LawFlash

Competitive Hyperbole Leads to Treble Damages? Bay Guardian Decision Lowers the Bar for Below-Cost Pricing in California

August 24, 2010

In Bay Guardian Company v. New Times Media LLC, California’s First District Court of Appeal announced a substantially lower standard for recovering on a below-cost pricing claim under California’s Unfair Practices Act (UPA)1 than plaintiffs face under the federal antitrust laws. While both the federal Sherman Act and California’s UPA require the plaintiff to show below-cost pricing, Bay Guardian holds plaintiff need not — as it must under the Sherman Act — prove the defendant’s ability to recoup its losses. Instead, the UPA requires proof only that the defendant intended to injure its competitor, and that it did.2

The case arose in the newspaper industry in San Francisco. The Bay Guardian and SF Weekly are weekly papers that compete for readers and, relevant here, advertisers. The Bay Guardian alleged that the SF Weekly’s parent, New Times Media, embarked on a scheme to set advertising rates below-cost. Following a five-week trial, a jury awarded the Bay Guardian damages and fees of $6.4 million, for a post-trebling judgment of $16 million. The California Court of Appeal affirmed the judgment in a decision that underlines important differences between California and federal antitrust law. Since the parties had settled after oral argument, but before the appellate court’s decision, there will be no appeal to the California Supreme Court.

Under the Sherman Act, plaintiffs face a high hurdle to recover for predatory pricing. In Brooke Group v. Brown & Williamson Tobacco Corporation, the Supreme Court held that plaintiffs must establish that below-cost pricing was capable of driving rivals from the market and, critically, that the defendant could then sustain monopoly pricing after its competitors’ exit, i.e., that a predatory pricing scheme would allow the defendant to recoup losses suffered while pricing below-cost. This tough standard requires highly speculative and rarely convincing expert testimony. As the court noted, “predatory pricing schemes are rarely tried and even more rarely successful.”

Bay Guardian interprets predatory pricing under California law much differently. Rather than expert testimony about likely effects on competition, Bay Guardian instructs courts to look to evidence of the defendant’s intent, apart from its likely effect. Presumably that would include documentary evidence expressing the defendant’s everyday competitive aspirations.

Although Bay Guardian states the burden of proving a UPA claim imposes a “rigorous task…to prove that the below-cost sales were implemented ‘for the purpose of injuring competitors or destroying competition,” the facts the court recited give significant cause for concern for UPA defendants. In addition to evidence of below-cost pricing for advertising, the plaintiffs relied on testimony that in 1995, shortly after its acquisition of the Bay Guardian’s competitor the SF Weekly, a New Times Media executive editor announced at a staff meeting that “he wanted ‘the SF Weekly to be the only game in town’,” that the New Times Media’s “deep pockets” would allow aggressive competition and “guerilla tactics,” and that “he wanted ‘to put the Bay Guardian out of business’.” This kind of hyperbole hardly seems remarkable in a competitive market.

In another dramatic departure from federal antitrust precedent, Bay Guardian holds the UPA “does not require an anticompetitive impact.” The court found that the UPA’s intent to enforce “fair and honest competition” and protect “smaller, independent retailers…against unfair competitive practices of the large chain stores,” differs from the Sherman Act’s, and even the Robinson-Patman Act’s, goals of encouraging price competition.3 As a result, the court said, a plaintiff need not “await success” in the below-cost pricing scheme before asserting a claim.

The court’s analysis of the actual competitive effects showed that from 1995 to 2007 New Times Media lost money on its competitive offerings against the Bay Guardian in all but two years. Other evidence the court recited showed that New Times Media intended to “slowly increase [its] rates over time” after establishing a “critical mass” of advertisers. At the same time, the Bay Guardian increased its advertising revenues for the first six years of the alleged scheme. It only began losing revenue after the “dot-com bust in the San Francisco Bay Area” and increasing competition from other sources, including Internet providers like Craigslist.com. Relying both on those facts and the evidence of New Times Media’s intent, the court upheld a $16 million verdict against New Times Media in an industry where each party earned only $4.5 million in advertising revenue in 2007.

This evidence highlights the difficulty the Bay Guardian decision may cause defendants. The nature of competition is to want to win — to beat the competitor. But loose talk and hyperbole in staff meetings, PowerPoints, e-mails or elsewhere, when coupled with evidence of pricing below “fully allocated” cost, may now lead to treble damages under the UPA, regardless of any actual impact on competition or consumers. Firms competing in California should take steps to increase awareness of such competitive hyperbole and effectively train employees not to use it — a tall order.

 

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Leiv Blad


1 The Unfair Practices Act, Business & Professions Code § 17000, et seq., is also referred to as the Unfair Business Practices Act and the Unfair Competition Act.

2 The court also held that the requisite intent may be inferred from evidence that a competitor was harmed.

3 The court distinguished the UPA from California’s Cartwright Act, which shares “common philosophies” with the Sherman Act and Robinson-Patman Act. The federal laws “are often valuable” when interpreting the Cartwright Act.

4 Although not discussed in the opinion, yet another significant difference between federal and California law is that California’s measure of cost is “fully allocated” or “average total” cost, rather than marginal or “average variable” cost. The idea that firms should price above “fully allocated” cost is quite foreign to both businesspersons and any antitrust economist, not to mention extremely difficult to comply with in practice.

This article was originally published by Bingham McCutchen LLP.