.App. 1284, 1299-02 (1993).

E. Advertising

Section 17500 is the key California statute designed to protectconsumers from false or deceptive advertising. It makes it “unlawful for any person[or entity] . . . to make or disseminate . . . by . . . any . . . manner or meanswhatever, including over the Internet, any statement . . . which is untrue ormisleading . . . and which is known, or which by the exercise of reasonable careshould be known, to be untrue or misleading” in connection with the sale ordisposition of goods or services. Both false affirmative misrepresentations andstatements which mislead by omitting material facts are actionable. Ford Dealers’Ass’n. v. The DMV, 32 Cal. 3d 347, 363-64 (1982). Any violation is a misdemeanorpunishable by not more than six months’ imprisonment or a fine not exceeding$2,500 or both. Bus. & Prof. Code § 17500. Injunctive relief and restitution are alsoavailable. Bus. & Prof. Code § 17535.

Unlike common law fraud, Section 17500 does not require anyshowing of intent to defraud, actual deception, reasonable reliance, or damage.See, e.g., Committee on Children’s Television, Inc. v. General Foods Corp., 35 Cal.3d 197, 211 (1983); People v. Cappuccio, Inc., 204 Cal. App. 3d 750 (1988). Instead,the legal standard is the tendency or likelihood of the statement to deceive orconfuse. Fletcher v. Security Pac. Nat’l. Bank, 23 Cal. 3d 442 (1979); Committeeon Children’s Television, Inc., supra, 35 Cal. 3d at 211. Negligent dissemination ofa statement which is untrue or misleading is enough. See, e.g., People v. SuperiorCourt (Forest E. Olsen, Inc.), 96 Cal. App. 3d 181, 195 (1979) (“the injury to


consumers victimized by false or deceptive advertising is no less when it resultsfrom negligence then when knowingly or recklessly made”).

Section 17500 has not been limited to traditional forms of advertising,but has been applied to all presentations related to products or services includingproduct displays, pictures, packaging and oral sales representations made on aone-on-one basis. See, e.g., Chern v. Bank of America, 15 Cal. 3d 866 (1976);People v. Superior Court, 9 Cal. 3d 283 (1973). It also applies to advertising andsolicitations for charitable causes. People v. Orange County Charitable Services,73 Cal. App. 4th 1054 (1999). In Keimer v. Buena Vista Books, Inc., 75 Cal. App. 4th1220 (1999), the court reversed a lower court order sustaining a demurrer. The trialcourt had concluded that the alleged false advertising was protected by the FirstAmendment.

In Kasky v. Nike, 27 Cal. 4th. 939 (2002) cert. granted 71 USLW 3319(2003), however, the California Supreme Court held a media campaign by defendantNike in response to media reports that its workers overseas were exploited insubstandard working conditions was commercial speech subject to regulationunder the unfair competition law. It rejected Nike’s contention that its pressreleases and other public relations documents were entitled to full FirstAmendment protection, reasoning that it was enough that Nike was a businessengaged in selling a product, the intended audience included customers who maypurchase the product, and the content related to the product or to Nike’s businessoperations. The United States Supreme Court has accepted review of this decision.Id.

In determining whether statements are false or misleading, Californiaapplies the “reasonable consumer” test derived from the FTC’s interpretation ofthe Federal Trade Commission Act. Lavie v. Proctor & Gamble, 105 Cal. App. 4th496, 503-06 (2003). Thus, an advertising campaign that “Aleve is gentler to thestomach lining than aspirin” was found to be lawful since it was not likely todeceive reasonable consumers. Id. Where advertising targets a particularlyvulnerable group, such as preschool children, its truthfulness will be measured bythe impact it will likely have on members of that group, not others to whom it wasnot primarily directed. See, e.g., Committee on Children’s Television, Inc., supra,35 Cal. 3d 197 (defendant’s advertising for sugar-filled cereals was targeted atchildren).

