Apex Wholesale v. Fry's Electronics

Filed 6/15/06 Apex Wholesale v. Fry's Electronics CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEALS from a judgment and APPEAL from postjudgment orders of the Superior Court of San Diego County, Kevin A. Enright, Judge. Judgment reversed in part and affirmed in part; orders affirmed.

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"In reviewing a challenge to the sufficiency of the evidence, we are bound by the substantial evidence rule. All factual matters must be viewed in favor of the prevailing party and in support of the judgment. All conflicts in the evidence must be resolved in favor of the judgment. [Citation.]" (Heard v. Lockheed Missiles & Space Co. (1996) 44 Cal.App.4th 1735, 1747.)

To prevail on a cause of action under the UCL, it is not enough to show the defendant committed wrongful acts or statutorily prohibited conduct; plaintiff must also show entitlement to equitable relief. If the court determines the equitable relief available under the UCL is not warranted, judgment for defendant is appropriate. (See Madrid v. Perot Systems Corp. (2005) 130 Cal.App.4th 440, 467 [demurrers to complaint brought under UCL were properly sustained without leave to amend on the ground complaint failed to state a UCL claim because plaintiff failed to state a viable claim for restitution or injunctive relief (the only remedies available) and failed to propose any amendment that would cure the defect].)

The court has very broad discretion in deciding "which, if any, remedies authorized by section 17203 should be awarded. [¶] . . . Section 17203 does not mandate restitutionary or injunctive relief when an unfair business practice has been shown. Rather, it provides that the court 'may make such orders or judgments . . . as may be necessary to prevent the use or employment . . . of any practice which constitutes unfair competition . . . or as may be necessary to restore . . . money or property.' [Citation.] That is, as our cases confirm, a grant of broad equitable power. A court cannot properly exercise an equitable power without consideration of the equities on both sides of a dispute." (Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 180.) "Therefore, in addition to those defenses which might be asserted to a charge of violation of the statute that underlies a UCL action, a UCL defendant may assert equitable considerations. In deciding whether to grant the remedy or remedies sought by a UCL plaintiff, the court must permit the defendant to offer such considerations. In short, consideration of the equities between the parties is necessary to ensure an equitable result." (Id. at pp. 180-181.) Thus, the issue raised by Apex's challenge to the sufficiency of the evidence to support the judgment on the equitable causes of action is not so much whether there was substantial evidence that Fry's engaged in the conduct alleged in those causes of action, but whether the court abused its discretion in deciding the conduct proved by Apex did not warrant equitable relief.

As noted, the court decided that with the exception of the violation of section 17504, Apex "failed to meet its burden of proof by the preponderance of the evidence to obtain the relief sought." The court's decision was primarily based on its finding that Fry's either had a satisfactory explanation for the acts forming the basis of Apex's false advertising and unfair competition claims, or the acts were too infrequent, inadvertent, or aberrational to warrant injunctive relief.[1] The evidence presented at trial reasonably supports that finding, and Apex does not expressly challenge it on appeal. The court acted within its sound discretion in deciding that with the exception of Fry's violations of section 17504, the facts proved under Apex's equitable causes of action were insufficient to warrant equitable relief.[2]

E. The Court Did Not Err in Denying Apex's Motion for JNOV as to the First Cause of Action for Violation of the UPA

Apex contends the court should have granted its motion for JNOV as to its first cause of action for violation of the UPA because Fry's evidence was insufficient as a matter of law to rebut the presumption of injurious intent under sections 17071 and 17071.5 as to Apex's claim that Fry's made sales below cost in violation of sections 17043 and 17044. Section 17071 provides: "In all actions brought under this chapter proof of one or more acts of selling or giving away any article or product below cost or at discriminatory prices, together with proof of the injurious effect of such acts, is presumptive evidence of the purpose or intent to injure competitors or destroy competition." Section 17071.5 provides, in relevant part: "In all actions brought under this chapter proof of limitation of the quantity of any article or product sold or offered for sale to any one customer to a quantity less than the entire supply thereof owned or possessed by the seller or which he is otherwise authorized to sell at the place of such sale or offering for sale, together with proof that the price at which the article or product is so sold or offered for sale is in fact below its invoice or replacement cost, whichever is lower, raises a presumption of the purpose or intent to injure competitors or destroy competition." In denying Apex's motion for JNOV as to the first cause of action, the court effectively concluded Fry's sufficiently rebutted these statutory presumptions by presenting evidence that its loss leader sales were undertaken to expand its customer base.[3]

