Untitled Texas Attorney General Opinion ( 1957 )


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    Honorable W.~S. Heatly, Jr.
    Chairman, State Affairs Committee
    House of Representatives
    Austin, Texas
    Opinion No. ~11-123
    Re: Conetitutlonalltyof
    House Bill 25 and Senate
    Bill 177, known as the
    "Sales Limitation Act."
    Dear Mr. Heatly:
    With respect to your request for an opinion on the
    constitutionalityof the proposed Sales Limitation Act" ln-
    corporated in House Bill 25 and Senate Bill 177, we submit the
    followlngt
    In es:senaethese identicalBills provide a definition
    of the 'cost basis" of products sold In the course of wholesale
    and retail business and prohibit the sale, or the advertising
    or offering for sale, of any Item of merchandise at less than
    cost ,whenthe seller limits, or reserves the right to limit, any
    ourchaser to a quantity less than the entire supply of that item.
    A similar Act was held-unconstitutionalin San Antonio Retail
    Grocers v. Lafferty, 2%' S.W.2d 813 (Tex. Sup. Ct. 1957) on the
    grounds that by limiting Its effect to grocery stores alone, it
    provided an unreasonableand arbitrary classification. The
    constitutionalimpediment found by the oourt in the
    case has been removed In these Bills slnoe they are v
    app 1etil.e
    to all sales in the course of businees. It is necessary, there-
    fore, to consider in this opinion questions not reached in the
    Lafferty case.
    The purpose of the'Bllls as evidenced by the emergency
    clause Is to "protect retailers and wholesalers, and the consuming
    public, against monopolisticpractices designed to lessen or destroy
    competitionin the ordinary purchase and sale of commodities."
    Such a purpose is a legitimate object for the exercise of the
    police power, and statutes prohibiting sales below cost when such
    sales are intended to Injure competitionor when they have that
    effect, have generally been held to be valid legislativemethods
    for the accomplishmentof this purpose. See oases collected in
    annotationsat 
    118 A.L.R. 506
    and 
    128 A.L.R. 1126
    .
    Honorable W. S. Heatly, Page 2 (WW-123)
    The principal difficulty with the proposed Sales
    Limitation Act Is that though its stated purpose Is the elimination
    of practloes "designed to lessen or destroy competition," the opera-
    tive provisions are not limited to situations where limited sales
    are made with an intent to injure competition or where that effect
    Is achieved. This intent or effect has been a part of every statute
    upheld by the courts of other jurlsdlctlons, snd in many cases the
    courts have considered such an element to be an essential ingredient
    to validity. See e.g. Blum v. Engleman, 
    190 Md. 109
    , 57 A.23 421
    (1948 ; Associated Merchants v. Ormesher, 
    107 Mont. 530
    , 
    86 P.2d 1031
    t1939); Wholesale Tobacco Dealers Bureau v. National Candy &
    Tobacco Co., 
    11 Cal. 2d 634
    , 
    82 P.2d 3
    (1938). Only two cases have
    been found where the statute before the court did not require a
    wrongful intent or an injurious effect, and in each the statute
    was held to be violative of due process requirements for that reason.
    Commonwealth v. Zasloff, 338Pa. 457,13 A.2d 67 (1940); State ex rel
    Llef v. Packard-Baumgardner & Co., 
    123 N.J.L. 180
    , 
    8 A.2d 291
    (1939).
    The basis for this holding was well expressed by the Pennsylvania
    Supreme Court in the Zasloff case as follows:
    "If the Act confined itself to prohibiting
    sales below cost when Intended to destroy competition,
    it would undoubtedly be valid, as has been held in
    various jurisdictions where such ants have been en-
    acted with that qualification. (Citing oases)   The
    opinions of the courts In those eases emphasized the
    fact that the statutes there under consideration made
    criminal only such sales as'were designed for the
    suppression of competition or other predatory purposes,
    and the means employed by those statutes were therefore
    reasonably related to their objective. In New Jersey,
    on the other hand, where, as in Pennsylvania, this
    qualification was not In the act, the statute was de-
    clared unconstitutional. (Citing the Lief case)
    Price cutting in itself is not an evil; on the contrary,
    the more intense the competition the greater the likely
    advantage to the purchasing public. Indeed there is no
    reason why merchants should not make an absolute gift
    of merchandise to his customers If he desires to be
    benevolent or thereby to advertise his business. There
    are many other conceivable and wholly proper reasons
    which might Induce him to make sales without profit,
    as, for example, a necessity of paying importunate
    creditors. It Is only when the object of price cutting
    Is sinister, -- to destroy a ,competitorby suffering a
    temporary loss in order to gain an ultimate monopoly...,
    or to defraud the public by seducing them into the pur-
    chase of other goods at an exorbitant price-- that the
    selling of goods at less than cost may oonstitute an
    economic or social evil. The Pennsylvania Act, there-
    fore, is arbitrary, and the means which it employs are
    grossly out of proportion to the object which it seeks
    to attain."
