Southern California Edison Co. v. State Board of Equalization

• Decision Date: 24 July 1972
• Court: California Supreme Court
• Parties: , 498 P.2d 1014 SOUTHERN CALIFORNIA EDISON CO., Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant. SAN DIEGO GAS & ELECTRIC CO., Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant. L.A. 29975, 29976. In Bank

Page 766

102 Cal.Rptr. 766

7 Cal.3d 652, 498 P.2d 1014

SOUTHERN CALIFORNIA EDISON CO., Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

SAN DIEGO GAS & ELECTRIC CO., Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

L.A. 29975, 29976.

Supreme Court of California,

In Bank.

July 24, 1972.

Rehearing Denied Aug. 23, 1972.

Evelle J. Younger, Atty. Gen. Ernest P. Goodman, Asst. Atty. Gen., and John J. Klee, Jr., Deputy Atty. Gen., for defendant and appellant.

John G. Wigmore, Lawler, Felix & Hall, Los Angeles, Bruce M. Casey, Jr., Leslie P. Jay and Chickering & Gregory, San Francisco, for plaintiffs and respondents.

TOBRINER, Justice.

In these consolidated actions instituted in 1966, plaintiffs Southern California Edison Company (Edison) and San Diego Gas and Electric Company (San Diego G & E) seek a partial refund of sales and use taxes paid by the utilities on purchases of various electrical equipment over the period January 1, 1956, to December 31, 1959. Although plaintiffs concede that the taxes which they initially paid in the late 1950's were accurately computed with respect to the original, agreed-upon sales prices of the equipment in question, the utilities contend that as a result of substantial payments of 'voluntary price adjustments' made to them by the sellers of the electrical equipment in 1964 and 1965--in settlement of the utilities' antitrust actions charging the sellers with a price-fixing conspiracy--the sales and use taxes paid to the state in the 1950's became improperly inflated. Plaintiffs claim that they are now entitled to a re-computation of their sales and use tax liability for the 1956--1959 period based upon the lower, 'adjusted' sales prices of their 1956--1959 purchases. In the instant litigation, the utilities accordingly seek reimbursement of sales and use taxes paid on that portion of the original sales prices subsequently returned to them by the sellers of the equipment, a total tax refund exceeding $325,000. ¹

The present case thus presents the novel question of whether a sales or use tax refund is available when, subsequent to a sale and payment of the appropriate tax, the parties to the sale agree to a downward 'adjustment' of the initial sales price as part of a settlement of litigation arising out of the seller's alleged illegal price-fixing activity. The trial court, reasoning that it would be 'unconscionable' to permit the state to retain--at the expense of the innocent utilities--'inflated' sales and use taxes collected on the basis of excessively high, 'price-fixed' prices, concluded that plaintiffs should be repaid the full tax refunds sought. Accordingly the court entered judgments in the utilities' favor.

Defendant State Board of Equalization appeals from these judgments, contending primarily that the sought refunds are not available because they are not authorized by any provision of the Sales and Use Tax Act. Further, defendant urges that the denial of a tax refund does not unconscionably burden the innocent victim of a pricefixing conspiracy, since under the federal Clayton Act the antitrust violator, rather than the victim, must properly bear any loss flowing from an antitrust violation.

For the reasons discussed more fully below, we agree with defendant's contentions and conclude that the judgments in favor of plaintiffs must be reversed. First, the payments received by the utilities in settlement of their antitrust claims, though termed 'voluntary price adjustments' by the parties to the agreement, do not differ in any realistic sense from any other damages paid by a seller to a buyer as a result of a seller's wrongful actions in the conduct of the sales transaction. Traditionally, the courts have not regarded such 'damages' as altering the 'sales price' of the original transaction, and we find nothing in the present statutory scheme to suggest that the Legislature intended such payments to support a 'readjustment' of the initial sales or use tax. Indeed, we conclude that the present statutory provisions negate such an interpretation.

Second, we believe that the allowance of a tax refund under these circumstances would, in general, produce the undesirable and inequitable effect of shifting one cost of a price-fixing conspiracy from the perpetrators of the conspiracy to the taxpayers of the state. To deter violations of the federal antitrust laws, the Clayton Act contemplates that violators of the act be held trebly liable for All damages resulting from any illegal activity. Since higher sales and use taxes are a direct and foreseeable consequence of any price-fixing scheme, such 'inflated' taxes, resulting from higher prices simply compose one element of the damages which the conspirators should bear. Plaintiffs have failed to demonstrate any justification for requiring the state, rather than the conspirators, to shoulder the 'excessive' tax burden flowing from the price-fixing conspiracy.

