California state welcome sign
SACRAMENTO — California Democratic state lawmakers have advanced sweeping changes to the state's antitrust law, tossing aside more than a century of legal precedent and threatening an avalanche of new lawsuits and regulatory actions against employers, innovators and other companies from throughout the U.S., not just those based in the Golden State.
On May 27, the Democratic supermajority in the California State Assembly passed the legislation, formally known as Assembly Bill 1776, by a 44-17 party line vote.
Nineteen Assembly members did not vote on the measure.
The legislation will next advance to the California State Senate, where Democrats also hold a 30-10 supermajority.
The Assembly's passage of the measure, which is known by supporters as the COMPETE Act, came over outspoken opposition from business groups and others, who warn the legislation would deal a severe blow to California's economy, as well as the rule of law.
Following the Assembly vote, for instance, the California Chamber of Commerce issued a statement warning the measure will force businesses operating in California to face a stream of "frivolous lawsuits," while leaving it to the state's famously plaintiff-friendly courts to sort out the new rules as they go.
"AB 1776 fails one of the basic tests of any good bill: It offers no clear, objective standard on how a business can comply with the law," the California Chamber said in its statement.
"Far too many provisions of the bill rely on subjective standards that can only be defined through litigation – a crippling cost for businesses that are the heart and soul of California’s innovation economy.
“Without objective standards, AB 1776 will create a chill to the pro-competition conduct of startup firms and the service providers on whom they rely."
Should it become law, AB 1776 would greatly expand the ability of both state regulators and trial lawyers to pursue antitrust actions against businesses under California's state antitrust law known as the Cartwright Act.
Currently, the Cartwright Act permits antitrust lawsuits only in cases in which two or more companies or people work together to restrict economic competition.
However, the new law would change the definition of antitrust conduct to include so-called single firm conduct.
But AB1776 would go much further still. The legislation would explicitly decouple California state antitrust law from its federal counterpart, the Sherman Act, and require courts to all but reject more than 100 years of U.S. legal precedent governing how to apply antitrust law.
The legislation specifically notes that "interpretations of federal antitrust laws are at most instructive..."
The new legislation allows lawsuits against companies accused of so-called "restraint of trade."
AB1776 includes a section identifying categories of conduct that “may constitute evidence” of anticompetitive conduct, but none of which the law says are required to demonstrate a violation of the Cartwright Act.
The categories that "may constitute evidence" include claims that a defendant business “has or might achieve a market share or has market power” at or above levels required to find a violation of the Sherman Act.
These changes would create massive legal uncertainty for companies operating in California — not just those based in California — and potentially massively drive up litigation costs by significantly lowering the standards of evidence needed to maintain a Cartwright Act violation claim.
The new law, for instance, would allow state regulators and trial lawyers to bring antitrust actions in court for supposed monopolistic actions against companies with market shares as low as 20-30 percent, not only those operating as traditionally defined monopolies that dominate a particular market.
Further, the legislation specifically calls for the use of subjective "qualitative evidence," not just quantifiable facts and data to demonstrate if a business had violated the state's rules for business competition.
The legislation means either the state or private plaintiffs may no longer need to meet current standards for antitrust claims, including defining a relevant market when relying on direct evidence of market power or measuring market shares when relying on indirect evidence of market power.
The legislation has drawn backing from much of California's Democratic progressive establishment, notably including labor unions, so-called consumer advocates, trial lawyers and left-wing activist and anti-corporate business groups.
The measure was introduced by Assembly Majority Leader Cecilia Aguiar-Curry, D-Winters.
She and other supporters have claimed the measure is needed to address economic consolidation and to restrain large corporate interests, which they claim is needed to address concerns related to "affordability" in the state.
Following the Assembly vote, the group known as the American Economic Liberties Project praised the passage of AB 1776.
The AELP is funded largely through the Omidyar Network, which is in turn funded by French-born Iranian-American billionaire and large Democratic Party donor, Pierre Omidyar, the founder of eBay.
AELP's senior legal counsel Lee Hepner called AB 1776 "a consensus-driven effort to fortify state law against the threat of monopoly power."
"California is the closest it has been in a quarter century to closing a loophole that has shielded the state's largest corporations for actions that drive up prices, depress wages, and restrict business innovation," Hepner said in statements posted to social media.
Opponents of the measure, however, say it is the changes proposed in AB 1776 that would ultimately lead to those economic and societal harms.
They particularly noted the prospect of wide-open legal interpretations in the face of massive lawsuit risks will cost the California economy trillions of dollars in years to come, while destroying millions of jobs by pushing companies out of the Golden State and causing businesses to pull back on research and other beneficial projects for fear of triggering antitrust actions.
The pharmaceutical advocacy group, California Life Sciences, for instance, has said AB 1776 will lead to the reduction in clinical trials for medicine, health equity programs and patient assistance programs, which provide free or steeply discounted medicines and health care services — programs which rely on exclusive arrangements.
And the Computer and Communications Industry Association has estimated AB 1776 would cost California's economy $67 billion and 180,000 jobs in its first year.
In its analysis, the CCIA warned that in a decade the changes to the law would cost the state about "$1,000 billion" ($1 trillion) and 1.6 million jobs.
While supporters have claimed the Cartwright Act revisions are modeled after New York's "21st Century" state antitrust reforms, the CCIA says the California legislation would go far beyond New York's changes, and would inflict 1.4 times the economic harm as New York's law, "owing to more aggressive features of AB 1776 such as the absence of any market-share threshold and the prohibition on cross-market balancing."
The CCIA further noted the legislation "comes at a time when California is already losing major employers to states with more favorable regulatory and tax environments," notably including Texas.
Since 2018, the San Francisco Bay Area alone has lost 156 corporate headquarters, including some of its most high profile companies, such as Oracle, Tesla, SpaceX, Hewlett Packard and others to Texas.
"Against this backdrop, a policy that deters investment, chills procompetitive business practices, and encourages firms to relocate operations to jurisdictions with more predictable legal frameworks would compound an already precarious fiscal situation," the CCIA said in its report. "The businesses most directly affected, including technology companies and digital services providers, are precisely the employers whose income and payroll tax contributions have been propping up the state's budget in recent years.
"Undermining the conditions that keep these firms in California would jeopardize not only the jobs they provide but the tax revenue on which millions of Californians depend."
Jay Brown contributed to this report.