Section 17500 applies to any person or entity directly engaged inmaking false or misleading statements or to any employee thereof. Bus. & Prof.Code §§ 17500, 17506. Liability also may be imposed upon those who direct andcontrol the activities of others who make such statements. People v. Toomey, 157Cal. App. 3d 1, 15 (1984). Several appellate decisions had held that those corporatepersonnel with control over the advertising at issue have a duty of care toinvestigate claims made and may be liable even absent any direct knowledge of the


misrepresentations. See, e.g., People v. Dollar Rent-a-Car Systems, 211 Cal. App.3d 119, 132 (1989).


Various affirmative defenses exist to claims under California’santitrust laws. These defenses can be roughly divided into two categories: thosederived from statutes, and those arising from traditional common law principles.

A. Statutory Defenses

1. Public Entities

The prohibitions imposed by the Cartwright Act apply only to“persons.” Bus. & Prof. Code § 16720. A “person” is defined to includecorporations, firms, partnerships and associations. Bus. & Prof. Code § 16702.“Person” does not include municipalities and other political subdivisions.California courts have therefore held that the Cartwright Act does not apply toactions by government bodies. Penn v. City of San Diego, 188 Cal. App. 3d 636,643 (1987); People ex rel. Freitas v. City and County of San Francisco, 92 Cal.App. 3d 913, 921 (1979); Widdows v. Koch, 263 Cal. App. 2d 228, 235 (1968). Yet,while municipalities and political subdivisions cannot be sued as defendants underthe Cartwright Act, they may sue as plaintiffs to enforce the Cartwright Act. Bus. &Prof. Code § 16750; Pacific Gas & Electric Co. v. County of Stanislaus, 16 Cal. 4th1143, 1150 (1997); Freitas, 92 Cal. App. 3d at 920.

Counties and, by analogy, other political subdivisions are not subjectto the Unfair Practices Act. Bus. & Prof. Code § 17021; Community MemorialHospital v. County of Ventura, 50 Cal. App. 4th 199, 209-210 (1996).

Two decisions have dealt with the issue of whether Section 17200applies to government entities. In Trinkle v. California State Lottery, 71 Cal. App.4th 1198 (1999) the court held it did not apply to the California State Lottery. InNotrica v. State Compensation Insurance Fund, 70 Cal. App. 4th 1198 (1999),however, the court held that Section 17200 applied to the defendant since, eventhough it was a public entity, it functioned as a private insurance company. 70 Cal.App. 4th at 944.

2. Filed Rate Doctrine

The federal “filed rate” doctrine precludes damage recoveries whenrates filed or approved with government agencies are challenged as unreasonable.Wegoland, Ltd. v. NYNEX Corp., 27 F. 3d 17 (2d Cir. 1994). California courts arevirtually unanimous in following the doctrine where federal agencies are involved,although one court did reject it where only a state agency was involved. Cellular


Plus, Inc. v. Superior Court, 14 Cal. App. 4th 1224, 1240-44 (1993). See generallyKnevelbaard Dairies v. Kraft Foods, Inc., 232 F. 3d 979, 991-92 (9th Cir. 2000).

The Ninth Circuit has also reaffirmed that rates filed with federaladministrative agencies may not be challenged under the Cartwright Act. Countyof Stanislaus v. Pacific Gas & Electric Co., 114 F. 3d 858, 866 (9th Cir. 1997). InPublic Utility District No. 1 of Snohomish County v. Dynegy Power Marketing,2003 W. L. 261396 (S. D. Cal. 2003) the court dismissed claims under both theCartwright Act and the UCL due to the filed rate doctrine even though defendants’specific prices were not reviewed and approved in advance by a federal agency.The court reasoned that since defendants operated pursuant to market basedtariffs approved by the Federal Energy Regulatory Commission, and those rateswere subject to the exclusive jurisdiction and review by the agency under a “justand reasonable” standard, that the filed rate doctrine applied to bar antitrust claimsbased on allegations that the rates were too high.

