G.H.I.I. v. MTS, Inc.

• Decision Date: 23 September 1983
• Parties: , 41 A.L.R.4th 653, 1983-2 Trade Cases P 65,688 G.H.I.I. et al., Plaintiffs and Appellants, v. MTS, INCORPORATED et al., Defendants and Respondents. AO 14321.
• Court: California Court of Appeals Court of Appeals

Page 211

195 Cal.Rptr. 211

147 Cal.App.3d 256, 41 A.L.R.4th 653,

1983-2 Trade Cases P 65,688

G.H.I.I. et al., Plaintiffs and Appellants, v. MTS, INCORPORATED et al., Defendants and Respondents.

AO 14321.

Court of Appeal, First District, Division 1, California.

Sept. 23, 1983.

Hearing Denied Dec. 28, 1983.

Lawrence Alioto, John F. Shirley, San Francisco, for plaintiffs and appellants.

Melvin R. Goldman, Jack W. Londen, Morrison & Foerster, San Francisco, for MTS and Tower.

Pettit & Martin, Robert L. Maines, G. Christopher Ritter, Samuel Wong, San Francisco, for Record Factory.

Mitchell, Silberberg & Knupp, Roy L. Shults, Judith N. Levy, Seth H. Katz, Los Angeles, for Integrity.

NEWSOM, Associate Justice.

The present appeal follows the sustaining without leave to amend of demurrers to 14 causes of action alleging antitrust violations under California state statutes.

Appellants are a closely-held corporation doing business as a retail tape and record store under the name of G.H.I.I., its predecessor partnership Gramaphone, and two individuals who own and manage the corporation.

On January 15, 1980, appellants filed a complaint alleging antitrust and unfair business practices against respondents which are three large retail record enterprises doing business in Northern California: MTS, Incorporated, which operates Tower Record Stores (hereinafter Tower) ¹; The Record Factory, Inc. (hereinafter Record Factory), operator of the Record Factory Stores; and Integrity Entertainment Corp. (hereinafter Integrity), controlling entity of the Wherehouse Record Stores. Mentioned as co-conspirators in the antitrust causes of action, but not sued as defendants, are the seven largest national sellers of records and tapes: C.B.S., Inc.; R.C.A.; Warner (Elektra) Atlantic; Capitol Records, Inc.; Polygram Distribution, Inc.; M.C.A. Distributing Corp.; and A.B.C. Records, Inc.

After demurrers were twice sustained with leave to amend, appellant filed a third amended complaint which is at issue in this appeal.

The third amended complaint (hereinafter the complaint), contains a total of 14 causes of action against the three respondents: Counts 1, 6 and 10 allege Cartwright Act violations (Bus. & Prof.Code, §§ 16720 and 16726); Counts 2, 9 and 11 charge respondents with accepting secret rebates (Bus. & Prof.Code, § 17045); Counts 3 and 12 accuse Tower and Integrity of practicing "locality discrimination" (Bus. & Prof.Code, § 17040); Counts 4, 7 and 13 allege "sales below cost" Bus. & Prof.Code, § 17043); and Counts 5, 8 and 14 charge respondents with using "loss leaders" (Bus. & Prof.Code, § 17044). ²

The Cartwright Act causes of action allege, in summary, the following: because of their prominent position and resulting economic power in the retail market, respondents are able to and have coerced record distributors (the co-conspirators) into selling records and tapes to them at reduced subdistributor (rather than retailer) prices, and giving them preferential financing and merchandising terms. ³ Respondents have been able to offer sales and specials on records and tapes as the result of the discriminatory and preferential treatment accorded them by the distributors. They allegedly have "used the advantages thus obtained to drive ... smaller competitors from the trade and otherwise cause them injury and damages, by selling at levels which ... competitors cannot meet, including below-cost levels." As a result, competition has been eliminated and appellants have suffered "reduced selling prices and substantial loss of trade and profits".

The causes of action for "secret rebates" include allegations stated in support of the antitrust claims, as well as additional claims that respondents accepted secret and favorable prices, commissions, discounts, financing arrangements and other special terms and services specified in the complaint which were not granted to appellants; and that these secret rebates have resulted in injury to appellants and tend to eliminate competition.

According to the causes of action for "locality discrimination" against Tower and Integrity, those respondents have sold merchandise in the San Francisco area at prices lower than charged in their stores located elsewhere. Such discriminatory pricing, the complaint avers, was practiced with an intent to destroy competition from independent record dealers such as appellant, and has caused appellant significant damages. The cause of action for "locality discrimination" against Integrity also includes an allegation, absent from the claim against Tower, that the difference in prices was not "cost-justified within the meaning of B & P 17041."

