An antitrust earthquake is about to happen in California if a bill currently pending in the state legislature becomes law. The aftershock of this new law would instill fear in those thinking to locate or expand businesses in California.
The bill is explicitly designed to be more aggressive against business than any current federal antitrust law. It effectively puts up a billboard on every highway entering the state, “Dear Business: Don’t rely on the federal law that applies in every other state, things will be tougher for you here.”
Last October, Business Insider magazine documented company relocations away from California. Among the largest in recent years are Tesla, Chevron, McKesson, CBRE, Oracle, Charles Schwab, Hewlett Packard Enterprise, and SpaceX. These are all large companies that might be able to spread the cost of lawsuits over a substantial capitalization. Mid-size firms that cannot do so will certainly reconsider headquartering, or even doing business, in California, if it comes with the risk of antitrust lawsuits that don’t exist in other states.
That factor must loom large for smaller companies given that the proposal states that an antitrust plaintiff (who can sue for treble damages) doesn’t even have to show the defendant “has or might achieve a market share or has market power at or above a threshold recognized under [federal law].”
Indeed, the bill doesn’t even require that a court define a relevant market “when there is direct evidence of market power.” That provision declares open season on firms that aren’t large enough to dominate a relevant market. What constitutes “direct evidence” is not specified.
While federal case law has some guidance on that question, the proposed new California law says their state courts are not bound by federal courts’ precedents.
A California television manufacturer who limited a distributor’s sales to the San Jose area was the subject of the major US Supreme Court opinion on this subject in 1977. The Court permitted the restriction in order to allow the television manufacturer to focus its retailer’s attention on competing with other television brands.
Under the new bill, however, the restricted retailer could now argue that it felt “direct effects” from not being able to sell televisions outside of San Jose.
The new law is also internally inconsistent on this point: it holds that “Anticompetitive effects and procompetitive justifications of the challenged conduct shall be evaluated within the same relevant market.” Yet we are told there is no need to delineate a relevant market if direct effects exist.
The California Constitution requires that a bill not be voted on in committee until 30 days after it was introduced. This proposed law was introduced on February 9. The first hearing was held on April 8.
However, the version introduced on February 9 was a mere place-holder; real substance wasn’t shared until March 23, cutting the obligatory waiting period in half. The California Legislature is famous for evading its Constitutional requirement through “gut and replace” amendments. While reprehensible in any instance to short-cut the California Constitution’s requirements, it is particularly dangerous to jam a bill like this, with such potential impact on California’s economy.
The bill should be delayed until next session, to allow for a set of public hearings over the summer, where its effect on small businesses in particular might be considered. The bill has no “urgency clause,” and no evidence of compelling immediacy has been produced by its supporters.
If the political imperatives behind this push won’t allow for that degree of deliberation, then at least one simple amendment should be offered in the legislative committees that remain ahead for this bill: “It shall be a defense to any lawsuit brought under this section that the respondent is too small to have market power.” That addition would go far to soften the threat felt by small businesses that it poses and might deter some of them from following the larger corporations that have relocated their businesses outside of the not-so-golden state.
Business Executive magazine has rated the 50 states every year since 2006 on whether the state is a good place to do business. California has been rated number 50 every one of those years. This bill would go far to help us retain that ignominious ranking.