Several courts have also dealt with the filed rate doctrine inconnection with false advertising claims under the UCL. In Day v. AT&T, 63 Cal.App. 4th 325 (1998), the court held that UCL claims seeking disgorgement or othermonetary recovery based on the practice of “rounding up” telephone charges tothe next highest minute were barred by the filed rate doctrine although aninjunction barring the false advertising itself was permissible. In Spielhotz v.Superior Court, 86 Cal. App. 4th (2001) the court held the filed rate doctrine did notbar false advertising claims which allegedly failed to disclose gaps or “dead zones”where wireless telephone users are unable to connect calls. It declined to give thebroad interpretation of the filed rate doctrine that defendant derived from Day v.AT&T, emphasizing that the doctrine should be limited to claims that directlychallenge the reasonableness of the approved rates. 86 Cal. App. 4th at 206.

The filed rate doctrine has also been applied to bar civil monetarypenalties sought by the Attorney General under UCL. People ex. rel Lockyer v.Mirant, et al, Case No. C-02-1787 (N. D. Cal. 2003). In Mirant, the Attorney Generalsought to impose monetary penalties on numerous electricity generators based ontheir alleged violations of rules promulgated by the Federal Energy RegulatoryCommission (“FERC”). The court dismissed on preemption grounds, and also heldthe filed rate doctrine barred the claims since the $2500 per day civil penalty claimwould effectively change the rate approved by FERC, which has exclusivejurisdiction over rates and other terms of sale with respect to wholesale electricity.Slip Op. at 27-30.

3. Labor Activities

The Cartwright Act specifically exempts labor from coverage underthe Act. Bus. & Prof. Code § 16703. Accordingly, labor union activities will beexempt from Cartwright Act scrutiny to the extent that the “primary purpose” of the


activity is to obtain a valid labor objective, e.g., collective bargaining, honoringpicket lines, or picketing non-union businesses. See, Los Angeles Pie BakersAss’n v. Bakery Drivers, Local 276, 122 Cal. App. 2d 237, 238 (1953) (collectivebargaining does not violate the Cartwright Act); Schweizer v. Local JointExecutive Board, 121 Cal. App. 2d 45, 53 (1953) (agreement not to cross picket linesdoes not violate the Cartwright Act); Messner v. Journeymen Barbers, Local 256,53 Cal. 2d 873, 886 (1960) (agreement to picket non-union business does not violatethe Cartwright Act).

The labor exception to the Cartwright Act has also been held to applyto non-unionized groups of workers who are seeking higher wages. CaliforniaDental Ass’n v. California Dental Hygienists’ Ass’n, 222 Cal. App. 3d 49, 68-69(1990). In California Dental Ass’n, the court found that an alleged conspiracyamong an informal association of dental hygienists to fix the compensation paid bydentists to hygienists for their services did not violate the Cartwright Act becausethe purpose of the association’s activities was to promote higher overall wages forthe hygienists.

4. The Business of Insurance

While the business of insurance in California is subject to its ownregulatory scheme administered by the Insurance Commissioner, it enjoys nogeneral exemption from the California antitrust laws. Ins. Code § 1861.03(a);Manufacturer’s Life Insurance Co. v. Superior Court, 10 Cal. 4th 257 (1995).California’s Unfair Insurance Practices Act (“UIPA”), set forth at Section 790 etseq. of the Insurance Code prohibits certain unfair methods of competition anddeceptive trade practices. § 790.03. There is no private right of action under theUIPA, and it is administered by the Insurance Commissioner. Moradi-Shalal v.Fireman’s Fund Companies, Inc., 46 Cal. 3d 287 (1988).

In Manufacturer’s Life, supra, the California Supreme carefullyanalyzed the history and relationship between the UIPA and the antitrust statutes.It held that the regulatory scheme of the UIPA did not exempt insurers from liabilityor claims under either the Cartwright Act, the Unfair Practices Act, or the UnfairCompetition Act. Moreover, the Antitrust Guidelines for the Insurance Industrypublished by the California Attorney General in 1990 to implement Proposition 103(which is now codified at §§ 1861 et seq. of the Insurance Code) made it clear thatthe state enforcement authorities will vigorously apply state antitrust laws to theinsurers. In Farmer’s Insurance Exchange v. Superior Court, 2 Cal. 4th 377 (1992),the Supreme Court, however, applied the primary jurisdiction doctrine to stay a UCLclaim against an insurer which involved underlying statutes subject toadministrative regulatory enforcement.