The undisputed factual background of the present litigation is set out at some length in stipulated statements of facts submitted in both cases. In essence, the stipulations reveal that the instant tax refund actions are one aftermath of the highly publicized, nationwide electrical manufacturers' price-fixing conspiracy which first came to light early in 1960 through criminal indictments returned by a federal grand jury against most of the country's major electrical manufacturing companies. As a result of the grand jury's actions, federal authorities instituted criminal prosecutions under section 1 of the Sherman Antitrust Act (15 U.S.C. § 1), charging some 30 companies and 46 individuals with conspiring to fix prices, to rig bids and to allocate markets with respect to more than 20 separate categories of electrical equipment. In Febraury 1961, all of the numerous defendants entered pleas of guilty or Nolo contendere to the charged antitrust violations; the federal court imposed fines upon the companies and sentenced several individual defendants to short prison terms.

Following these criminal convictions, major purchasers of electrical equipment across the country filed scores of civil antitrust actions against electrical manufacturers, seeking, pursuant to section 4 of the Clayton Act, ² to recover treble damages for all injuries arising from the manufacturers' widespread conspiratorial activities. Plaintiffs Edison and San Diego G & E were among the many large investorowned public utility companies which brought such suits against a large number of the electrical manufacturers. Edison and San Diego G & E each joined more than a dozen companies as defendants to their actions; both utilities, however, sought the greatest share of the recovery from their largest suppliers, General Electric and Westinghouse.

In response to the deluge of civil antitrust suits filed against them across the country, the electrical manufacturers--with General Electric taking the lead--instituted negotiations with the numerous complaining utility companies in an effort to reach a settlement of the massive litigation. After more than a year of negotiation, these discussions eventually succeeded in producing nationwide and industry-wide settlements of all pending actions. By September 1965, Edison and San Diego G & E had executed separate agreements with each of the suppliers against whom they had initiated treble damage actions.

Although individual settlement agreements varied in minor detail, the substance of all the agreements was identical. Each manufacturer agreed to pay to the complaining utility a sum of money equal to the total of two distinct categories of damages: the first category was designated 'voluntary price adjustments,' the second, 'reimbursement for out-of-pocket expenses.' It is the former category--the so-called 'voluntary price adjustment' payment--which is directly relevant to the instant litigation.

Under the agreements, the parties computed the 'voluntary price adjustment' figure by multiplying a utility's purchases from a given supplier during the calendar years 1956 through 1959 by agreed-upon percentages. The percentage formula was not identical for all categories of purchases: in the case of a large number of smaller, not readily identificable items purchased within a particular category of equipment, the parties determined the percentages by multiplying the aggregate billing prices of the disparate purchases within the category by a single percentage figure; in the case of large, identifiable pieces of equipment, such as turbine-generators, the amount of the 'adjustment' percentage was separately negotiated. In all cases the percentage formula was applied to a billing price which did not include sales or use tax.

In consideration for the substantial payments provided by these adjustment formulas, ³ plaintiffs Edison and San Diego G & E agreed to dismiss all pending treble damage actions and to execute 'covenant(s) not to sue' with respect to the alleged antitrust conspiracy. Thus, taken as a whole, the agreements effected a complete and final settlement of any claims that the utilities may have had against their suppliers under federal or state antitrust laws. The parties have stipulated that both Edison and San Diego G & E on the one hand, and their electrical suppliers on the other, have fully performed all terms of the settlement agreements.

On April 8, 1966, plaintiff Edison filed a claim with the defendant Board of Equalization seeking, as a result of its 'voluntary price adjustment' receipts, a partial refund of sales and use taxes which had been paid to the state on the utility's purchase of electrical equipment from January 1, 1956, to December 31, 1959; ⁴ San Diego G & E filed a similar claim with the board on September 29, 1966. (See Rev. & Tax. Code, §§ 6901, 6904.) In these claims for refund, the utilities alleged that by virtue of the antitrust settlement...