Retailers have been highly attuned to price-gouging laws triggered by the COVID-19 pandemic. But as things return to some semblance of normalcy, retailers should also consider the other end of the antitrust spectrum: below-cost pricing and the potential liability that comes with it.
Below-Cost Pricing Statutes
Below-cost pricing generally occurs when a seller’s prices to consumers are less than the seller’s cost of doing business. Below-cost pricing is typically addressed at the state level; there is no federal below-cost pricing statute (though below-cost pricing can constitute an antitrust violation under the Sherman Act, which prohibits, among other things, actual or attempted monopolization through “predatory pricing”). Most states have enacted some type of below-cost pricing law. Many states’ statutes often apply broadly to all retail sales, but several states have also carved out below-cost pricing statutes for specific items, including dairy, eggs, alcohol, gasoline and tobacco.
But what is required to establish a below-cost pricing violation differs across states. For example, Minnesota requires that the below-cost pricing have the intent or effect of injuring competition. Others, like California, require that below-cost pricing have the purpose of injuring competitors or destroying competition. Still others, like Arkansas, require the below-cost pricing to injure competitors and destroy competition.
States also take varied approaches toward whether, and under what circumstances, a retailer can assert defenses to a below-cost pricing violation. For example, California, Tennessee and Wisconsin allow retailers to assert a meeting-competition defense, which allows a retailer to lower its price to meet the legal price of a competitor selling the same, similar or comparable product. However, several states require that this defense be done in good faith and have held the defense is invalid if the retailer knows or believes that its competitor has set an illegal price (i.e., below-cost).
Most states provide for both criminal and civil penalties for below-cost pricing violations. Most states also allow private lawsuits for actual damages, with some states explicitly allowing treble damages. Many states also allow their attorneys general to bring enforcement actions. Enforcement in recent decades has been fairly low, with the exception of California, Hawaii, Michigan and Wisconsin.
Example: The Fictional Grocer
To demonstrate how a below-cost price violation may play out, let’s take the fictional The Grocer, which we’ll say is a midsize retailer in San Francisco. The Grocer was careful about not raising prices during California’s and San Francisco’s various states of emergency to avoid complaints of price gouging. However, as California opens back up, The Grocer hopes to drive additional business into its store and away from competitors by selling a number of still hard-to-find items below cost, including hand sanitizer, disinfecting wipes and toilet paper.
California’s below-cost statute makes it illegal to sell any article or product at less than cost, or to give away any article or product, for the purpose of injuring competitors or destroying competition. After losing sales because of The Grocer’s pricing, the competitor down the street sued The Grocer. Under California law, evidence of one or more acts of selling or giving away any product below cost, together with proof of injury to a competitor or competition, is presumptive evidence of intent to injure. California courts have previously found injury based on a mere diversion of sales from one retailer to another and awarded treble damages.
Although California allows for the meeting-competition defense when a seller, in good faith, meets the legal price of a competitor selling the same, similar or comparable product, The Grocer was not acting to meet competition when it lowered its prices. The Grocer may have unknowingly violated California’s below-cost pricing statute.
Avoiding Below-Cost Pricing Violations
Businesses should be mindful that if they sell or consider selling goods below cost, they may be vulnerable to below-cost pricing enforcement actions or lawsuits. Large retailers should be particularly mindful because the effect of injuring competition, which is required by a number of states’ below-cost pricing statutes, may be exacerbated by the effects of the pandemic on small businesses. The specific laws governing below-cost pricing vary by state, with important distinctions in required elements and potential defenses. For this reason, businesses that believe they are victims of below-cost pricing by competitors, or that are selling or intend to sell specific goods at or below cost, would be wise to consult with counsel experienced in this area.