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.