United States: Allegations That Defendants Provided Product For "Free" State Claims Under California’s UPA And UCL, Notwithstanding That "Cost" Of Product Was Recouped By Overcharging For Shipping

Bebe Au Lait, LLC v. Mothers Lounge, LLC and Udder Covers, LLC, Case No. 5:13-CV-03035-EJD (N.D. Cal. Sept. 23, 2014)

Plaintiff Bebe Au Lait sells nursing covers.  It was the first company to make and sell, pursuant to patent, a flexible, convex stiffener located across the top of a nursing cover ("udder cover") that can be bent to allow a nursing mother to view a nursing infant, and then returned to its original shape.

Bebe alleged that defendants Mothers Lounge, LLC ("Mothers") and Udder Covers, LLC ("Udder") began marketing "Udder Covers" as "knock offs" of Bebe's nursing cover.  Bebe alleges that the defendants infringed its patent for its RIGIFLEX stiffener, copied its trade dress, and gave away its udder covers free of charge, when certain promotion codes were entered.  It also alleged that the defendants overcharged its customers for shipping.  Bebe alleged that the practice caused it lost profits and reduced its market share.  It brought an action for patent infringement, trade dress infringement, violation of the California Unfair Practices Act, Business and Professions Code §§ 17043 and 17044, and violation of the California Unfair Competition Law, Business and Professions Code § 17200.

After dismissal of the patent infringement claim, defendants Mothers and Udder moved to dismiss the Unfair Practices Act and Unfair Competition Law claims.  Defendants argued that while they were allegedly "giving away" the nursing covers for free, this was more than made up for in its charge to consumers for shipping.  Thus, a "zero" charge for the product, plus "$11.90" for product shipping more than covered the total cost of $7.00 to manufacture and ship the product.

Bebe argued in rejoinder that the $11.90 shipping fee was distinct from the "zero" charge for the nursing cover itself.  As such, it argued that it stated a claim under §17043 because the nursing cover was given away for "free", and plaintiff had suffered injury as a result of the diversion of sales and its loss of market share.

The court agreed, and dismissed the attack on the § 17043 claim.  The court reasoned that the plain meeting of the statute provided for a cause of action if either the defendant sells a product for less than cost, or if the defendant gives away the product for free.  The court held that the common understanding of shipping costs is something additional to the cost of the product.  Accordingly, it would be error to allow the defendants to aggregate the two.  Bebe had alleged that the defendant's purpose was to harm the plaintiff through the diversion of sales, which caused it to suffer injury through lost profits and reduced market share.

Bebe also alleged that the giving away of the udder covers constituted a loss leader prohibition, in violation of Business and Professions Code § 17044.  Section 17044 defines a "loss leader" broadly as an article or product sold at less than cost for the purpose of inducing sales of other products or articles, or where the effect or tendency is to mislead customers, or where the effect is to divert trade from or otherwise injure rivals.  Here, the court found that the allegations were sufficient to state a claim for the diversion of trade from rivals.

Defendants responded with the same arguments urged in attempted dismissal of the § 17043 claims.  Defendants argued that they were not "giving away" the product for free, because the aggregate charge, including the $11.90 for shipping, negated any notion that they were giving the product away.

In dismissing defendant's arguments under § 17044, the court noted that Unfair Practices Act cases focused literally on whether the defendant sold "any article or product" at less than cost.  Under the individual item approach, the invoice cost of a product becomes the benchmark to determine the sales price, and other charges are not to be aggregated.  See Fisherman's Wharf Bay Cruise Corp. v. Superior Court, 114 Cal. App. 4th 309, 326 (2003) (costs of retail and wholesale market segments cannot be aggregated);  but see Western Union Financial Services, Inc. v. First Data Corporation, 20 Cal. App. 4th 1530 (1993) (permissible to aggregate all sales for "average total cost" purposes, to enhance sales against larger rival.)  Thus, the court held that the cost of the product itself is separate from the cost of shipping the product.  In a nutshell, the aggregation of an invoice price of zero cannot be aggregated with shipping costs to negate a viable charge under the Unfair Practices Act.

Finally, the court held that, as the California Unfair Competition Law, Business and Professions Code §17200 prohibits "any unlawful, unfair or fraudulent business act or practice", the UCL could "borrow" the violations of § 17043 and § 17044 to meet the "unlawful" prong charge.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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