    Honorable W. S. Heatly, Page 3 (WW-123)
    We believe this reasoning to be applicable to the
    proposed Sales Limitation Act unless other features of the Bills
    are effective to exclude such lawful practices from their effect.
    The proposed Act differs from the statutes before the
    courts In the above cases principally in that those statutes pro-
    hibited all sales below cost while in the Instant Bills only sales
    below cost in limited quantities are within the reach of the
    statute.    It has.been argued that such a provision intensifies
    the invalidity of the statute rather than aiding Its validity by
    providing an unreasonable classification in not prohibiting un-
    limited sales lntended'to destroy competition. It is, of course,
    quite possible thata,powerful seller might make unlimited sales
    of his productbelow cost until his competitors are forced out of
    business, but it Is believed that this argument overlooks the fact
    that it is not required that the Legislaturepl-ohibitall forms of
    unfair comp+t?.tionIn order to reach specific abuses it considers
    to be threatening. As stated by the Supreme Court in Central
    Lumber Co. v. South Dakota, 
    226 U.S. 157
    , 33 s.ct. 65 -(iffy
    "If the Legislature shares the now prevailing
    belief as to what is public policy, and finds that a
    particular instrument of trade war Is being used
    against that policy in certain cases, it may direct
    its laws against what it deems the evil as it actually
    exists without covering the whole field of possible
    abuses, and it may do so none the less that the for-
    bidden act does not differ in kind from those that are
    allowed."
    The problem, therefore, is not whether some classes of
    unfair competitors are excluded from the Bills, but whether the
    device of prohibi.tingonly limited below cost sales removes from
    the statutory ambit those practices innocent of destructive intent
    or effect on competition referred to in the Zasloff case. No case
    has been found where this feature has been considered by a court,
    but it is apparent that,.by removing unlimited sales from the Bill's
    prohibition, unquestioned fair methods of competition, such as
    sales below cost to clear inventories of slow-moving, damaged, im-
    perfect or short stock,,or to liquidate a business, are removed
    from the scope of the Bill.
    However, It is also apparent that other legitimate
    competitive practices are still prohibited by the prox;~;i Act.
    For instance, an attempt to attract business through
    leaders" would seem to be as legitimate a competitive device as
    advertising, credit services, attractive surroundings and the like
    where there is no attempt thereby to monopolize the market. Further-
    more, sales below cost made In good faith to &    competition do not
    appear to be adequately excluded by the proposed Act. Section 7
    ..-   .
    Honorable W. S. Heatly, Page 4 (WW-123)
    which purports to exclude such sales is ineffective for this pur-
    pose since it requires a business man to determine at his peril that
    the competing price is at cost or above before lowering his price to
    meet the competing price without providing any method whereby he can
    ascertain whether the competing price is lawful. See State ex rel Lief
    v. Packard-Baumgardner & 
    Co., supra
    . We find no feature in the Act
    which would save such below cost sales which are not intended to in-
    jure competition from its effect, and we must conclude that the Bill
    as written is unconstitutional as violative of due process of law.
    Tex. Const. Art. I, Section 19; U.S. Const. 14th Amend.   In view
    of our holding, it is unnecessary to consider other constitutional
    objections which have been raised against the Bill.
    SUMMARY
    The proposed Sales Limitation Act in-
    corporated in House Bill 25 and Senate
    Bill 177 violates the requirements of
    due process of law provided in Article
    I, Section 19, of the Texas Constitution,
    and the 14th Amendment to the U.S. Con-
    stitution, since it includes within its
    prohibition practices which are not
    reasonably related to its purpose of
    preventing unfair competition.
    Very truly yours,
    WILL WILSON
    Attorney General of Texas
    JWW:tiw
    APPROVED:
    OPINION COMMITTEE
    H. Grady Chandler, Chairman
    REVIEWED FOR THE ATTORNEY GENERAL
    BY:
    Geo. P. Blackburn       ,