"A trial court must render judgment notwithstanding the verdict whenever a motion for a directed verdict for the aggrieved party should have been granted. (Code Civ. Proc., § 629.) A motion for judgment notwithstanding the verdict may be granted only if it appears from the evidence, viewed in the light most favorable to the party securing the verdict, that there is no substantial evidence in support. [Citation.] [¶] The moving party may appeal from the judgment or from the order denying the motion for judgment notwithstanding the verdict, or both. [Citation.] As in the trial court, the standard of review is whether any substantial evidence--contradicted or uncontradicted--supports the jury's conclusion. [Citations.] (Sweatman v. Department of Veterans Affairs (2001) 25 Cal.4th 62, 68.)

Apex argues that two cases taken together – E&H Wholesale, Inc. v. Glaser Bros. (1984) 158 Cal.App.3d 728 (E&H) and People v. Pay Less Drug Store (1944) 25 Cal.2d 108, 113-114 (Pay Less) – compel the conclusion that Fry's failed to rebut the presumption of injurious intent under sections 17071 and 17071.5 as a matter of law. Apex relies on Pay Less for the proposition that where none of the express statutory exceptions (set forth in section 17050)[4] to the UPA prohibitions against sales below cost and loss leaders apply, a seller of goods below cost can rebut the presumption of injurious intent under sections 17071 or 17071.5 only by showing a good faith necessity for its sales below cost. Apex relies on E&H for the proposition that a mere denial of injurious intent, standing alone, is insufficient to rebut the statutory presumptions. Apex contends the evidence Fry's presented at trial amounted to mere denial of injurious intent and that Fry's made no showing of a good faith necessity for its sales below cost or that its sales below cost fell within any section 17050 exception.

Addressing the statutory presumption of injurious intent now codified in section 17071, Pay Less observed: "[A]n injurious effect is not an essential element of the [UPA] violation. The violation is complete when sales below cost are made with the requisite intent and not within any of the [statutory] exceptions. Proof of injurious effect is permitted to be shown with the proof of sales below cost as presumptive or prima facie evidence that the requisite intent existed. The obvious and only effect of this provision is to require the defendants to go forward with such proof as would bring them within one of the exceptions or which would negative the prima facie showing of wrongful intent. They may present facts showing that they were within the express exceptions regardless of actual intent; or they may introduce evidence of another necessity not expressly included to show that sales were made in good faith and not for the purpose of injuring competitors or destroying competition." (Pay Less, supra, 25 Cal.2d at pp. 113-114, italics & underscoring added.)

In Dooley's Hardware Mart v. Food Giant Markets, Inc. (1971) 21 Cal.App.3d 513 (Dooley's Hardware), the Court of Appeal stated that its "view of how [the section 17071.5 presumption may be rebutted] is akin to that of our Supreme Court in [Pay Less] in regard to the [section] 17071 presumption. We believe that defendants may rebut the [section] 17071.5 presumption either by evidence tending to bring them within one of the exceptions to the prohibitions contained in the Act or by evidence establishing otherwise that they did not have the requisite wrongful intent." (Dooley's Hardware, supra, 21 Cal.App.3d at p. 518, italics added, fn. omitted.)

We do not construe Pay Less's reference to "evidence of another necessity" as imposing a requirement that such evidence be presented to rebut the statutory presumption of injurious purpose where none of the section 17050 exceptions apply. Although a defendant may be able to show it made below-cost sales in good faith and not for the purpose of injuring competitors or competition by introducing evidence of "another necessity," this does not mean the requisite showing of good faith can only be made by presenting evidence of a business necessity. We conclude that a defendant may rebut a [section] 17071 or [section] 17071.5 presumption by presenting any evidence upon which the trier of fact can reasonably find that the defendants' below-cost sales were not made for the purpose of injuring competitors or destroying competition. Our conclusion accords with Dooley's Hardware's observation that "defendants may rebut the [section] 17071.5 presumption either by evidence tending to bring them within one of the exceptions to the prohibitions contained in the Act or by evidence establishing otherwise that they did not have the requisite wrongful intent." (Dooley's Hardware, supra, 21 Cal.App.3d at p. 518, italics added, fn. omitted.; see also Western Union Financial Services, Inc. v. First Data Corp. (1993) 20 Cal.App.4th 1530, 1540 [defendant rebutted section 17071 presumption by presenting evidence that its promotional sales below cost were made with the good faith intent of increasing and maintaining its customer base]; Tri-Q, Inc. v. Sta-Hi Corp. (1965) 63 Cal.2d 199, 209 (Tri-Q) [defendant company president's testimony that he was unaware of any attempt to destroy plaintiff's business was sufficient to rebut section 17071 presumption of injurious purpose].)

