California State Capitol, Sacramento
SACRAMENTO — California Democrats are pushing ahead with legislation to dramatically overhaul California's antitrust law, over protests and warnings from business leaders and other observers that the new law would massively empower trial lawyers to drag companies from all over the Golden State and the U.S. into California courts to extract payouts.
On April 7, the California State Assembly's Judiciary Committee advanced the so-called COMPETE Act out of committee on a party-line vote. All nine Democrats on the committee voted to approve the bill as amended. The committee's only three Republicans voted against it.
The legislation, formally docketed as AB1776, was introduced by Assembly Majority Leader Ceclilia Aguiar-Curry, D-Winters. The legislation follows the recommendations in a report issued by the California Law Revision Commission, seeking expansion of the Cartwright Act to cover so-called single-firm conduct.
Unlike its federal counterpart, the Sherman Act, and the antitrust laws of most other states, the Cartwright Act applies only to “a combination of capital, skill or acts by two or more persons.” Conduct by one company does not violate the Cartwright Act, though it may violate other California unfair competition laws.
The original bill would have expanded the law’s reach by simply changing the phrase “two or more persons” to “one or more persons.” All other provisions of the law would have remained the same.
That approach was abandoned, however, when an amended bill was filed in late March to add four new sections to the Cartwright Act, each aimed at rejecting precedent developed over the course of the last century under the federal Sherman Act.
During the hearing, Aguiar-Curry asserted AB1776 is needed to combat the growing consolidation of corporate economic power in California. She noted that, within her district, small businesses struggle to compete against larger retailers and manufacturers.
The antitrust laws of 45 other states currently cover single-firm conduct, Aguiar-Curry noted, suggesting the bill would bring California in line with these states.
In testimony, supporters of the legislation claimed the lengthy new sections added to address single-firm conduct still don't involve "radical changes" and don't penalize companies based solely on their size.
Abiel Garcia, a plaintiffs' antitrust lawyer from the firm of Kesselman Brantly Stockinger, testified in favor of the proposed new law. Garcia's firm has boasted of bringing antitrust lawsuits on behalf of a specialty pharmacy against a pharmacy benefits manager, opt-out health care companies against generic pharmaceutical companies and a health care provider against a health care product manufacturer, among others.
He was joined in support by Biana Blomquist, of the organization known as the Small Business Majority, which describes itself as a "national small business advocacy organization" and lobbies for policies to restrain large corporate interests, among other goals.
The bill also registered support from several labor unions, including the Teamsters California, California Federal of Labor Unions and SEIU California, and lawyer groups, like the California District Attorneys Association and the Consumer Attorneys of California.
The California Chamber of Commerce, represented by Crowell & Moring attorney Eric Enson, provided testimony opposing the bill. A number of other state and local business groups also opposed the bill.
The California Chamber said they were particularly troubled by the bill’s inclusion of a provision allowing legal actions against businesses under the concept of a single-firm “restraint of trade.”
Enson said such a concept has never before been interpreted by a court, and would come on top of the law's overall rejection of many longstanding legal standards governing how courts evaluate the competitive effects of single-firm conduct. Those standards have been developed by courts, including the U.S. Supreme Court, through a century of proceedings interpreting the Sherman Act.
The amended bill includes a new section identifying 10 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, the opponents argued, would create massive legal uncertainty for companies operating in California — not just those based in the state — and potentially massively drive up litigation costs by significantly lowering the standards of evidence needed to maintain a Cartwright Act violation claim.
In response, Garcia, supporting the bill, seemed to concede that point when he said the point of the COMPETE Act is to force businesses that have market power to “play fair.” To do this, he said the law needed to be able to reach companies with market shares as low as 20 to 30 percent, not just those operating as traditionally defined monopolies.
Assemblywoman Diane Dixon, R-Newport Beach, expressed concern that the COMPETE Act signals “in neon lights” that the state is going after the likes of Amazon and that California is “not open for business.”
A study issued on April 6 by the Computer & Communications Industry Association Research Center, for instance, estimates that the COMPETE Act could cost the California economy $67 billion in the first year alone and about $1 trillion over 10 years. Employment losses could amount to 180,000 full-time jobs in the first year and 1.6 million over the following decade.
“Who’s going to benefit?” Dixon asked. “Consumer lawyers are the ones who will benefit.”
Assemblywoman Kate Sanchez, R-Rancho Santa Margarita, also criticized the bill, describing it as the largest expansion of antitrust law in the U.S.
Sanchez noted California Attorney General Rob Bonta is already very active in antitrust enforcement, and ranks among the most experienced AG offices in pursuing antitrust claims under existing law.
Even some of the Democrats on the Committee expressed their concern with the breadth of the COMPETE Act’s changes.
Assembly Member Blanca Pacheco, D-Downey, highlighted that the law could insert ambiguity into antitrust enforcement in California by the removal of the federal antitrust standards.
Likewise, Assembly Member Rick Chavez Zbur, D-Los Angeles, expressed nervousness about the “laundry list” of conduct the COMPETE Act says California courts would no longer have to consider in a Cartwright Act case.
He gave a hypothetical of Target giving its store-branded products preferred placement on its shelves over competing products. This, he noted, would not sustain an antitrust lawsuit under federal law, but might under the COMPETE Act as proposed, raising significant lawsuit risks for larger retailers.
Despite these concerns, Pacheco and Chavez Zbur still joined their Democratic colleagues in voting 9-3 to recommend approval of the COMPETE Act as amended.
The bill heads next to the Appropriations Committee for further hearings.
Jonathan Bilyk contributed to this report.