The causes of action for "sales below cost" allege that respondents sold merchandise at prices below invoice cost plus respondents' cost of doing business, for the purpose of destroying competition. Appellants further claim damages, in the form of lost customers and profits, from respondents' below-cost sales. The causes of action for "loss leaders" merely add that respondents sold merchandise at less than cost in order to induce the purchase of their merchandise and that the practice diverted trade from appellants.

Respondents demurred to the complaint on grounds, inter alia, that it failed to state facts constituting any causes of action and that the claims based on the Unfair Practices Act are barred by the applicable statute of limitations. The demurrers were sustained on the former ground, and based upon appellants' representation that no further allegations could be added to the complaint, no leave to amend was granted.

Judgment dismissing the complaint was thereupon entered and timely notice of appeal was filed.

We turn first to appellants' argument that its causes of action based upon the Cartwright Act are sufficiently stated in the complaint.

The Cartwright Act is contained in Business and Professions Code sections 16700 et seq. Sections 16720 and 16726 generally codify the common law prohibition against restraint of trade. (Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842, 852, 94 Cal.Rptr. 785, 484 P.2d 953.) Thus, an unlawful trust is defined in section 16720 as "a combination of capital, skill or acts by two or more persons" for enumerated purposes which restrain trade. Section 16726 declares that "every [such] trust is unlawful, against public policy and void." Section 16750, subdivision (a) confers a private right of action for treble damages and attorneys' fees upon "Any person who is injured in his business or property by reason of anything forbidden or declared unlawful by this chapter, ..."

The Cartwright Act is patterned after the federal Sherman Anti-Trust Act (15 U.S.C., § 1 et seq.) and decisions under the latter act are applicable to the former. (Corwin v. Los Angeles Newspaper Service Bureau, Inc., supra, 4 Cal.3d 842, 852, 94 Cal.Rptr. 785, 484 P.2d 953; Saxer v. Philip Morris, Inc. (1975) 54 Cal.App.3d 7, 19, 126 Cal.Rptr. 327.)

Recovery is provided under the Cartwright Act "where the activities of a combination result in a restraint of trade." (Weissensee v. Chronicle Publishing Co. (1976) 59 Cal.App.3d 728, 729, 129 Cal.Rptr. 188.) In order to maintain a cause of action for such combination in restraint of trade, the complaint must allege: The formation and operation of the conspiracy; the illegal acts done pursuant thereto; a purpose to restrain trade; and the damage caused by such acts. (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 119, 81 Cal.Rptr. 592; Saxer v. Philip Morris, Inc., supra, 54 Cal.App.3d 7, 20, 126 Cal.Rptr. 327.)

Our high court demands a "high degree of particularity in the pleading of Cartwright Act violations. (Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 326-328 [70 Cal.Rptr. 849, 444 P.2d 481] )." (Motors, Inc. v. Times Mirror Co. (1980) 102 Cal.App.3d 735, 742, 162 Cal.Rptr. 543.) Consequently, generalized allegations of civil antitrust violations are usually insufficient (Chicago Title Ins. Co., supra, at p. 317, 70 Cal.Rptr. 849, 444 P.2d 481) and the unlawful combination or conspiracy must be alleged with specificity. In Chicago Title Ins. Co. v. Great Western Financial Corp., supra, 69 Cal.2d 305, 316-317, 70 Cal.Rptr. 849, 444 P.2d 481, the court noted that " 'contracts, combinations, or conspiracies in restraint of ... trade or commerce cannot be alleged generally in the words of the statute but ... facts must be set forth which indicate the existence of such contracts, combinations or conspiracies.' " Thus, general allegations of a conspiracy unaccompanied by a statement of facts constituting the conspiracy and explaining its objectives and impact in restraint of trade will not suffice. ⁴ (Id., at pp. 317-318, 70 Cal.Rptr. 849, 444 P.2d 481; Bartley v. California Association of Realtors (1980) 115 Cal.App.3d 930, 935, 173 Cal.Rptr. 284.) Put slightly differently, the lack of factual allegations of specific conduct directed toward furtherance of the conspiracy to eliminate or reduce competition renders the complaint legally insufficient. (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d 93, 119, 81 Cal.Rptr. 592.)

At the same time, as with any demurrer, the material allegations of an antitrust cause of action are deemed admitted and assumed to be true (Saxer v. Philip Morris, Inc., supra, 54 Cal.App.3d 7, 18, 126 Cal.Rptr. 327; Bondi v. Jewels by Edwar, Ltd. (1968) 267 Cal.App.2d 672, 676, 73 Cal.Rptr. 494), while the general rule of pleading that a complaint must be given liberal construction in order to achieve substantial justice between the parties is applicable. (Saxer, supra, at pp. 18-23, 126 Cal.Rptr. 327.)

Respondents first contend that appellants have failed to satisfactorily allege a conspiracy to restrain trade as required by the Cartwright Act, insisting that the complaint presents a case of unilateral action which, reduced to essentials, merely charges that respondents...