Both the statutes and the Guidelines, however, permit and encouragesome collaborative activities by insurers, both with respect exchanging rate and


claim data as well as joint ventures necessary to offer coverage where it wouldotherwise not exist. Ins. Code § 1861.3(b). While they prohibit price fixing, they dopermit the exchange of historical data on paid claims and reserves. Poolingarrangements to insure the availability of assigned risk coverage is also permitted.Ins. Code § 1861.03(b)(2). So is joint underwriting when a single insurer is unable orunwilling to cover a particular risk. The standardization of policies, however, issubject to the usual antitrust rules, although legislation now provides that it isencouraged so long as it is approved by the commissioner. Ins. Code §§ 1855.4,1855.5. Finally, the Guidelines appear to treat each type of coverage as a separateproduct for purposes of tying analysis.

The filed rate doctrine discussed supra may operate to precludedamage claims when premium rates have been approved by the InsuranceCommissioner. The doctrine has been applied in other jurisdictions to precludedamage claims based on approved insurance rates even where the regulated partyis alleged to have defrauded the regulator in connection with the filing or approvalof the filed rate. Uniforce Temp. Personnel, Inc. v. National Council onCompensation Insurance, Inc., 892 F. Supp. 1503, 1512, n. 10 (S.D. Fla.1995);Wegoland Ltd. v. NYNEX Corp., 27 F. 3d 17, 21 (2d. Cir. 1994).

5. Agriculture

Agricultural cooperative associations organized under California lawenjoy statutory antitrust exemptions. Food & Agri. Code § 54038 provides thatsuch associations are not considered:

“(a) A conspiracy, a combination in restraint oftrade, or an illegal monopoly.

(b) An attempt to lessen competition, to fix pricesarbitrarily, or to create a combination or pool in violationof any law of this state.”

Similarly, marketing contracts between an agricultural cooperativeassociation and its members, or any other agreement authorized by the statutoryscheme governing agricultural cooperative associations, “are not illegal, inrestraint of trade, or contrary to any statute which is enacted against pooling orcombinations.” Food & Agri. Code § 54039.

Acts done in compliance with the California Marketing Act of 1937, ormarketing orders issued pursuant to the Act, cannot be challenged under theCartwright Act, the Unfair Practices Act, the Fair Trade Act, or under “any rule ofstatutory or common law against monopolies or combinations in restraint of trade.”Food & Agri. Code § 58655. Sweeping antitrust immunity also applies to acts donein compliance with orders of California’s various agricultural commissions, such as


the Table Grape Commission (Food & Agri. Code § 65671), the Iceberg LettuceCommission (Food & Agri. Code § 66682), and the Winegrowers Commission(Food & Agri. Code § 74005).

6. Electric Utility Service Areas

Public Utilities Code § 8107 provides a defense against Cartwright Actclaims and any other claims based on statutory or common law rules againstmonopolies or combinations in restraint of trade. Under Section 8107, the defenseapplies upon proof that the act complained of was done in compliance with theprovisions of the Public Utilities Code establishing electric utility service areas, ororders of the CPUC regarding electric utility service areas.

7. Natural Gas Producers

Like activities sanctioned by California agricultural marketingcommissions, acts done by a natural gas producers association organized underCalifornia law do not restrain trade or constitute price fixing. Pub. Util. Code §§3028 and 3029.

8. Professional Associations and Charities

While prior precedent held that the Cartwright Act does not apply tothe professions, in Cianci v. Superior Court, 40 Cal. 3d 903, 925 (1980), theCalifornia Supreme Court overruled that prior precedent, and specifically held thatthe Cartwright Act applies to all businesses, including the professions. In Cianci,the California Supreme Court also held that the Cartwright Act applies to nonprofitoccupations that have a “public service aspect.” This suggests that charitableinstitutions and associations may also be subject to the Cartwright Act.