E&H does not compel a different conclusion. In E&H, the plaintiff, a competitor of the defendant cigarette wholesalers, alleged the defendants violated section 17043 of the UPA by selling cigarettes below cost with the intent to injure or destroy competition. (E&H, supra, 158 Cal.App.3d at pp. 732-733.) The plaintiff appealed the trial court's denial of its requests for a temporary restraining order and preliminary injunction, contending the court abused its discretion by determining the defendants had not violated section 17043. (E&H, supra, 158 Cal.App.3d at p. 732.) The Court of Appeal agreed. Although the president of one of the defendant companies filed a declaration denying the company acted with the intent to injure the plaintiff or to destroy competition (id. at p. 736), the president of another of the defendant companies testified he routinely solicited new customers by offering to sell them cigarettes at prices he arbitrarily set to beat the prices they were paying to their current cigarette distributors. (Id. at pp. 736-737.) The Court of Appeal concluded this testimony clearly established that defendants violated section 17043. (E&H, supra, 158 Cal.App.3d at pp. 737-738.)

E&H did not hold generally that a defendant's denial of intent to injure competition is insufficient to rebut the statutory presumption of injurious intent; E&H simply concluded that one defendant's testimony denying an intent to injure the plaintiff was insufficient to rebut the presumption in light of contrary testimony of another defendant showing that "defendants were not concerned with determining the price of cigarettes pursuant to the statutory criteria" (E&H, supra, 158 Cal.App.3d at p. 737) and clearly indicating "that defendant's determination of price was purposely calculated to obtain business by undercutting prices offered by their competitors." (Ibid.) E&H concluded: "Given such testimony, evidencing defendant's clear intent to undercut prices regardless of the statutory criteria, we cannot construe the record as sufficient to overcome the presumption of intent to injure competition. Thus, we find the trial court's denial of plaintiff's request for a preliminary injunction a ' " manifest miscarriage of justice " ' [citation], for defendants have clearly violated section 17043." (E&H, supra, 158 Cal.App.3d at pp. 737-738.)

The evidence here does not similarly establish a clear violation of section 17043 or section 17044. In E&H – a dispute between competing wholesale distributors of a particular product – the evidence showed that the defendants, engaged in the routine business practice of getting a potential customer to disclose the price it was paying its current cigarette distributor and then offering that customer (as opposed to customers generally) a lower price arbitrarily set for the purpose of stealing the customer from the competing distributor. Here, there is no evidence that Fry's routinely offered individual customers below-cost prices that Fry's sales representatives arbitrarily set "on the spot" for the purpose of injuring a specific competitor with whom the customer had an ongoing business relationship. Although there was evidence that Fry's occasionally sold merchandise below cost to beat a competitor's price, there was abundant evidence to support the finding that Fry's below-cost prices generally were set to meet the temporary sale prices of competitors. The evidence does not show that Fry's routinely undercut its competitors' prices for the purpose of stealing specific customers from competitors, as did the defendants in E&H. Rather, the record contains substantial evidence that Fry's generally advertised below-cost prices on different items at different times to attract customers who might otherwise buy on the internet or at a competing store – i.e., to expand its customer base, and not to injure specific competitors or competition generally.

Paul Friday, employed by Fry's as a buyer, testified that he never set prices to meet competitors' prices with the intent to injure or destroy competition. Until Apex filed the instant action against Fry's, Friday had never heard of Apex while working in Fry's San Diego store.

