United States: Cross Subsidization For Purpose Of Enhanced Grocery Sales Through Alleged Below Cost Gasoline Discounts Found Not To Violate California Unfair Practices Act

Injury to competing retail fuel stations is non-actionable where market conditions demonstrate that an "incipient antitrust violation" is not imminent. Dixon Gas Club LLC v. Safeway Inc., Case No. A139283 (Court of Appeal 1st Dist. July 20, 2015) (not for publication).

Dixon Gas Club LLC brought an action against defendant Safeway Inc. under the California Unfair Practices Act and Unfair Competition Law. To enhance its supermarket grocery sales, Safeway granted its grocery customers discounts at retail service stations with whom it had discount contracts. It thus rewarded purchasers of its grocery products with cents-off on their fuel purchases. The discount resulted in fuel sales to grocery customers that were below "total cost." The trial court dismissed the claims and the Court of Appeal (First Appellate District) affirmed, in a not-for-publication opinion.

Plaintiff Dixon filed an action alleging violations of California Business and Professions Code sections 17043 and 17045. Section 17043 provides, in relevant part:

It is unlawful for any person engaged in business within this State to sell any article or product at less than the cost thereof to such a vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition.

Section 17044 provides in relevant part:

It is unlawful for any person engaged in business within this State to sell or use any article or product as a "loss leader" as defined in . . . this chapter.

Dixon's complaint also alleged violations of the California Unfair Competition Law (UCL), Business and Professions Code Section 17200.

Much has been written as to the legislative and judicial history of the UCL. Most commentators have argued that it is designed to protect both consumers and businesses from "unlawful, unfair or fraudulent business acts or practices and unfair, deceptive, untrue or misleading advertising." The UCL is expansive in its application, as intentionally framed in its broad, sweeping language, precisely to enable judicial tribunals to address the innumerable "new schemes which the fertility of man's invention would contrive". 1 Its purpose has been said to protect consumers and competitors by promoting fair competition in markets for goods and services, extending to the entire consuming public protection traditionally afforded only to business competitors.2 As a strict liability statute, it has not been necessary under the UCL to show that a defendant "intended" to injure anyone.3The UCL was added to the California Business and Professions Code in 1997, to immediately follow the Unfair Practices Act. The California Supreme Court has stated that the UCL's intended breadth was such that (at least through its earliest years) "whenever the legislature has acted to amend the UCL, it has done so only to expand its scope, never to narrow it.4
However, a good argument can be made that by embracing more modern economic theory of the purpose of antitrust law to prevent against monopolistic practices that would raise price and reduce output, and thus retransfer economic rents from consumers to producers, the California courts may have subverted or at least sidetracked this "purpose". Thus, the California Supreme Court, in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.5 may have turned the statute on its head, and turned its back on disadvantaged consumers and smaller, and arguably less efficient, competitors. An "incipient violation of an Antitrust law" is a sine qua non to a finding of Section 17200 "unfairness".

After a bench trial, the Dixon trial court dismissed the action. It held that there was no evidence that the "purpose" rather than the "intent" of Safeway was to injure competitors and destroy competition. Absent such a "purpose", it was immaterial that it would seem intuitive that the granting of fuel saving discounts to customers of Safeway's food markets would tend to cannibalize fuel sales that would otherwise have gone to smaller competing retail service stations in the area. This was of no moment, as the court found that the "purpose" of Safeway's discount fuel program was to enhance its sales of groceries. It did not matter that the cross-subsidization would "injure" smaller competitors in the retail fuel service station market, where the "purpose"of Safeway's below cost selling was to enhance its grocery business.6 The court was careful to note that during the relevant time period, there were at least eleven, if not more, retail fuel stations operating in the same general area. In essence, it found that the relevant market was competitive, that barriers to entry were low, and that there had been a history of actual entry. In addition, other competing supermarkets had comparable promotions in place with contract fuel stations. Internal Safeway documents, verified by Safeway witnesses, referenced that the "goal" or "purpose" of Safeway's fuel business program was to "help maximize traffic in the main store, not necessarily to maximize revenue per gallon of gas sold." Thus, as the "purpose" was to maximize profits for its core business, and not to injure competitors or competition, the seemingly intuitive result that smaller marginal competitors would necessarily be injured through the loss of sales opportunities and actual sales was immaterial. "Purpose" means "purpose", and does not mean "intent".

Next, the Court had to determine whether, notwithstanding that Safeway could not be held liable for practices under either Section 17043 or 17044, it had nevertheless engaged in a practice that was "unfair" within the meaning of the UCL. The court held that anecdotal evidence that Safeway's below-cost sales harmed its smaller fuel station "competitors" was not evidence of the species of competitive harm for which a business may be held liable under the "unfair" prong of the UCL. This, of course, was on the authority of Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.7 In Cel-Tech, the California Supreme Court held that:

When a plaintiff who claims to have to have suffered injury from a direct competitor's "unfair" act or practice invokes Sections 17200, the word "unfair" in that section means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those law because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or hides competition.8

The Court explained:

Courts must be careful not to make economic decisions or prevent vigorous, but fair, competitive strategies that all companies are free to meet or counter with their own strategies.9

As stated by Ninth Circuit Court of Appeals Chief Judge Kozinski in Freeman v. San Diego Association of Realtors:10

Inefficiency is precisely what the market aims to weed out. The Sherman Act, to put it bluntly, contemplates some roadkill on the turnpike to Efficiencyville.

Thus, the Dixon court found no "incipient antitrust violation". The evidence tended to show that the relevant geographic market for fuel sales was healthy and competitive, with relatively low barriers to entry. The court found that the evidence tended to disprove plaintiff's theory that Safeway's below-cost pricing was stifling robust competition. The court concluded:

Pricing practices are not unfair merely because a competitor may not be able to compete against them. Low prices often benefit consumers and may be the very essence of competition.

Footnotes

1 Barquis v. Merch's Collection Ass'n of Oakland, Inc., 7 Cal. 3d 94, 112 (1972).

2 See id.

3 See Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998).

4 Stop Youth Addiction, 17 Cal. 4th at 570.

5 20 Cal. 4th 163 (1999).

6 Not at issue was whether it would be appropriate to consider Safeway's sales as not "below cost" when its profitable grocery sale margins were combined with the below-acquisition price of its fuel sales. Compare Fisherman's Wharf Bay Cruise Corp. v. Superior Court, 114 Cal. App. 4th 309 (2003) with Western Union Fin. Servs., Inc. v. First Data Corp., 20 Cal. App. 4th 1530 (1993). Fisherman's Wharf refused to permit the averaging of sales across product lines, where Western Union allowed the averaging of above and below cost sales through time for a unitary service.

7 28 Cal. 4th 163 (1999).

8 Cel-Tech at 187.

9 Id. at 185.

10 322 F. 3d 1133 (2003).

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