9. Health Care

While there is no exemption for health care entities, Section 16770 ofthe Business & Professions Code provides that the formation of groups ofproviders (e.g., doctors and hospitals) and purchasing groups for the purpose ofcreating efficient-sized contracting units should be subject to “only those antitrustprohibitions applicable to the conduct of other presumptively legitimateenterprises.” Bus. & Prof. Code § 16770(g). See also, Health & Safety Code§ 1342.6. Where such groups are at least partially integrated and risk sharingoccurs, this has been interpreted to mean that the rule of reason applies.Reynolds v. California Dental Service, 200 Cal. App. 3d 590 (1988) (court held thatdental plan requirements of copayments and that it would not pay dentist morethan “usual fee” for any given service were permissible and affirmed grant ofsummary judgment to defendant).


10. Statute Of Limitations

The Cartwright Act has a four year statute of limitations for both civiland criminal actions. Bus. & Prof. Code §§ 16750.1, 16755(b). If the violation is acontinuing one, the statute does not run. Union Carbide Corp. v. Superior Court,36 Cal. 3d 15, 24-25 (1984). Fraudulent concealment of the violation also tolls therunning of the statute. Id.

B. Common Law Defenses

1. The Noerr-Pennington Doctrine

The federal Noerr-Pennington doctrine provides that there is noantitrust liability under the Sherman Act for efforts to influence government whichare protected by the First Amendment right to petition the government for redressof grievances, even if the motive behind the efforts is anticompetitive. In Blank v.Kirwan, 39 Cal.3d 311, 320 (1985), the California Supreme Court held that the Noerr-Pennington doctrine applies to Cartwright Act claims and that federal decisionsapplying it are persuasive authority under California law.

In Blank, the plaintiff alleged that defendants had conspired tomonopolize the poker industry and exclude plaintiff by persuading the city councilto first legalize the industry and then pass zoning ordinances that made itimpossible for plaintiffs to compete. The California Supreme Court affirmed a lowercourt ruling sustaining demurrers to claims under both the Cartwright Act and theUCL. The Supreme Court held that the Noerr-Pennington doctrine barred suchclaims regardless of the motive or tactics used by defendants to obtain governmentaction. The court reasoned that the First Amendment right to petition appliedequally to state law claims, and that efforts to influence the government cannotproperly be called a “business” act or practice within the meaning of Section 17200of the Business & Professions Code. Accord, Ludwig v. Superior Court, 37 Cal.App. 4th. 8, 21-23 (1995).

An exception to the Noerr-Pennington doctrine arises when efforts toinfluence government are merely a “sham;” such efforts are not protected by theNoerr-Pennington doctrine and are subject to antitrust liability. Blank, 39 Cal. 3dat 321. In Hi-Top Steel Corp. v. Lehrer, 24 Cal. App. 4th 570, 580-81 ( 1994), theCourt of Appeal held that the “sham” exception is applicable under California lawand the California Constitution.

In Ludwig v. Superior Court, supra, 37 Cal. App. 4th at 21-22, theCourt of Appeal adopted the test articulated by the United States Supreme Court inProfessional Real Estate Investors v. Columbia Pictures, 508 U.S. 49 (1993), todetermine whether a particular lawsuit is a “sham.” PRE held that the shamexception did not apply unless the action was objectively baseless and the


subjective motive of defendant was to suppress competition. The objectivelybaseless standard is analogous to that necessary to prevail in a maliciousprosecution action. If the two prong test is PRE is not satisfied, then the lawsuit isimmune under the Noerr-Pennington doctrine.

2. Standing

Bus. & Prof. Code § 16750(a) provides a private right of action to“[a]nyone who is injured in his or her business or property” by a violation of theCartwright Act. This language is identical to the federal statute creating a privatecause of action, and from which federal courts have concluded that standing islimited to those who suffer “antitrust injury,” i.e., the injury must result fromlessened competition, not heightened competition, and is generally limited toconsumers or competitors. Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477(1977). This injury and standing requirement has also been applied to claims underthe Cartwright Act. Morrison v. Viacom, 66 Cal. App. 4th. 534, 548 (1998); Vinci v.Waste Management, 36 Cal. App. 4th. 1811,1814 (1995).