Kathryn Kolder, who is Fry's executive vice president, corporate secretary, and one of the company's founders, was asked if she ever heard any participant in Fry's top management meetings communicate a desire to see Fry's injure or destroy a competitor. Kolder responded: "You, know, it's actually the exact opposite. We talk about making the pie bigger . . . and strengthening the competitors. Because any time one of our competitors is hurt, it actually hurts us." Kolder explained that customers prefer to shop when there is more excitement in the market, and, for that reason, Fry's almost always located its stores one of its major competitors. She never heard any management person at Fry's say words to the effect that he or she wanted to injure or destroy a particular competitor or competition in general. She also had never heard of Apex and certain other competitors (e.g., Toner Express, Rom Emporium and Hot Chip) before the instant litigation. Kolder explained that one reason Fry's sold certain items below cost was to meet the prices of certain competitors who were able to buy at lower prices than Fry's because they were much larger than Fry's. Kolder stated: "[S]o our . . . cost is [going to] be higher . . . than whatever it is they are running it for, which . . . may or may not be above their cost . . . , but they will be running it so low that we have to take it below cost in order to compete on those items. And because we don't ever want to be perceived by our . . . customer base as not being able to compete, you know, no matter who we are, what size we are compared to them."

Raymond Cheng, Fry's director of software merchandising and operations, testified that Fry's sold below cost to bring customers into the store. He had never heard any management employees of Fry's say that they wanted to injure or destroy a competitor or competition. Cheng had never heard of Apex before Apex filed the instant lawsuit. He explained that Fry's does competitive shopping and lowers prices, sometimes below cost, to match the prices of its competitors. Cheng testified Fry's sells items below cost "[t]o be competitive, to increase customer accounts . . . and to make sure that we're not exposed to inventory risk, because technology does change very, very quickly, so if – if we see a certain item of us having an over abundance of inventory, we'll go out there at a pretty high [sic] price to bring a lot of customers in." He never heard anyone at Fry's say words to the effect that Fry's was going to set a price to destroy a particular competitor.

Scott Anderson, director of electronic components merchandising and operations for Fry's, also testified that he never heard anyone at Fry's talk about destroying competition. To the contrary, he testified that the general view was that competition was good for Fry's, stating: "It's what has made us strong over the years and it's also what is going to make [Fry's competitors] strong if they are willing to compete and continue to grow the business." When asked why, Anderson stated: "Well, imagine a market place with no competitors, obviously that is not good and that is what anti-trust laws are all about, and those are good things. The reality is, is those people that are willing to compete, actually improve their business model and lower their costs, and that benefits the consumer. That forces us then to do the same. And we become a more efficient business model. We are able to offer better values all the time to the consumer, and it . . . keeps us fresh, and on our toes. It keeps us having to change our business to continue to grow in that business, if you don't, you lose very quickly and you are out."

Based on this testimony, the jury could reasonably find that Fry's made sales below cost for the purpose of fairly competing in the retail marketplace, and not for the purpose of destroying competition or injuring competitors. The court did not err in denying Apex's motion for JNOV as to its first cause of action.

F. The Issue of Whether the Court Erred in Granting Summary Adjudication of the First Cause of Action as to Bicknell Is Moot

Apex contends the court erred in granting Bicknell's motion for summary adjudication of the first cause of action for violations of the UPA (loss leader, sales below cost, and locality discrimination) because under section 17095, Bicknell is personally liable for Fry's UPA violations as an officer, director or agent of Fry's who assisted or aided Fry's in the violations. The issue of Bicknell's liability under the first cause of action is moot in light of our affirmance of the order denying Apex's motion for JNOV as to that cause of action. Bicknell cannot be held liable for aiding or assisting Fry's in alleged UPA violations for which Fry's has no liability.

G. The Court Did Not Abuse Its Discretion in Denying Apex Cost of Proof Sanctions

Apex's final contention on appeal is that the court committed reversible error in denying its motion for "cost of proof" sanctions under subdivision (o) of former Code of Civil Procedure section 2033 (CCP section 2033), which governs requests for admission (RFA's).[5] Apex contends that because the jury made findings establishing the truth of certain ultimate facts that Apex asked Fry's to admit but Fry's denied in its responses to Apex's RFA's Nos. 17 through 20 concerning loss leaders, Apex is entitled to recover the costs and attorney fees it incurred in proving those facts.[6]

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[1] The court twice made the point in its statement of decision that "one or two, or even a few inadvertent instances of alleged misconduct, depending upon the specific type of business act or practice shown, are [insufficient] to prove a violation of either [section] 17200 or 17500 sufficient to warrant injunctive relief." (Italics added.)

