California Wants to Make it Easier to Sue Businesses
SACRAMENTO — California’s business climate continues to be subpar, with a continued exodus of businesses amid the usual array of high taxes, punitive regulations, and soaring cost of living. The recent CNBC ranking that placed the state’s business climate at 17 nationwide was shocking because it’s such an obvious outlier, as most other rankings place California far lower on the list. The state has its pluses, such as a booming tech sector and highly educated workforce, but billionaire job creators are fleeing in the face of a potential wealth tax that has qualified for the November ballot.
However, one might rank us, California lawmakers, at the very least should not be passing laws that make it even tougher to operate a business here. Yet, despite all the bad business news, CalMatters reported this week that Democratic Assembly Majority Leader Cecilia Aguiar-Curry is advancing an antitrust bill that would give Californians a “new way to sue big companies.” Called the COMPETE Act, “Assembly Bill 1776 would expand California’s antitrust law to allow people and businesses that claim they’re harmed by a company’s attempts to stifle competition to sue in state court.”
California has myriad private right of action (PRA) measures that allow individuals — and not just district attorneys and the state Department of Justice — to file civil suits against companies for alleged wrongdoing. As the U.S. Chamber of Commerce correctly explains, “While … private rights of action sound like a helpful resource for consumers, the truth is that PRAs can lead to litigation abuse because plaintiffs’ lawyers are financially incentivized to file as many lawsuits as possible, placing monetary gain over properly addressing potential harms.”
While this legal tool is problematic in itself, it’s even more troublesome when legislation uses vague definitions that make it impossible for companies to know whether they are even following the statute. For instance, California had considered a “child protection” technology bill that would have allowed private lawsuits against firms that potentially caused “harms” to internet users, with “harms” being so broad that basically any tech company could be sued for almost anything. Likewise, AB 1776 can trigger a suit against virtually any business for “unreasonably” restraining trade or for an “attempt to monopolize any part of trade or commerce.” It amends California’s main antitrust law, known as the Cartwright Act, which already imposes stricter standards than federal ones.
The problem, of course, is that private business efforts to, say, expand their operations could conceivably be called “unreasonable” — or at least conceivable enough for a law firm or activist group to file a lawsuit. And Democratic officials — and a surprising number of populist Republicans, too — define the term “monopoly” in an overly broad way. The dictionary term means “when a single company or entity has exclusive control over a market, product or service.” Lawmakers often use it to mean a company that’s really big and dominant in an industry. In reality, the only true monopolies are the ones granted by the government (such as public utilities). Otherwise, upstart companies have no barriers to compete, so even a big corporate player doesn’t have “exclusive control” over a market. Granted, federal law uses the “market power” definition in its antitrust definition, but this California bill would move the state even further away from the dictionary concept of a monopoly by making it far easier to label a business practice as monopolistic.
So Katy bar the doors when it comes to lawsuits. As the California Chamber of Commerce explains in its opposition, the legislation “amends California’s Cartwright Act to include prohibitions on single-firm conduct, whereas the act has only covered the coordinated conduct of two or more firms since its passage in 1907.” As a result, “AB 1776 calls into question the legality of common business practices — such as unilateral price cuts, loyalty programs, rebates, licensing decisions, and efforts to undercut rivals — that are generally legal under federal law and viewed as good for competition and good for consumers. The sheer novelty of the bill’s ‘restraint of trade’ language will cause great uncertainty, will increase costs [and] will increase litigation.”
As the CalMatters article added, the legislation is causing discomfort for some Democrats, mainly moderates who fear that it would further undermine the state’s business community. Yet it passed the Assembly floor on a 44-17 vote, although 19 members didn’t vote on it, which signals concern among some members. It then passed out of the Senate Judiciary Committee on a 9-2 vote despite the committee chairman’s concerns. This could end up on the governor’s desk — and we’ll see what calculation Gov. Gavin Newsom makes, as he positions himself for a possible presidential run.
The bill is championed by progressives and unions that see it as a way to limit the expansion of big businesses. They even claim that the measure will boost competition, but it’s hard to see how it will do anything other than punish the best competitors — and it will also hobble small businesses. “Although AB 1776 may be framed as targeting large companies, its practical effects would reach the broader innovation ecosystem. Small-business developers, startups, and emerging technology companies rely on larger platforms for cloud infrastructure, digital marketplaces,” the Competitive Enterprise Institute explains.
In its defense of the bill, a coalition of labor and advocacy groups blasts the Chicago School of economics for historically undermining antitrust laws and claims that these conservative economists “de-emphasized market competition in favor of short-sighted economic gains.” In reality, this free-market school (based in the University of Chicago, with luminaries including Milton Friedman) “argued for a narrowly tailored enforcement standard focused on economic metrics such as price, output, and efficiency,” per the Chicago Booth Review.
They understood that the marketplace would sort through most of these issues, and that government shouldn’t be a tool for picking winners and losers. A lighter government touch actually yields the most competition. Yet California’s officials have consistently shown their hostility to freer markets, which is why our business climate continues to suffer. It will suffer even more if these antitrust crusaders give the trial bar another means to vastly expand their business.
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Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.