However, despite this close parallel to federal law, one courtconcluded that standing to assert a Cartwright Act violation is broader than federallaw. Cellular Plus, 14 Cal. App. 4th at 1233. The better view is that the antitrustinjury requirement is the same as federal law given the identical statutory language.Knevelbaard Dairies v. Kraft Foods, Inc., 232 F. 3d 979, 991 (9th Cir. 2000) (notingthat, except for indirect purchasers, California standing requirements are same asfederal law).

Other courts have also applied the federal antitrust injury requirementand required that the injury to the plaintiff must flow from the “anticompetitiveaspect” of the defendant’s conduct. In Vinci v. Waste Management, Inc., 36 Cal.App. 4th 1811 (1995), the Court of Appeal held that a plaintiff employee could notsue his former employer under the Cartwright Act for firing him. Id. at 1816.Although the firing allegedly arose from a Cartwright Act conspiracy to engage inpredatory pricing, the court held plaintiff lacked standing because “[t]he injury hesuffered, the loss of his job, was not the type of loss the antitrust statute wasintended to forestall.” Id. at 1816. Accord Morrison v. Viacom, Inc., 66 Cal. App.4th 534, 548 (1998) (plaintiff must show “the type of injury the antitrust laws wereintended to prevent, and which flows from the invidious conduct which rendersdefendants’ acts unlawful”);

3. Primary Jurisdiction

Primary jurisdiction is a judicially created doctrine whereby a courtmay dismiss or stay an action pending resolution of some portion of the action byan administrative agency. Ricci v. Chicago Mercantile Exch., 409 U.S. 289 (1973).In Farmers Ins. Exchange v. Superior Court, 2 Cal. 4th 377 (1992), the court applied


the doctrine to stay a UCL claim pending insurance administrative proceedings,and indicated that a trial court has discretion to invoke it if it will benefit fromadministrative expertise and it will promote uniform application of regulatory laws.In Cellular Plus, however, the Court of Appeal rejected the application of thedoctrine of “primary jurisdiction” to a Cartwright Act claim involving a regulatedindustry, holding that antitrust claims need not first be brought before theadministrative agency charged with regulating that industry. Cellular Plus, 14 Cal.App. 4th at 1246-47.

4. In Pari Delicto

Under the doctrine of in pari delicto, or “equal fault,” a plaintiff maybe barred from recovery if the plaintiff participated in and reaped the benefits of thedefendant’s alleged wrong. The California Supreme Court has held that, in thecontext of a Cartwright Act violation, in pari delicto is not a defense, provided thatthe plaintiff “does not bear equal responsibility for establishing the illegal scheme,or . . . is compelled by economic pressures to accept such an agreement.”Mailand v. Burckle, 20 Cal. 3d 367, 381 (1978). Although it appears no Californiacourt has considered the issue, in pari delicto might apply if the plaintiff did, infact, bear “equal responsibility” for setting up the scheme which constitutes theCartwright Act violation.

5. Unclean Hands

The equitable doctrine of “unclean hands” is not a defense to aninjunction brought to restrain violations of the Cartwright Act. Jomrica, Inc. v.California Mobile Home Dealers Ass’n, 12 Cal. App. 3d 396, 402 (1970).

6. Indirect Purchasers

In Illinois Brick v. Illinois, 431 U.S. 720 (1977), the United StatesSupreme Court held that indirect purchasers who are not in direct privity with thedefendant may not sue for violations of Section 1 of the Sherman Act. Reacting tothe Illinois Brick decision, the California Legislature amended the Cartwright Actin 1978 to allow indirect purchasers to sue for Cartwright Act violations. Bus. &Prof. Code § 16750(a) now provides that a private action

“may be brought by any person who is injured in his orher business or property by reason of anythingforbidden or declared unlawful by this chapter [theCartwright Act], regardless of whether such injuredperson dealt directly or indirectly with the defendant.”

The California Supreme Court has stated that the legislative repudiation of IllinoisBrick creates a “mandate to avoid unnecessary procedural barriers to indirect


purchasers’ prosecution of California antitrust suits. Union Carbide Corp. v.Superior Court, 36 Cal. 3d 15 (1984).