[2] The court's rejection of Apex's claim that Fry's sold used goods as new is also supported by substantial evidence in the form of testimony by Fry's cofounder Kathryn Kolder and employee Scott Anderson that when Fry's places a returned item on the shelf for resale, its practice is to place a sticker on the item that identifies it as having been returned or unpackaged.

[3] The court did not expressly rule that Fry's presented sufficient evidence to rebut the section 17071 and 17071.5 presumptions; that ruling is necessarily implied by the court's rejection of Apex's contention that "[Fry's] evidence that loss leader sales were undertaken to expand [Fry's] customer base . . . is insufficient to rebut the statutory presumptions because [Fry's] proffered explanations do not fall within a statutory exception [or] constitute a business necessity."

[4] Section 17050 provides: "The prohibitions of this chapter against locality discriminations, sales below cost, and loss leaders do not apply to any sale made: [¶] (a) In closing out in good faith the owner's stock or any part thereof for the purpose of discontinuing his trade in any such article or product and in the case of the sale of seasonal goods or to the bona fide sale of perishable goods to prevent loss to the vendor by spoilage or depreciation; provided, notice is given to the public thereof. [¶] (b) When the goods are damaged or deteriorated in quality, and notice is given to the public thereof. [¶] (c) By an officer acting under the orders of any court. [¶] (d) In an endeavor made in good faith to meet the legal prices of a competitor selling the same article or product, in the same locality or trade area and in the ordinary channels of trade. [¶] (e) In an endeavor made in good faith by a manufacturer, selling an article or product of his own manufacture, in a transaction and sale to a wholesaler or retailer for resale to meet the legal prices of a competitor selling the same or a similar or comparable article or product, in the same locality or trade area and in the ordinary channels of trade. [¶] The notice required to be given under this section shall not be sufficient unless the subject of such sales is kept separate from other stocks and clearly and legibly marked with the reason for such sales, and any advertisement of such goods must indicate the same facts and the number of items to be sold."

[5] CCP section 2033 was repealed July 1, 2005 (Stats. 2004, Ch. 182, § 22), as part of a nonsubstantive reorganization of the Civil Discovery Act of 1986. (Code Civ. Proc., §§ 2016 et seq.) Subdivision (o) of CCP section 2033 was replaced, without substantive change, by Code of Civil Procedure section 2033.420.

[6] RFA Nos. 17 and 18 both asked Fry's to admit: "More than once since April 1997 Fry's Electronics' San Diego store has sold as a loss leader an item of merchandise advertised by Fry's for sale in the San Diego Union-Tribune newspaper." However, the two RFA's used different definitions of the term "loss leader." RFA No. 17 stated: "The term 'loss leader' is being used in this request in the sense of California Business & Professions Code [section] 17030[, subdivision] (a), which provides: 'Loss leader' means any article or product sold at less than cost[ w]here the purpose is to induce, promote or encourage the purchase of other merchandise." RFA No. 18 stated: "The term 'loss leader' is being used in this request in the sense of California Business & Professions Code [section] 17030[, subdivision] (c), which provides: 'Loss leader' means any article or product sold at less than cost where the effect is to divert trade from or otherwise injure competitors."

RFA Nos. 19 and 20 both asked Fry's to admit: "More than once since April 1997 Fry's Electronics' San Diego store has sold as a loss leader an item of merchandise advertised by Fry's for sale in the San Diego Union-Tribune newspaper wherein the quantity to be purchased by any one customer was advertised as limited to one item." RFA No. 19 set forth the definition of "loss leader" of section 17030, subdivision (a) whereas RFA No. 20 set forth the definition of "loss leader" of section 17030, subdivision (c).

Apex's motion for cost of proof sanctions indicated that it also sought sanctions for the cost of proving its RFA No. 14 (concerning advertising items for sale that Fry's did not have on hand) and the court's ruling denying the motion addresses that RFA. However, we do not address RFA No. 14 because none of the declarations in support of Apex's motion (evidencing costs and attorney fees incurred in proving the truth of the RFA assertions) addressed RFA No. 14 and Apex does not address it on appeal.