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Below Cost Pricing and Loss Leaders

The California Unfair Practices Act, which is found at Section 17000 of the California Business and Professions Code, deals with certain pricing practices, such as charging different prices to competing customers below cost pricing.

Generally, the California Unfair Practices Act prohibits the following types of pricing practices

  • Below cost pricing and loss leaders
  • Locality discrimination
  • Giving secret, unearned discounts or rebates to some purchasers but not others.

Below Cost Sale

According to the Business and Professions Code, it is prohibited selling a product below its cost for the purpose of destroying competition or injuring competitors.

Elements of Below Cost Sale

According to CACI 3301, in case the plaintiff claims that the defendant engaged in unlawful sales below cost he must be able to prove all of the following elements to establish this claim.

  • Defendant offered to sell or sold product or service at a price that was below cost
  • Defendant gave away the product or service
  • By acting unfairly defendant had intention to injure competitors or destroy competition
  • Plaintiff was harmed
  • Defendant’s conduct was a substantial factor in causing harm to the plaintiff

Loss Leaders Sale

Loss leaders are defined as selling below cost with the intention to induce the purchase of other merchandise, divert business from competitors or mislead purchasers.

Elements of Loss Leaders Sale

According to CACI 3302 in case the plaintiff claims that the defendant offered to sell, sold, offered the use of product or service as an unlawful loss leader, he must be able to prove the following elements to establish this claim:

  • Defendant offered to sell, sold or offered the use of product or service at prices that were below its costs
  • Defendant had a purpose to promote, influence, or encourage the purchase of other merchandise from him
  • The offer or sale had a capacity or tendency to mislead or deceive purchasers or potential purchasers
  • The offer or sale took business away from or otherwise injured competitors
  • By acting unfairly defendant had intention to injure competitors or destroy competition
  • Plaintiff was harmed
  • Defendant’s conduct was a substantial factor in harm to the plaintiff causing

Price

According to California Business and Professions Code Section 17049, the word “price” should be read sufficiently broadly to include collateral contracts, special rebates, or any device of any nature whereby such sale below cost is in fact or substance effected.

Cost

According to CACI 3303 “cost” means all costs of doing business, including variable costs that tend to change with sales, such as sales commissions and also fixed costs that don’t tend to change with sales, such as light and heat.

Costs of doing business can include:

  • Labor, including salaries of officers and executives and officers
  • Maintenance of equipment
  • Rent and utilities
  • Interest on loans
  • Licenses, taxes
  • Depreciation
  • Selling cost
  • Delivery costs
  • Insurance
  • Credit losses
  • Advertising costs

Remedies for Unfair Competition

  • Recovery of economic damages
  • Relief to prohibit the illegal and unfair practices.

In unfair competition cases, the plaintiff can’t recover punitive damages.

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