In 1989, the United States Supreme Court held that the federal antitrustlaws do not preempt state laws like Section 16750(a) that permit indirect purchasersto recover for antitrust violations. California v. ARC Am. Corp., 490 U.S. 93 (1989).Where, however, an indirect purchaser’s price fixing in federal court is dismissedon Illinois Brick grounds, such dismissal may operate as a bar to a similar statecourt action under principles of res judicata and collateral estoppel. Boccardo v.Safeway Stores, 134 Cal. App. 3d 1037 (1982).


Section 16754 et seq. of the Business & Professions Code providesthat the Attorney General or district attorney of any county may institute criminalor civil proceedings to enforce the Cartwright Act. This enforcement is ongoingand aggressive, as a substantial portion of the Attorney General’s office and part ofthe larger DA offices are assigned to antitrust enforcement.

Any violation of the Cartwright Act is subject to criminal penalties.Bus. & Prof. Code § 16755(a). In addition to the business entity involved, criminalpenalties may also be imposed on managers, directors, or other employees whoknowingly participate in a violation. Id. The potential criminal penalties includefines up to $1 million for a corporation and $250,000 for individuals andimprisonment up to 3 years. Bus. & Prof. Code § 16755(a)(1) and (2). Althoughcriminal penalties are fairly rare and generally confined to horizontal collusiveactivities, they have been utilized in several cases. Neither the Cartwright Act northe UPA provide for civil monetary penalties (but see Bus. & Prof. Code§ 16755(c)).

The Attorney General may also bring parens patriae actions underBus. & Prof. Code § 16760(a)(1) on behalf of natural persons for monetary reliefsustained by such natural persons to their property by reason of a Cartwright Actviolation. Treble damages are recoverable in these actions. Bus. & Prof. Code§ 16760 (a)(2). Notice is given to members of the group by publication and anindividual may opt out. Bus. & Prof. Code § 16760(b). Damages in parens patriaeactions need not be proved with certainty, and aggregate proof by statistical orsampling methods is permitted. Bus. & Prof. Code § 16760(d).

Likewise, the Attorney General or district attorneys may bring civilactions to recover damages for injury to the state and its political subdivisions.Bus. & Prof. Code § 16750(c). The Attorney General may also serve as the classrepresentative in a class action brought on behalf of political subdivisions, publicagencies, or citizens of the state. Bus. & Prof. Code § 16750(d). As in privateactions, damages are automatically trebled, and prejudgment interest may be


recovered if the court finds it is “just in the circ*mstances.” Uneedus v. CaliforniaShoppers, Inc., 86 Cal. App. 3d 932 (1978); § 16761. The state also may seekinjunctive relief, including such mandatory injunction as may be necessary torestore competition. Bus. & Prof. Code § 16754.7; People v. Mobile Magic Sales,Inc., 96 Cal. App. 3d 1(1979).

The Attorney General also has civil investigative powers under thegeneral provisions of the Government Code (§§ 11180, 11181) and need not firstshow that a violation has probably taken place. Younger v. Jensen, 26 Cal. 3d 397,404(1980). District attorneys have similar powers but must first show a reasonablebelief that there has been a violation of the Cartwright Act, the UPA, or the UCA.Bus. & Prof. Code § 16759.

Finally, a corporation that violates the Cartwright Act runs the risk offorfeiture of corporate rights, and foreign corporations can be prohibited fromdoing business in the state. Bus. & Prof. Code §§ 16752, 16753. These sanctions,however, are rarely used.


Under the Cartwright Act, “[a]ny person who is injured in his or herbusiness or property by reason of anything forbidden or declared unlawful” by theCartwright Act “may sue therefor. . . .” Bus. & Prof. Code § 16750(a). Thus, “theCartwright Act gives a private right to sue for damages and treble damages to eachperson who suffers harm.” Borgeson v. Archer-Daniels Midland Co., 909 F. Supp.709, 717 (C.D. Cal. 1995). The limitations period on Cartwright Act claims is fouryears. Bus. & Prof. Code § 16750.1.

