Report: CA antitrust law to cost economy $670B, state treasury $9B

SACRAMENTO — A new report estimates a proposed new California law to rewrite the rulebook to greatly expand the number of companies that could be sued for alleged "unfair trade practices" would carry a steep price tag, costing the Golden State an estimated $670 billion in lost economic activity over the next decade and costing state government nearly $9 billion in lost tax revenues.

That warning over the impact of California's proposed new state antitrust law, formally known as Assembly Bill 1776, was delivered in an updated analysis released Aug. 7 by the Computer and Communications Industry Association, a trade group representing the tech companies that power the economy in the San Francisco Bay Area and other parts of California.

"Supporters of AB 1776 often downplay its potential impact," the CCIA wrote in its report. "They describe it as a 'small step' to 'clarify' California antitrust law.

"The bill’s own text tells a much more radical story and threatens the venture capital and startup ecosystem that California policymakers want to keep."

And at the same time, the proposed new law has also drawn a warning from the state's own Department of Finance, which similarly warned the legislation would result in "significant new state costs" that haven't yet been accounted for by state lawmakers, who nonetheless appear to be speeding the controversial legislation toward a final vote.

The California State Senate Appropriations Committee was scheduled to vote on Aug. 13 on the legislation, formally known as Assembly 1776, as part of the committee's so-called suspense calendar hearing. Such suspense hearings are essentially "speed round" hearings in which committee members quickly vote on whether to hold or advance hundreds of bills, without any debate or discussion.

It would mark the likely final stop for the proposed new law before it heads to the full Senate for a vote.

The legislation, known by its supporters as The COMPETE Act, has already passed in the California State Assembly, despite strong and continuously growing opposition to the measure from a broad coalition of California companies, employers, trade associations, and economists.

Opponents have consistently warned that AB 1776 would deal a severe blow to California's economy, as well as the rule of law.

The California Chamber of Commerce, as recently as Aug. 10, warned the proposed new law "would wreak havoc on the Golden State's economy and the tax dollars needed to fund vital government programs."

The core of the opposition to the bill centers on its potential to unleash swarms of new lawsuits against companies of all kinds and sizes, potentially devastating the state's reputation as an incubator for startup tech companies and others.

The CalChamber particularly has warned that the proposed law would slam businesses with a stream of new "frivolous lawsuits," while leaving it to the state's famously plaintiff-friendly courts to sort out the new rules of the game as they go.

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."

AB 1776 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.

During a hearing before the state Senate Judiciary Committee, for instance, Aguiar-Curry said the legislation would be "about making sure the success comes from building the best product, offering the best service, and competing on the merits. It's about making sure that no company, no matter how large, can use its power to shut out others and limit opportunity."

Business groups have consistently warned the legislation would achieve the opposite results, primarily as a result of the combination of a law that makes it far easier to go after companies for alleged anticompetitive actions, and then throws open the courthouse doors to anyone to file such a lawsuit through a so-called "right of private action."

While nearly every state in the U.S. includes a right of private action in their antitrust laws, those laws are almost uniformly in line with the more exacting standards established under federal law and U.S. Supreme Court precedent governing when companies can be sued for alleged anticompetitive behavior.

Opponents have warned that no one can predict the full impact of this legislation at this point, because new and developing legal standards, coupled with a right of private action, will result in plaintiff's lawyers using California courts as a laboratory, of sorts, to test out novel legal theories under which to extract payment from businesses operating in California.

In their new report, the CCIA attempts to place an estimate on the potential damage to California's economy. While they concede that changes to the text of the law have reduced its expected impact, the damage could still be severe.

"... The costs from increased litigation are likely to be enormous, and California senators will have to consider whether the costs exceed the benefits," the CCIA said in its Aug. 7 analysis.

"There has been no official cost-benefit analysis, and no supporters have even bothered to quantify the bill’s supposed benefits."

The CCIA said the new law's burden would be felt most acutely in the startup world.

While the law provides a "narrow exemption" for startups, the CCIA said, it only will function as a defense.

"...That exemption does not prevent a startup from being sued," the CCIA said.

And that could result in startups being forced to dedicate already limited funds to potential legal defense fees, rather than research and development or hiring workers to advance their products and services to market and grow the business, which could in turn serve to limit the willingness of investors to take a gamble on a company that may not generate enough income quickly enough to offset the risk of getting sued.

"Wider outcome ranges mean higher required returns, and higher required returns mean lower valuations today," the CCIA wrote. "In other words, if AB 1776 becomes law, until and unless California courts establish a body of state case law that remains largely consistent with federal case law, the value of startups will start declining immediately..."

All told, the CCIA warned the chilling effect from AB 1776 would conservatively cost the California economy $670 billion in lost economic growth by 2037, and would cost the state nearly $9 billion in lost tax revenue during that time, as well.

The unpredictable economic impact of the legislation also led the California Department of Finance to tell lawmakers that the agency opposed passage of AB 1776.

In a staff analysis published Aug. 3, the Finance Department, which oversees California's state budget, said it could not account for the potential impact on state spending from new lawsuits the state may bring against companies. California has in the past typically partnered with other states and the federal government on such antitrust actions. But since AB 1776 would place California out of step with the standards used by other states and federal regulators, the Finance Department warned that California would be left footing the entire bill for its own actions.

They said "it is unclear" if the state budget "would be able to absorb those costs."

Further, the Finance Department also warned that the state's courts could become sodden with more new antitrust lawsuits, as well.

In a statement that echoed the concerns of the business groups, the Finance Department said, "because this bill allows anti-trust action to be carred out against single firms, it may significantly increase the amount of anti-trust cases filed."

"To the extent that this bill adds to trial courts' caseload, court backlogs may increase and could create pressure on the General Fund to handle the increased caseload," the Finance Department wrote.