By: Brian P. Brosnahan, Roxane Polidora, Harvey Saferstein, Sonja
Sonnenburg, and Ashley Winn
Each of the separate prohibitions of the UPA may have application to the
operations of a business.
A. Prohibition of Below-Cost
Sales
* * *
4. Definition of ''Below
Cost'' Under the UPA
Perhaps the most important and difficult of the provisions of the UPA
concerns calculations of cost. The definition of ''cost'' under the UPA
establishes less permissive thresholds of illegality than federal predatory pricing
rules. Also, under the pertinent provisions of the UPA, determining ''cost''
for any transaction is likely to be difficult and will involve important
departures from customary cost accounting methods.
a. Fully Allocated Cost
Standard
''Cost'' under the UPA means ''fully allocated cost'' or ''average total
cost.''n77 Fully allocated cost means the sum of the direct costs associated
with the article or product plus a fair allocation of all indirect costs.
For manufacturers or ''producers,'' cost is defined to include ''the
cost of raw materials, labor and all overhead expenses of the producer.''n78
For distributors, ''cost'' means the lower of invoice or replacement costs plus
the ''cost of doing business ... and in the absence of proof of cost of doing
business a markup of six percent on such invoice or replacement cost'' is
rebuttably presumed.n79 Cash discounts are not applied to reduce costs
(although a cash discount would apply to reduce the revenue from a salen80).
Overhead costs are defined sweepingly to include ''all costs of doing business
incurred in the conduct of the business and shall include without limitation
... labor (including salaries of executives and officers), rent, interest on borrowed
capital, depreciation, selling cost, maintenance of equipment, delivery costs,
credit losses, all types of licenses, taxes, insurance and advertising.''n81
The fully allocated cost standard requires ''a fair allocation of all
fixed or variable costs associated with production of the article or
product.''n82 Further, ''the allocation of indirect or fixed overhead costs to
a particular product or service must be reasonably related to the burden such
product or service imposes on the overall cost of doing business.''n83 Cost is
to be measured as ''the fair average cost of production over a reasonable time,
rather than the cost of one item on a particular occasion.''n84
Please click on the link at the top of
the post to view or download the extended excerpt as well as the Table of
Contents for California
State Antitrust and Unfair Competition Law.
California antitrust and unfair
competition law derives from statutes, policies, concerns, and history unique
to our state. California State Antitrust and Unfair Competition Law, which is the source of the above
commentary, has been launched
to comprehensively document and describe this area of law for practitioners and
regulators alike. It
is a reasonably priced desk manual that is available at the LexisNexis Store and
is the product of highly experienced practitioners of differing perspectives. Teams of peer
reviewers also drawn from the ranks of California's leading practitioners were
tasked with the review of every chapter.
If you are a lexis.com subscriber, you
can access the complete online version of California State Antitrust and
Unfair Competition Law. Lexis.com subscribers can in fact
access a vast wealth of reference materials, including other practice guides,
longer, multi-volume treatises and shorter Emerging Issue Analyses. California
State Antitrust and Unfair Competition Law can also be purchased by calling
(800) 833-9844.