Private plaintiffs may recover treble damages and may securepreliminary and permanent injunctive relief. Bus. & Prof. Code § 16750(a). Once aplaintiff proves actual damages, however, the award of treble damages ismandatory. Uneedus v. California Shoppers, Inc., 86 Cal. App. 3d 932, 942 (1978).Private plaintiffs may also recover prejudgment interest. Bus. & Prof. Code§ 16761. Further, any contract in violation of the Cartwright Act “is absolutely voidand is not enforceable at law or in equity.” Bus. & Prof. Code § 16722.

As discussed supra, the Cartwright Act requires a showing ofBrunswick-type antitrust injury as a standing requirement under Section 16750(a).Knevelbaard Dairies v. Kraft Foods, Inc., 232 F. 3d 979, 991 (9th Cir. 2000);California Dental Assn. v. California Dental Hygenists Assn., 222 Cal. App. 3d 49,61 (1990). Except for indirect purchaser standing discussed supra, however, theantitrust injury requirement under Section 16750 is similar to federal law.Knevelbaard, supra, 232 F. 3d at 989. See also Big Bear Lodging Ass’n. v. SnowSummit, 182 F. 3d 1096, 1103 (9th Cir. 1999) (no antitrust injury where competitorsbenefit from inflated prices).


Private antitrust actions under Section 16750(a) may also be broughtas class actions. Section 382 of the California Code of Civil Procedure is thegoverning statute, and has been interpreted to require predominance of commonquestions, adequacy of representation and other requirements for classcertification similar to Rule 23 of the Federal Rules of Civil Procedure. Rosack v.Volvo of America, 131 Cal. App. 3d 741 (1982). Thus, it is likely that horizontal pricefixing cases will be certified as class actions, whereas other types of Cartwright Actclaims may not be certified. BWI Custom Kitchen v. Owens-Illinois, Inc., 191 Cal.App. 3d 1341 (1987).

In a class action claim based on the Cartwright Act, the claims ofindividual class members may be not aggregated together to meet the $75,000amount in controversy requirement for federal diversity jurisdiction. Borgeson,909 F. Supp. at 718-19. Treble damages under the Cartwright Act do not constitutea “common and undivided” interest belonging to the class as a whole, such that thetreble damages claims could be aggregated for diversity jurisdiction purposes. Id.

A defendant faced with a Cartwright Act claim filed in a Californiastate court may sometimes seek to remove that claim to federal court based on the“artful pleading” doctrine. See, e.g., Salveson v. Western Bankcard Ass’n, 731 F.2d 1423 (9th Cir. 1984). When the removal is based on the fact that the artfullypleaded claim is really a federal antitrust claim, the Ninth Circuit has held thatgenerally removal is not proper. Redwood Theatres, Inc. v. Festival Enterprises,Inc., 908 F. 2d 477, 480 (9th Cir. 1990). By contrast, the Ninth Circuit permits removalwhen state law claims raise issues subject to exclusive federal jurisdiction, byreason of a federal agency regulatory framework or otherwise. Sparta SurgicalCorp. v. National Associatio of Securities Dealers, 159 F. 3d 1209, 1211 (9th Cir.1998); ARCO Environmental Remediation, LLC v. Department of Health andEnvironmental Quality, 213 F. 3d 1108, 1113-14 (9th Cir. 2000). The rationale ofsuch cases is that removal is proper when the claim is necessarily federal incharacter, or the right to relief depends on the resolution of a substantial federalquestion. 213 F. 3d at 113-14.

Arbitration may be a time-efficient and cost-effective way of resolvingcomplex business disputes. While in the past the arbitrability of Cartwright Actclaims was in doubt, recent California authority squarely holds that private partiesmay agree to binding contractual arbitration of Cartwright Act claims.Wolitarsky v. Blue Cross of California, 53 Cal. App. 4th 338, 345 (1997); CrownHomes, Inc. v. Landes, 22 Cal. App. 4th 1273, 1283 (1994).

Private actions and remedies under the Unfair Competition Act arediscussed supra in Section XII.

©2003 Sheppard, Mullin, Richter & Hampton LLP

Disclaimer: Sheppard, Mullin, Richter & Hampton LLP has used its best efforts to ensure the accu-racy of this publication at time of printing. Sheppard, Mullin, Richter & Hampton’s lawyers and itsemployees disclaim liability for any inaccuracies or error that may appear in this publication.

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